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Can a Partnership Deduct Reimbursed Mileage and Per Diem?

Technical topics regarding tax preparation.
#1
Chay  
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I've found a few opinions that suggest partnerships can deduct mileage reimbursements to the individual partners, and it would follow that per diem meals and incidental expenses, and also possibly the simplified home office deduction, would also be eligible for reimbursement.

However, nothing I've found from IRS sources confirms this, and in fact what I've found indicates the opposite.

This is from Rev. Proc. 2011-47:
This revenue procedure provides rules for using a per diem rate to substantiate the amount of an employee’s expenses for lodging, meal, and incidental expenses, or for meal and incidental expenses only, that a payor (an employer, its agent, or a third party) reimburses. Employees and self-employed individuals that deduct unreimbursed expenses for travel away from home may use a per diem rate for meals and incidental expenses, or incidental expenses only, under this revenue procedure.

The part about reimbursements indicates it only applies to employees. Can a partner of a partnership be counted as an employee for this purpose? Probably not.

The part about deductions indicates it applies to "individuals that deduct unreimbursed expenses". A partner that submits a reimbursement request doesn't fall into this category because the expense is not "unreimbursed". Likewise, a partnership with expenses to deduct doesn't fall into the category because it isn't an "individual".

This is from Publication 463:
As a self-employed person, you adequately account by reporting your actual expenses.

Although the quote is from a section about independent contractors, the statement itself is broad and would seem to apply in any case where the expenses are incurred by someone other than an employee...such as a partner in a partnership.

Of course, none of this would stop a partner from taking the SMR, per diem, or simplified home office deductions as unreimbursed partnership expenses.

And that leads me to my final thought...can a partnership agreement provide for guaranteed payments in respect of these UPE's? Section 707(c) only affords guaranteed payment treatment "for services or the use of capital". It doesn't seem like paying expenses that aren't partnership expenses would fall into either of those categories, but I don't know. If guaranteed payments can be computed this way, that would produce the same result as if the SMR, etc. had been reimbursed by the partnership. It could also be used to allow some partners to circumvent the § 280A(c)(5) limit on the home office deduction.
 

#2
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And that leads me to my final thought...can a partnership agreement provide for guaranteed payments in respect of these UPE's? Section 707(c) only affords guaranteed payment treatment "for services or the use of capital". It doesn't seem like paying expenses that aren't partnership expenses would fall into either of those categories, but I don't know.


PLR 9330001
X represents that he incurred certain club dues and other expenses on behalf of the partnership, in order to service existing clients and establish new business contacts, and that the partnership reimbursed the expenses to him by way of guaranteed payments under section 707(c) of the Code. This method of reimbursement required X to include the amounts in income on his
individual tax return, and no deduction was taken for the expenses at the partnership level. Assuming that the club expenses in question are trade or business expenses that meet the requirements of sections 162(a) and 274 of the Code, X may deduct the expenses from gross income under section 62(a)(1) in computing adjusted gross income.
 

#3
Chay  
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Thanks for that information.

As far as the other issue goes, I stumbled on the section of Rev. Proc. 2011-47 providing that partners and volunteers receiving reimbursements can use the standard mileage rate and per diem. This means the quote from Publication 463 is rather misleading, since partners are self-employed but don't have to use actual expenses. I guess that's what you get for trying to rely on IRS publications.
 

#4
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If guaranteed payments can be computed this way, that would produce the same result as if the SMR, etc. had been reimbursed by the partnership. It could also be used to allow some partners to circumvent the § 280A(c)(5) limit on the home office deduction.


Do you mean no income limitation for home office deduction?
 

#5
Chay  
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Yes. Say for example you have three equal partners and $300 in net profit. One partner qualifies for a $900 home office deduction before taking the income limit into account. The partnership makes a guaranteed payment to that partner in the amount of $900. Now the partner's net income is his $900 guaranteed payment less his $200 share of the net loss of the partnership after guaranteed payments. He can claim a $700 home office deduction. If standard reimbursement rules are used, the limitation is applied at the partnership level and only $300 can be claimed for that year.
 

#6
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Would you treat a partnership reimbursing a partner for paying the partnership's utility bill as a guaranteed payment? What if the partner bought equipment for the partnership? What if the partner purchased depreciable property and the p'ship reimbursed the p'ner? I have a p'ner who funded almost all of the startup year epenses for a p'ship and was reimbursed the next year. I ran the reimbursement part through the capital and p'ner loan accounts. The partners (do not live in same proximity so for convenience sake) continue to pay for expenses on behalf of the p'ship and are continually reimbursed. Its messy. I wrestle with the employee reimbursement rules as well but they dont apply to p'ners.
 

#7
Chay  
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You certainly could treat the reimbursements as guaranteed payments offset with UPE's. That would leave the burden of supporting the expenses claimed to the partners when they each file their personal return.
 

#8
Doug M  
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You certainly could treat the reimbursements as guaranteed payments offset with UPE's.


The only two provisions in the law that determines a GP is (1) services rendered (2) use of capital.

Expense reimbursements are not GP's. What you need is a thorough agreement as to what is reimbursed by the partnership and what is not.
 

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Doug, have you any resource that would provide additional guidance for Expense Reimbursement provisions in the agreement?
 

#10
Chay  
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Doug M wrote:Expense reimbursements are not GP's. What you need is a thorough agreement as to what is reimbursed by the partnership and what is not.

That's exactly what I thought until Taxmaster cited PLR 9330001 in post #2.

In rethinking my position, I've concluded that while the presence of services rendered or use of capital determines whether a partner is in receipt of guaranteed payments or not, the amount of the guaranteed payment can be determined in any way the partners see fit, including by reference to expenses incurred.
 

#11
Doug M  
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TAM 9330001 references Cropland, 75 T.C. 288 (1980) and Rev. Rul. 70-253, 1970-1 CB 31

The Rev Ruling states that under the partnership agreement, a partner is required to pay that (otherwise deductible) expense with his own funds, it is deductible under §162.

If it ends up as a GP (not deducted by the partnership), then he is not getting the deduction, since the GP will create income and then an offsetting deduction.
Last edited by Doug M on 21-Aug-2019 8:49pm, edited 2 times in total.
 

#12
Doug M  
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Florida-the partnership should have an agreement as to what expenses it will reimburse to a partner. If the expense is not on the list, and it is otherwise deductible under §162, it can be deducted against (above the line) the K-1 income. But, it should have been paid by the partner, with his own funds.

I would have classified it as a partner draw, not as a GP, as the expense should have been paid with his/her own funds.
 

#13
Chay  
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Doug M wrote:If it ends up as a GP (not deducted by the partnership)

Since when are GP's not deducted by the partnership?

Doug M wrote:he is not getting the deduction, since the GP will create income and then an offsetting deduction.

Exactly. The partnership is getting the deduction. The effect is the same as if there were a reimbursement arrangement, except that if any expenses turn out to be nondeductible, the individual partner will suffer the consequences and not the partnership.

Maybe what you're trying to say is that if the partnership bases guaranteed payment amounts on expenses a partner is required to pay, then in effect he isn't actually required to pay them, so the positions on the character of the expenses as deductible and of the payments as income are inconsistent.

It's a good argument. Like I said, that's exactly what I thought when I started this thread. But apparently, based on TAM 9330001, the IRS doesn't care enough to make the argument. So why should we? Also, there is a genuine non-tax purpose to doing the transactions that way: you keep the expenses as partnership expenses while at the same time shifting the burden of keeping records and proving expenses to the individual partners. Who are we to say that a partnership is forbidden to structure its affairs in this way?
 

#14
Doug M  
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I did not double check the statement by TAXMASTER in post #2

This method of reimbursement required X to include the amounts in income on his individual tax return, and no deduction was taken for the expenses at the partnership level.
Emphasis added.

It appears to be a quote directly from the TAM
 

#15
Chay  
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Here's another quote from the TAM:
the partnership reimbursed the expenses to him by way of guaranteed payments under section 707(c) of the Code.

Applying section 707(c) of the Code results in a deduction at the partnership level in respect of the amounts paid out. So, while the partnership did not deduct the expenses, they deducted the guaranteed payments.
 


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