Unreimbursed Expenses: Partnership and S-Corp

In previous articles, we have covered both the home office deduction and the personal vehicle expense deduction that are available to sole proprietors, self-employed 1099 contractors, and single member LLCs. But what about partners and s-corp shareholders? These individuals also can incur such expenses out of pocket that will not be reimbursed by the partnership or s-corporation. How can these individuals get tax breaks for these expenses as well?

Partners of Partnerships

Both partners and S-corp shareholders may take a deduction for ordinary and necessary expenses in the current tax year that are incurred in the process of carrying on the trade or business.

The IRS and the Tax Court have held that, in order to take unreimbursed expenses as a partnership, the formal partnership agreement must include a policy that explicitly states the expenses that certain partners must pay personally.

Shareholders of S-corporations

S-corporations are required to establish an accountability plan in order to take deductions for shareholder paid expenses that are business related, timely substantiated, and returned by the employee. Unlike the partner deduction above, these expenses are taken at the business level as expenses on the books and tax return of the S-corporation. The S-corp gets the deduction for the expenses paid by the shareholder and then reimburses the shareholder for the expenses incurred.

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