Judgement call involving partnerships

[Gretel]

Partnership A (2 partners B&C) pays expenses on credit card (in A's name but sole responsibility of B) for partnership D (2 partners B&Z). Can these expenses deemed to be paid for by B only and therefor be claimed as losses for him?

I am pretty certain they can but I am not sure what needs to happen on A's books. The personal (for D) expenses could be a loan to B (it is under $10,000). But, I would like to be able to treat the credit card liabilities, which are in A's but B's is responsible only, as B's personal contribution, thus offsetting the loan to B.

I hope this is clear. I am only clear that all the charges are at risk for B, confused about distribution issues for partnership A.

[BHoffman]

Partnership A (2 partners B&C) pays expenses on credit card (in A's name but sole responsibility of B) for partnership D (2 partners B&Z). Can these expenses deemed to be paid for by B only and therefor be claimed as losses for him?

I am pretty certain they can but I am not sure what needs to happen on A's books. The personal (for D) expenses could be a loan to B (it is under $10,000). But, I would like to be able to treat the credit card liabilities, which are in A's but B's is responsible only, as B's personal contribution, thus offsetting the loan to B.

I hope this is clear. I am only clear that all the charges are at risk for B, confused about distribution issues for partnership A.

Hi Gretel - If I'm understanding your question:

Assuming there is valid language in the partnership agreement(s), and Partner B is permitted to take the expenses listed on the company credit card as Unreimbursed Partnership Expense (UPE) on his 1040 form, Sch. E:

The expenses should not appear in either Partnerships' books if Partner B is going to take them as UPE. If the credit card was paid with a company check, I would perhaps think hard about Partner B taking UPE.

If everything is OK regarding UPE, then I would reverse the expenses against the credit card debt on the books if possible.

Or, I'd recode those expenses as a "due to Partner B" and the credit card payments made by Partner B as a credit to "due to Partner B". The ending balance in that account would be the balance remaining, if any, on the credit card.

Would advise keeping extra careful records for UPE transactions, and verifying that the partnership agreement allows this.

[Gretel]

Hi Gretel - If I'm understanding your question:

Assuming there is valid language in the partnership agreement(s), and Partner B is permitted to take the expenses listed on the company credit card as Unreimbursed Partnership Expense (UPE) on his 1040 form, Sch. E:

The expenses should not appear in either Partnerships' books if Partner B is going to take them as UPE. If the credit card was paid with a company check, I would perhaps think hard about Partner B taking UPE.

If everything is OK regarding UPE, then I would reverse the expenses against the credit card debt on the books if possible.

Or, I'd recode those expenses as a "due to Partner B" and the credit card payments made by Partner B as a credit to "due to Partner B". The ending balance in that account would be the balance remaining, if any, on the credit card.

Would advise keeping extra careful records for UPE transactions, and verifying that the partnership agreement allows this.

Thanks, B. I try to restate my question using your reply. UPE and partnership agreement are not a problem. I have reclassified all credit card expenses that do not pertain to partnership A as "loan to B". But B didn't make any payments on the credit cards, partnership A did so there is nothing to offset this loan, which will need to be paid back at the end of the day.

I think a light bulb just turned on. If the partnership falters and B has the responsibility for all credit card debts, it will more than offset the loan to him, therefor it is not him who has to pay back the partnership but partner C, who will walk away with no debts.

Am I thinking straight? I don't like partnerships that are not straight forward.

[BHoffman]

I hardly ever see a straight forward partnership . Did one recently for a new partnership. They had the first year loss. One partner put up almost all of the cash and wanted to take all of the loss even though he has 33% ownership. That can be done, but it took awhile to get everything straightened out.

I would code Partner B's personal expenses, if any, charged on the credit card as distributions to Partner B and not as "Loan to B".

I would code any of Partnership D's expenses charged on the card as "Due from Partnership D", and that amount should be actually repaid by Partnership D to Partnership A.

The credit card debt sounds like "recourse" debt to Partner B. This affects his basis.

I might ask Partner B if it is possible for him to get a credit card for Partnership D instead of mixing things up like this. Those dratted credit cards and their airline mileage points! I have a client who owns 3 different entities. He insists on using one credit card to get those points and it takes a lot of time to keep track of the 'due to/due from' transactions.

[Gretel]

I would code Partner B's personal expenses, if any, charged on the credit card as distributions to Partner B and not as "Loan to B".

I would code any of Partnership D's expenses charged on the card as "Due from Partnership D", and that amount should be actually repaid by Partnership D to Partnership A.

B, the only transactions I have are Partnership D's expenses on credit cards that are in Partnership A's name and that will not be paid back. It was their first year of existence, the second year the loss is very minimal, and they might close their doors soon.

So, the only way I see is to have a loan to Partner B (that he will to pay back eventually) so he can take the deduction for the expenses he is responsible for anyway.

I would not like to treat this as distributions since I would need to amend the tax return. All these tax returns were finished on 4/15. and then my client was shocked how Partnership D's tax return looked like (he had told me earlier that everything would be paid back) so I hold off on filing it.

Am I getting in trouble?