The following informational diagnostic may generate when entering unreimbursed expenses on an S corporation Schedule K-1 return:
S-Corporation #: Unreimbursed Expenses have been entered on an S-Corp K-1. Several Tax Court cases have held that Unreimbursed Expenses are not deductible by S-Corporation Shareholders on Schedule E. See the Help for input code "Unreimbursed Expenses (Enter as positive) (Adjust)" in the S-Corporation K-1 Input Screen for more detail. (ref. #6334)
Understanding diagnostic Ref. 6334:
Tax courts have generally held that unreimbursed expenses aren't deductible by S corporation shareholders (TC Memo 1989–207 and TC Memo 1997–446).
You can treat the unreimbursed expenses as contributions for capital, or allow them as an employee business expense on Schedule A subject to the 2% adjusted gross income (AGI) limitation.
See IRS Instructions for Schedule A for more information.
If the unreimbursed expense is allowable for the shareholder:
- Go to Input Return ⮕ Income ⮕ Passthrough K-1 ⮕ S-Corp Info.
- Select the Less Common Scenarios tab.
- Scroll down to the Separately Stated Income and Deductions section.
- Enter the amount in Unreimbursed expenses (enter as a positive) [Adjust].
- If the standard mileage rate is used on a vehicle, the mileage deduction and business portion of parking fees and tolls, interest, and property taxes carry here automatically.
- If the actual expense method is used, the business portion of all actual expenses carries here automatically.
- The program reports the amount as a separate line item on Schedule E, page 2, with the description UPE.
- If passive rules apply, current year losses will be allowed before the unreimbursed expenses. This amount reduces self-employment income if the K-1 is nonpassive and you have an entry in "Net Earnings From Self-Employment" for the K-1.
