UNREIMBURSED PARTNERSHIP EXPENSES
With Edofalltrades, you receive expert advice in all the other financial arenas you’ll
encounter in your partnership. Since each type of business structure requires
different accounting methods and tax reporting processes, you need to have a solid
relationship with one of our accountants who understands your individual needs.
When you use your considerable resources to create a
formal partnership agreement with another person —
or more than one — it’s more important than ever to rely
on an accountant familiar with your personal needs as well
as those of the partnership.
A partnership is similar in many ways to a sole proprietorship when it comes to filing taxes. Each partner in the business pays taxes separately; the partnership as an entity doesn’t pay any taxes. A partnership agreement is merely a way to share a sole proprietorship.
When preparing your partnership taxes, most all of the business expenses incurred by the business are reported on tax form Schedule K-1. The partnership serves strictly as a “pass-through” for expenses and profits. All expenses that were made to sustain the business are reported on the K-1. Exceptions include unreimbursed expenses.
When preparing your partnership agreement, the way you and your partners share the load is spelled out. For example, you may decide that each partner pays his own cell phone bill. When your agreement separates these costs, these unreimbursed partnership expenses are reported only on your personal tax returns.
Herein lays the benefit of having one personal accountant who also serves as your business accountant. All your interests are protected when we are aware of both your personal and business dealings. Tax preparation then becomes a holistic process whereby your accountant serves all your interests.
When you rely on our expertise, you get more than just an accountant who runs the numbers and gives you the final forms to sign. You’ll get advice with your best interest in mind through every transaction.
• Consulting services. From the beginning, you receive advice that leads to the highest return for your investments, both personally and through your partnership.
• Strategic planning. Your personal accounting consultant participates in your planning processes to keep you on track.
• Restructuring service. We can help you restructure your partnership agreement if necessary to either add or remove the unreimbursed partnership expenses in the contract.
LEAVING A PAPER TRAIL
When you add in all the personal expenses that you incurred in the name of your business and include them as partnership expenses on your K-1, then you reduce the amount of income you show on your own 1040. If, on the other hand, your agreement calls for you to keep separate logs of certain expenses, then those expenses can come off your 1040 return, just as if you were a sole proprietor. There’s little difference regarding your final tax burden.
While the process seems pretty straightforward on paper, complications can ensue when the partnership agreement doesn’t specify certain expenses as reimbursable, yet you believe they’re tantamount to the business’ success. For example, if you take classes to improve your skills so that you’re better at your job, you may not be able to deduct this expense on your personal tax statement unless there’s a direct reference to educational expense in the partnership agreement. So sometimes, without a denial letter from the partnership, you’re stuck with the costs in full, with no tax breaks.
It’s these small details that often trip up successful business people who understand the value of spending money to make money. Even though you invest in yourself and your business to continue reaping such high rewards, you don’t have to lose out on tax breaks. Since you’re not a tax accountant who keeps up with the hundreds of changes the IRS sometimes makes in a year, hire someone who is, Edofalltrades.
The first place your accountant checks is your partnership agreement to determine how you set up your cash flow. This is the document that defines the predetermined allowable unreimbursed expenses. It’s also the place that directs the partners’ capital investments and liabilities in the business.
Typically, when you start a business partnership, each partner invests a certain amount of resources that could include cash, real estate or other real assets, such as computers. Each partner’s contribution then is set aside in an equity account. The amount of your investment represents your equity interest in the company. Throughout the year, you may add to that account or take money out. These transactions are not part of the business profits or losses, but still are tracked within the partnership accounting books.
Your personal accountant understands the differences and can help you not only take the proper personal deductions you’re owed on your 1040, but also help direct your contributions and liabilities in the future so that you always come out ahead. Sometimes, a simple ledger change can make a difference in how your taxes are calculated.
A simple topic such as unreimbursed partnership expenses can lead to a wide range of possibilities in how your wealth is distributed, accounted for and taxed.
Other vital financial services you need to maintain and grow your wealth may include:
• Forensic accounting when you need another set of experienced eyes to find discrepancies in your books that may indicate one or more of your partners is not as honest as you hoped.
• Payroll accounting to handle all the transactions inherent in hiring, paying and providing benefits to your employees and outside contractors.
• Succession planning so that your family smoothly can pick up where you left off in the business partnership.
• Retirement planning because even successful business partners want to retire at some point and enjoy that success more fully. Even if you enjoy your business too much to retire, we see to it that you’re comfortable, meeting your personal goals, achieving the life you aspire to and protecting your assets.
Edofalltrades have the expertise to advise you on unreimbursed partnership expenses and other financial issues between you and your partners. Better yet, talk us before you draw up any legally binding contracts. Being prepared is always better than being surprised.