If you are a member of a multi-member LLC taxed as a partnership or a traditional partnership, you may sometimes pay for business expenses out of pocket. These expenses include travel, meals, car expenses, continuing education, professional dues, and home office costs.
There are two ways to handle these payments:
The partnership can reimburse you, or
You can deduct them on your personal tax return.
Reimbursement by the partnership
If your partnership reimburses you, the payment is both tax-free to you and deductible by the partnership, provided that.
The expenses qualify as business operating expenses,
You adequately document the expenses, and
You submit them for reimbursement in a timely manner.
Deducting Unreimbursed Expenses on Your Personal Return
If your partnership does not reimburse certain expenses, you can deduct them on your tax return, but only if your partnership has a formal policy of not reimbursing those expenses.
This policy must be:
stated in the LLC/partnership agreement or another written document, or
established as a consistent routine within the business.
Your LLC/partnership determines which expenses it will or won’t reimburse.
If needed, the LLC/partnership can amend its agreements to formalize your reimbursement policy.
This amendment must be made by the due date of the LLC/partnership tax return for the year (excluding extensions) and will apply to the entire tax year.
What’s the Best Approach?
In most cases, getting reimbursed by the LLC/partnership is the better option. However, situations exist where members/partners prefer not to use LLC/partnership funds for these expenses.