Partner's Unreimbursed Expenses

• If you incur a business expense as a partner-owner of the business, your ability to claim a deduction for it will depend on the terms of the partnership's operating agreement. The IRS takes the position that a partner cannot claim a deduction for an unreimbursed expense he incurs on behalf of the partnership unless the operating agreement of the partnership specifically allows for it. Therefore, an expense that you pay as a partner on behalf of the business is deductible at the partnership level when the agreement is silent on the issue.
  
  

Employee Unreimbursed Expenses

• When you are an employee of a partnership, your employer's choice of entity has no effect on your ability to claim a deduction for your unreimbursed expenses. The IRS imposes the same rules on all employees who incur an expense on behalf of their employer. This rule requires that your employer not provide any reimbursement and that the expense be necessary to carry out the duties of your job. Furthermore, this cannot be an expense that is only loosely related to your job. For example, if the partnership requires you to use a personal vehicle to meet with clients outside of the office, this is an expense you can include. However, using your vehicle for personal purposes, even if during work hours, is not an unreimbursed expense you can deduct.
  
  

Claiming Unreimbursed Expenses

• Partners and employees of partnerships who are eligible to deduct unreimbursed expenses report the deduction on different tax forms. As a partner, you report the expense directly on the Schedule E attachment to your personal tax return with your other partnership income and deductions. However, as an employee, you can only claim unreimbursed expenses if you itemize deductions on Schedule A instead of taking the standard deduction. When you do, include all amounts as miscellaneous expenses subject to the 2-percent Adjusted Gross Income limitation. This means that only the amount of your total miscellaneous expenses that exceed the 2 percent are deductible.
  
  

Reimbursed Employee Expenses

• If the partnership reimburses you for some of your work-related out-of-pocket expenses, it's important to understand the tax return implications for those as well. If the partnership has an accountable plan, meaning it has a formal employee reimbursement policy, your expenses are not deductible, but the reimbursement is not taxable. As long as the plan reimburses employees within a reasonable amount of time after they pay the expense and requires the employee to return any excess allowance or reimbursement, the additional amounts in your paycheck for the reimbursement are not taxable income to you.