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Deductible unreimbursed partnership expenses are deductible

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on Line 28 of Schedule...
Deductible unreimbursed partnership expenses are deductible on Line 28 of Schedule E. In this case the expense is a tractor with a cost of $ 25,000.00. This is a depreciable asset and would not normally be deductible all in one year. What is the correct way to handle this?
Submitted: 4 months ago.Category: Tax
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7/7/2017
Tax Professional: Matthew Breecher, Certified Public Accountant (CPA) replied 4 months ago
Matthew Breecher
Matthew Breecher, Certified Public Accountant (CPA)
Category: Tax
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I don't deal a lot with tractors, but why wouldn't this qualify under section 179 and take accelerated depreciation.

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Customer reply replied 4 months ago
It would qualify, but wasn't really an option I wanted to use. This is for a tree farm and didn't want to raise a red flag for hobby rules.
Tax Professional: Matthew Breecher, Certified Public Accountant (CPA) replied 4 months ago

Is he passive or active in the partnership? He would have to have Schedule C losses for hobby loss rules; I run corporations at a loss consistently if the situation is right. If you could, put it on the 4562 as 7 year property. I think if the amount is significant to the partnership income/loss, then calling the entire amount unreimbursed partnership expense is more of a risk and if audited would cause an issue.

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Customer reply replied 4 months ago
Active participation for sure.
UPE on schedule C?
Really?
The instructions say Schedule E where partnership gains and losses are.
Tax Professional: Matthew Breecher, Certified Public Accountant (CPA) replied 4 months ago

No, I mean the hobby loss rules are applied to Schedule C reporters - those individuals who try to create a business, never have substantial income, and then takes losses and offset their ordinary income. Actually, individuals in a partnership cannot deduct expenses on a Schedule C. However, there is more of a presumption for people that create partnerships or corporations are not out trying to make a hobby a business. Assuming this is a proper partnership and he received a K-1.

...

If he is active in the partnership you have to make sure a few things are appropriate. For a partner to be permitted to deduct partnership expenses he or she paid, the partnership agreement must require the partner to pay such expenses without having a right to be reimbursed. Additionally, these are usually reported on the K-1 so it ties out to Schedule E. You can try to list it on the Schedule E as UPE, I think that is a big risk. It should have been dealt with at the partnership level and on the K-1.

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Customer reply replied 4 months ago
The IRS instructions tell me to report 1065 UPE on page 2 of Schedule E Form 1040 and I know that it is where it goes. The issue is that I don't want to flag an audit by deducting the entire $25K, so I was going to depreciate it, but there is no mechanism to do this. I was trying to find out if anyone has dealt with this before and how was it handled.I am fully aware of the fact that it should have been dealt with at the partnership level, but the CPA that prepared the 1065 is telling me that the articles are written as such that the partner does not have the right to be reimbursed so I must handle it as Schedule E UPE.
Tax Professional: Matthew Breecher, Certified Public Accountant (CPA) replied 4 months ago

Let me ask a few people in my office. I have very few partnership clients; nearly all my client base is traditional corporate entities or sub-chapter s corporations. Frankly, I think either way might be high risk; but, being able to defend the position is the most important part.

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