It’s not unusual for a partner to pay for some expenses related to the partnership’s business out of the partner’s own pocket.

This is especially likely to occur if you are a partner in a service partnership, such as a medical practice, an accounting firm, or a law firm.

For example, in an accounting or law firm, you might incur meal expenses in developing new client relationships. You might also incur auto expenses for getting to and from client meetings, pay for professional publications and continuing education, and incur home-office expenses.

What’s the federal income tax treatment of such expenses? Good question. Read on for the answers.

Key Question: Reimbursable or Not?

As long as the expenses are of the type that you, as a partner, are expected to pay without reimbursement under the partnership agreement or firm policy (written or unwritten), you can deduct allowable expenses as deductible business expenses on Schedule E of Form 1040.

But you cannot deduct expenses if the partnership would have honored a request for reimbursement.

Example 1. You Pay Expenses Related to Your Partnership’s Business

You are a partner in a local service-providing firm. Under the firm’s partnership agreement, partners are expected to bear the costs of meals to solicit potential new clients and retain existing clients, except in relatively unusual cases where firmwide goals are involved.

In attempting to attract new clients during the current year, you spend $7,000 of your own money on meals.

Since firm policy stipulates that you will not be reimbursed for the cost of these meals, you can deduct $3,500 (50 percent of $7,000).

You also incur $4,000 of allowable car expenses for travel to meet with prospective new clients. Since the partnership agreement stipulates that you will not be reimbursed for these expenses, you can deduct the $4,000.

Finally, you incur $6,000 of allowable home-office expenses. More on this later. Since the partnership agreement stipulates that you will not be reimbursed for these expenses, you can deduct the $6,000.

Where to Report Deductible Partner Expenses

According to the instructions to Schedule E of Form 1040 (2025 version), report unreimbursed partnership expenses that you pay on Schedule E, line 28 in column (i). Use a separate line for unreimbursed partnership expenses, and enter the notation “UPE” (unreimbursed expenses) in column (a) of that line.

Key point. Be sure to include deductions for your unreimbursed partnership-business expenses as deductions in arriving at your net income from self-employment on Schedule SE. These deductions will reduce your self-employment tax bill.

Example 2. Reporting Your Deductible Expenses

Same facts as in Example 1. On line 28, column (i) of Schedule E, report a total of $13,500 of deductible unreimbursed partnership expenses ($3,500 for meals, plus $4,000 for car expenses, plus $6,000 for home office expenses). Enter the notation “UPE” in column (a) of line 28.

Don’t forget to include the $13,500 as deductions in calculating your net self-employment income on Schedule SE.

Use of Office in Your Home

Subject to the normal deduction limitations under the home-office rules, you as a partner can deduct expenses allocable to the regular and exclusive use of your home office for partnership business.

When you have a deductible home office under the federal income tax rules, the Schedule E home-office deduction can deliver multiple tax-saving benefits because it’s deducted for federal income tax, self-employment tax, and state income tax.

The Principal-Place-of-Business Advantage

When your deductible home office qualifies as a principal place of business, commuting mileage from the home office to partnership-business temporary work locations (such as client sites) and partnership-business permanent work locations (such as the partnership’s official office) counts as business mileage.

Example 3. Home Office Increases Vehicle Deduction

Tony establishes his home office as his principal place of business. The home office changes his commuting mileage from his home to his downtown office from personal use to business use. This change increases Tony’s business mileage percent from 30 percent to 87 percent, which increases his vehicle deductions by 57 percent.

You can pass the principal-place-of-business test in either of two ways:

   •  Conduct most of your partnership income-earning activities in your home office. (That’s probably not going to happen.)

   •  Use your home office to conduct partnership-related administrative and management tasks, and do not make substantial use of any other fixed location (such as the partnership’s official office) for such administrative and management tasks.

Administrative and management activities that may be conducted from your home office include, but are not limited to:

   •  Scheduling appointments, meetings, and travel for yourself, supervised partners, and employees.

   •  Writing, reviewing, and finalizing reports required by partnership management, including employee performance evaluations, partner performance reviews, project status reports, and compliance documentation.

   •  Determining and reviewing compensation, bonuses, and benefits for employees and junior partners under your supervision.

   •  Reviewing and approving expense reports, timesheets, and reimbursement requests.

   •  Billing clients, reviewing accounts receivable, and following up on collections.

   •  Bookkeeping, recordkeeping, and reconciling partnership financial records relating to your practice area or supervisory responsibilities.

   •  Reading and responding to business correspondence, including email with clients, partners, employees, vendors, and outside counsel or advisors.

   •  Ordering supplies, equipment, and professional materials.

   •  Conducting hiring activities, including reviewing résumés, scheduling interviews, and conducting reference checks.

   •  Researching and reading professional journals, continuing education materials, and industry publications relevant to your role.

   •  Planning the partnership’s strategic activities within your area of responsibility, including budget preparation and forecasting.

   •  Preparing for client meetings, depositions, negotiations, or other substantive engagements.

   •  Conducting confidential personnel discussions or partner-level conversations by phone or video conference.

To further support that your home office is your principal place of business, the partnership agreement should require that certain categories of work be performed only from your home office and not from the partnership’s official office.

The partnership agreement could, for example, require that only billable work be done in the partnership office.

Simplified Home Office Deduction Method

You can use the simplified safe-harbor method for claiming home office deductions. The maximum deduction under the safe-harbor method is limited to only $1,500.

Note that if the partnership reimburses you for home-office expenses, it may not use the optional safe-harbor method. See Q&A: Can a Corporation Reimburse a Home Office with IRS Method?

Where to Deduct Home Office Expenses

Report the total of your deductible home-office expenses on line 28, Schedule E as explained earlier. Apparently, you need not file IRS Form 8829 (Expenses for Business Use of Your Home), because that form is intended only for Schedule C filers.

Court Decision Illustrates What Not to Do

In a 2014 decision, the Fifth Circuit Court of Appeals agreed with the Tax Court that the IRS had properly disallowed a law firm partner’s claimed deductions for various firm-related business expenses.

Under the partnership agreement, partners’ expenses for business meals, travel, client entertainment, local transportation, and continuing education were reimbursed subject to the approval of the managing partner.

Professional organization and bar membership fees were routinely reimbursed by the firm. Therefore, the taxpayer could not deduct these expenses on his personal return.

The Fifth Circuit agreed with the IRS that certain expenses the taxpayer chose to incur, such as for advertising and a home office, were not deductible because they were not clearly related to the partnership’s business. Finally, the Fifth Circuit agreed with the IRS that the taxpayer had failed to substantiate amounts, dates, and business purposes for claimed business-related auto expenses.

Key point. This case was a total loser for the taxpayer. Don’t let this happen to you!

Get Your Partnership Agreement Right!

As mentioned earlier, a partner cannot deduct expenses if they could have turned them into the partnership and been reimbursed.

In other words, no deduction is allowed for “voluntary” out-of-pocket expenses. The best way to eliminate any doubt about the proper tax treatment of unreimbursed partnership expenses is to install a written firm policy that clearly states what will and will not be reimbursed. That way, you and the other partners can deduct unreimbursed partnership-related business expenses without any IRS static if you ever get audited.

Takeaways

When your partnership will reimburse you for partnership-related expenses, according to the partnership agreement or standard practice, be sure to get reimbursed, because you can’t deduct those expenses individually.

If you incur expenses that will not be reimbursed, deduct allowable amounts as business expenses on Schedule E. And make sure you deduct them against your self-employment income so you reduce your self-employment tax.

Get your partnership agreement right by installing a written policy that clearly states what will and will not be reimbursed and whether partners are expected to maintain offices in their homes. That way, you and the other partners know what to expect and can avoid needless IRS controversies.

These points apply equally to members of LLCs that are treated as partnerships for tax purposes, because such members are treated as partners for tax purposes.

SIDEBAR: If the Partnership Pays You Rent for Your Home Office

If you use a qualifying home office for partnership business and the partnership does not pay you rent, you can generally deduct the related home-office expenses as unreimbursed partner expenses on Schedule E, assuming the partnership agreement requires you to bear those costs.

By contrast, when the partnership pays you rent for that same home-office space, the arrangement runs into the “rental to an employer” limitation under Section 280A(c)(6), which treats you much like an employee for this narrow purpose.

In that case, you lose the separate home-office deduction. The partnership deducts the rent on its return. (You have rental income but with no deductions to offset it.)

Key point. Don’t rent your home office to your partnership. Either get reimbursed by the partnership or deduct the home office as a business expense on your Form 1040, Schedule E.