Partnership expenses

[kipalass]

I have a partnership with 10 partners. Three are active in the special projects activity of the partnership. Can certain expense deductions{purchases of equipment, dumpster rentals, etc) additional to regular ongoing operational expenses be allocated only to those three partners? If not, how can I take these expenses on individual personal returns?

[DaveinTexas]

Upe

I'm convinced that a Partnership can do just about whatever it wants to do, as long as it is agreed upon in the Partnership Agreement. I think I know the reason behind this question but you didn't mention whether or not this Partnership is an LLC but I assume the goal is to avoid SE tax for the active partners.

I would recommend the partners put their heads together and write up an addendum to the Partnership Agreement that would include a provision regarding UPE (unreimbursed partnership expenses). The Agreement should specifically list the expenses you mention, the fact that the Partners must incur these expenses personally and the Partnership will not reimburse these out of pocket expenses incurred by the Partners.

See Page 9 of the Schedule E Instructions for reference. Also see Michael T Hines V Commissioner; this case outlines the details of the arrangement I described above.

[Jiggers]

Most partners would want the expenses to be paid out of the partnership and not out of their pockets. I think that maybe the project costs and income be kept separate and then have the profit be allocated to the specific partners as guaranteed payments. And all in the partnership agreement.

[DaveinTexas]

Not the goal

I think the overall goal is to allocate the larger expenditures among the active partners (the ones that are actually doing the leg work in the Partnership).

Say you have a $30,000 rental expense that is being funded primarily by the active partners. Well, instead of splitting this expense among 10 partners (let's assume they all have equal ownership in the partnership) so each partner receives credit for a $3,000 deduction on their respective K1s; the 3 partners would rather pay this expense personally and split the UPE expense among the 3 of them so they each can deduct $10,000 on their personal returns.

[taxea]

why are these special projects being included in the partnership if the partnership is not reimbursing out-of pocket expenses. Is the income from these projects being put into the partnership and shared with all the partners? If not, how is the income being allocated?

[spanel]

I'm convinced that a Partnership can do just about whatever it wants to do, as long as it is agreed upon in the Partnership Agreement. I think I know the reason behind this question but you didn't mention whether or not this Partnership is an LLC but I assume the goal is to avoid SE tax for the active partners.

I would recommend the partners put their heads together and write up an addendum to the Partnership Agreement that would include a provision regarding UPE (unreimbursed partnership expenses). The Agreement should specifically list the expenses you mention, the fact that the Partners must incur these expenses personally and the Partnership will not reimburse these out of pocket expenses incurred by the Partners.

See Page 9 of the Schedule E Instructions for reference. Also see Michael T Hines V Commissioner; this case outlines the details of the arrangement I described above.

I'm not sure what you mean by this... all partnerships flow through and have to pay SE tax on earnings (other than rental income). LLC's do NOTHING as far as tax matters go (unless they choose to be taxed as a corporation)

Chris

[DaveinTexas]

Huh?

All partnerships have to pay SE tax on earnings? I wasn't aware Partnerships paid SE tax on earnings. If you meant all Partners pay SE tax on earnings, that isn't true either. What if you have a Limited Partnership? What if you have an LLC with Members that own only Membership shares, have no Management authority, can't transact business/sign contracts binding the Partnership and don't materially participate? What if a Member has bifurcated his ownership interest, would he pay SE on his earnings if this were the case?

The OP never mentioned how this Partnership was organized, I was just trying to cover all the bases. And LLC Partnerships are perhaps the most flexible forms of doing business in allowing partners to allocate ownership/management/profit structure/capital requirements, etc, etc.

Personally, I don't like Partnerships; the tax law is too complicated/ambiguous for me. It would take a lifetime to master the ins/outs of Subchapter K, I'd rather go fishing!