But if that were possible, then wouldn't it be one of the greatest tax loopholes of all time? If it were possible, couldn't every business just shift taxable income between tax years at will, simply by claiming an owner wasn't reimbursed in the past but the business wants to take a deduction now for prior year expenses it didn't deduct in the year paid?. Interesting thought, but, while I haven't looked lately, if these UPE are of the type that would usually be covered by an accountable plan, don't those plans have some sort of time-limit requirements?
This could most easily be exploited by sole proprietors, even more so than partners.. Sole proprietorship isn't an entity, right, so how would that work? Plus, in a partnership context, wouldn't it mess with the sharing percentages?
I was hoping if they were unable to take a tax deduction it might help sway the judge into not giving the other member the reimbursement or at least reducing the amount as they would be losing the tax benefit.. Until I saw this, I thought this was solely a tax question, i.e., that you as preparer would be objective and not have a conflict of interest. Be careful.
Before you mentioned hoping for a particular result, I was thinking the following:
An expense of even a closed business is sometimes deductible in a later year. So, is this general rule, from
McKinsey, An expense, otherwise deductible under section 162 or section 212, may remain so even though the business or the income-producing activity out of which it arose has since terminated. See, e.g., Kornhauser v. United States [1 USTC ¶ 284], 276 U.S. 145 (1928); Flood v. United States [43-1 USTC ¶ 9259], 133 F. 2d 173, 178-179 (1st Cir. 1943); Dowd v. Commissioner [Dec. 34,430], 68 T.C. 294, 301-302 (1977); Burrows v. Commissioner [Dec. 34,430], 38 B.T.A. 236, 238 (1938). However, deductibility in such a situation is premised on a showing that the expenses sought to be deducted are directly connected with or proximately resulted from the taxpayer's since-terminated business or income-producing activity. Kornhauser v. United States, supra at 153; Flood v. United States, supra at 178.
,
overridden by
McLAUCHLAN, even if, say, they timely amend the operating agreement, as allowed by reg. 1.761-1(c), to make the prior years' expense(s) deductible upon reimbursement,
(c) Partnership agreement. For the purposes of subchapter K, a partnership agreement includes the original agreement and any modifications thereof agreed to by all the partners or adopted in any other manner provided by the partnership agreement. Such agreement or modifications can be oral or written. A partnership agreement may be modified with respect to a particular taxable year subsequent to the close of such taxable year, but not later than the date (not including any extension of time) prescribed by law for the filing of the partnership return. As to any matter on which the partnership agreement, or any modification thereof, is silent, the provisions of local law shall be considered to constitute a part of the agreement.
. Also,
https://www.thetaxadviser.com/issues/20 ... ments.html