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How to resolve Lacerte diagnostic ref. 6334 for S corporation unreimbursed expenses

by Lacerte Tax 2023 Updated 6 months ago

The following informational diagnostic may generate when entering unreimbursed expenses on an S corporation 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)" (Screen 20.2, Code 2) 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:

  1. Go to Screen 20, Passthrough K-1's.
  2. Under the Passthrough K-1's panel, select the S corporation.
  3. Scroll to the Separately Stated Income and Deductions section.
  4. Enter the amount in Unreimbursed expenses (enter as a positive) [Adjust] (code 2). 
    • F1 Help Details: Enter unreimbursed expenses related to this K-1. This field also adjusts amounts carried from the Vehicle/Employee Business Expense worksheet.  The vehicle expense worksheet is generated from entries in Screen 22, Depreciation or Screen 30, Vehicle / Employee Business Expense. 
    • 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.
Lacerte Tax

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