1065: Must an Accountable Plan Actually Reimburse with Cash?

[kochumai]

I have information that it's possible to have an accountable plan yet not have the partnership pay actual cash for reimbursement and so just record the expense against equity (as a contribution) instead of cash. I need to know if this is correct.

I know it's possible to treat the expenses as unreimbursed partnership expenses and not have them in the books at all. But I need to know if it's possible to have an accountable plan in place and yet not reimburse with actual cash and record this in the books to go against an expense (whether for actual expenses or a general expense using SMR) and a contribution.

[Strongsilence-CPA]

IRS Pub 463 quickly scanned. I didn't see an answer in that publ.  The answer seems to be about reimbursement, which is mentioned throughout Pub 463. Is an offset to equity considered to be a form of reimbursement?  Do you have CCH Answer Connect?

[Taxes-by-Rocky]

You might start by reviewing the partnership agreement to ascertain that a partner may incur such expenses on behalf of the partnership, if applicable, as UPE or otherwise.  You might review the invoices to determine if such expenses were incurred in the partnership's name, or at least with respect to partnership authorized business.  If not, an accountable plan may be irrelevant.  I suspect the accountable plan rules focus on payments actually made to a partner (for actual expenses incurred for partnership business) but would need to look.  Are the ownership percentages changing with every hypothetical distribution and recontribution?

[BobKamman]

In other words, you have information that you won't reveal the source to us, but you want us to reveal helpful information to you.  Sounds just like the guessing game that my 12-year-old grandson wanted to play during a car trip last month.  

[qbteachmt]

I would think it doesn't need to be paid out by cash or equivalent, because what you asked is the result of a wash, avoiding the banking. I found this for you (note it is from before TCJA):

https://lifestylecpa.com/2014/12/22/unreimbursed-partnership-expenses/

"Partners in partnerships can deduct unreimbursed partnership expenses by using one of the following methods:

Partnership Agreement Clause

As a partnership, you should have a partnership agreement (operating agreement if LLC). Treatment of the unreimbursed partner expenses is specified in the partnership agreement. In the partnership agreement, there should be a clause that allows the expenses paid for by the owner to be fully deductible without limitations. The amount is deducted on the partners personal form 1040, Schedule E on page 2, part II.

Capital contribution

Partner’s unreimbursed expenses can be treated as capital contribution. Capital contribution increases the partner’s basis in the partnership.

Loan

The unreimbursed expense can be treated as a loan to the partnership. The following procedures must be followed to document the expense as a loan:

• Both the partner and the partnership must intend for this to be a loan
• The partnership is obligated to pay the partner
• There is a written agreement and interest is paid on a periodic basis
• Form 1099-INT is issued to the partner

A loan that is derived from unreimbursed expenses is generally treated as a recourse loan. A recourse loan increases both the partners basis and at risk basis.

Partner Beware

If your partnership does not have a partnership or operating agreement, you cannot deduct your unreimbursed expenses on your schedule E. The partnership or operating agreement must state what is charged on the business account and what the partners are responsible for. Partners have to be careful to maintain documentation of their unreimbursed expenses. The unreimbursed expenses are deducted on Schedule E and reduces the partner’s taxable income."

[Strongsilence-CPA]

@qbteachmt This source that you found makes me more curious about when and why CPAs, EAs, etc use sources low on the authority list.  I do it too and it isn't what I learned to do (last century!).  So, with Google and AI available and ubiquitous, how are you deciding what authority or weight you give?

[BobKamman]

@Strongsilence-CPA What makes me curious is why so many entities are still electing to be partnerships.  It's usually the worst form of organization, because of the unlimited liability.  I suppose the main advantage is to avoid payroll returns, when there are no employees.  Otherwise, in the old days a corporation was the way to avoid liability and these days, the LLC electing to be taxed as a corporation is, at least in most cases, a better choice.  Are these legacy businesses, left over from the 50s?  Or are people still setting them up without giving it much thought?

[qbteachmt]

"how are you deciding what authority or weight you give?"

Great question. I judge first by the nature of the issue, because authoritative sources such as IRS won't always provide a combined answer for this type of topic, in the way a blog might do so. Instead of one blog (which might have reference links, hopefully), the IRS or Cornell references will be 3 or 4 individual references that must be related to make sense, The perspective of good sources such as Spidell and Investopedia and even Nerd Wallet is more "man on the street" or "what it means in reality, not Congress."

It also depends on the forum or community. This isn't the only place I participate, and some are geekier and some are "common man." Some participants (looks to Bob) will want quoted authorities. Some want a directly applicable answer. And I always warn people, it's not just AI or Google results you can't trust. With all the changes after 2017 TCJA that were short-term solutions, provisions, and retroactive changes, don't rely on something if you can't also determine the date it applies/applied. The link I provided is from 2014, but nothing I found indicates any change to the Accountable Plan reimbursement provisions as asked here. If I hadn't been able to check it, I wouldn't have posted it.

[qbteachmt]

"Or are people still setting them up without giving it much thought?"

Cue TikTok.

"still electing to be partnerships."

Quoting Dave Ramsey: The only Ship that doesn't float.

[Strongsilence-CPA]

 combined answer...

And that hits the issue on the nub.  As I understand you, and maybe assuming what you mean, "combining" might require critical thinking (synthesis, reasoning, etc.) that is the essence of your profession. So, leaving it to some other authority feels like an abdication of our responsibility. Yet, we can use those skills to judge the opinions by others, such as the one you found. So maybe it is okay to "rely" on lower lever sources.

[Terry53029]

@BobKamman Here is a good article from the Tax Advisor on the subject.

https://www.thetaxadviser.com/issues/2022/oct/10-good-reasons-why-llcs-should-not-elect-s-corporatio...

[Michaelinebonbin]

Partner paid out of pocket for an expense incurred on behalf of the partnership and did not receive reimbursement. 1st, an accountable plan is for employees, which in a partnership can not be the partners. The partner did not contribute to capital but paid an expense of the partnership and was not reimbursed. That would be a UPE and is not deductible unless explicitly stated as such in the operating agreement. Either it was UPE and deductible or not deductible if the partnership agreement is not explicit in the UPE. Adding a contribution to capital and then adding an expense to the books could be argued but looking at the substance of the transaction leads to its a UPE and may or may not be deducted on the individual partner return and should not be a contribution to capital and an expense of the partnership. Does that help?