Investor · Madison, WI · Member since 2012 · 242 posts · 61 votes
Quick question for a tax professional, I've read extensively and started to draft a modification for our partnership operating agreement - but want to verify that this method works.
Since we use our personal vehicles for doing rental activities, and have racked up quite a bit of mileage - there is a section in Schedule E instructions about unreimbursed partnership expense (https://www.irs.gov/pub/irs-pdf/i1040se.pdf). Is there any issue with just doing standard mileage deduction ($0.575/mile) as unreimbursed partnership expense? We have extremely detailed mileage logs (we keep booklets in our car).
I should also note that we do not want to do actual cash reimbursements or have mileage credited towards capital accounts, etc. We want to do mileage this way if we can.
I'm planning on telling my accountant on doing it this year - but if there is an issue I hate to spend a bunch of money having him research it if not familiar.
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
10y
@John K. Yes there is an issue with this. If you claim it as an unreimbursed business expenses, you will report on Schedule A and the expenses will be subject to a 2% floor. So if your AGI is $100k, the first $2k in mileage deductions is throw out.
The best way to do this is to establish an accountable plan. It's an actual policy you will draft with your CPA that will then be adopted by the partnership. You will detail the requirements that must be met in order to reimburse for mileage expenses. You must submit expenses reports to the partnership and have the partnership reimburse you. Now the partnership is deducting these expenses against its income rather than you doing it personally on your Schedule A.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
10y
Brandon is completely right; however, there is a provision that allows you to deduct unreimbursed partnership expenses; however, these should be taken at the partnership level as they come under strict scrutiny AND I have never come q cross a Tax Court case or Private Letter Ruling indicating these expenses being allowed on a rental activity.
Investor · Madison, WI · Member since 2012 · 242 posts · 61 votes
10y
Thanks @Steven Hamilton II , great advice! Are there any creative ways to give mileage tax advantage to the partner without effecting capital accounts or actually paying it out? With my limited accounting knowledge I think the answer is probably no.
Basically, some partners in our company drive a ton (5000+ miles/year), others do not - but we all agree it's not something we want to pay out or want to have effect capital accounts since everyone has equal contributions - but the partners that drive just want the tax break (and to actually get it). Last year we did the Schedule A with 2% which gave us nothing. Is there any way on the K-1 or any other creative (but acceptable) accounting ways to do this?
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
10y
@John K. you can list mileage on Schedule E, Line 28 as "UPE" Unreimbursed Partnership Expenses. https://www.irs.gov/uac/IRS-Offers-Tips-for-Accura...
But the best way to do it is have an accountable plan established for the partnership. This will reduce the partnership's income and associated taxes (if generating earned income). Then it's up to your operating agreement and bookkeeping to figure out how capital accounts are affected.