Unreimbursed partnership expenses are ordinary and necessary business costs that a partner pays out of pocket, deductible on the partner’s individual return rather than the partnership’s, but only when the partnership agreement requires the partner to bear the cost personally. Reported correctly on Schedule E, these expenses reduce both income tax and self-employment tax on your share of partnership earnings.
What Qualifies as UPE
Two tests have to be met. The expense must be ordinary and necessary in carrying on a trade or business under Internal Revenue Code Section 162, meaning it’s common in your industry and genuinely helpful to the work you do as a partner.1Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses And the partnership must not reimburse you, with your partnership agreement specifically requiring you to pay the cost from personal funds.
The second test is where most partners lose the deduction. Revenue Ruling 70-253 set the rule: a partner can deduct business expenses paid personally only when the partnership agreement specifically requires the partner to bear those costs without reimbursement.2Internal Revenue Service. IRS Field Attorney Advice 20150701F The Schedule E instructions echo it: you can deduct unreimbursed ordinary and necessary partnership expenses “if you were required to pay these expenses under the partnership agreement.”3Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040)
If your agreement is silent on who pays, the IRS presumes the partnership should cover the cost. Anything you pay personally in that situation is not deductible, even if it was a legitimate business expense. If the partnership would have reimbursed you and you simply didn’t ask, the IRS treats your payment closer to a contribution to the partnership than a deductible expense.4Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses Verbal understandings rarely hold up under audit.
The fix has to happen before the expenses are incurred. Your operating agreement or a written expense policy should spell out which categories of costs partners are expected to pay personally. Amending the agreement after the fact looks exactly like what it is.
Expenses Partners Typically Deduct
The eligible categories are the same ones the partnership itself could deduct. The only difference is who writes the check.
Vehicle and Mileage
Business use of a personal vehicle is the most common UPE. Miles driven to client meetings, between office locations, or to partnership job sites qualify. For 2026, the IRS standard mileage rate for business use is 72.5 cents per mile.5Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents You can use that rate or track actual costs, but either way you need a contemporaneous mileage log.
Travel, Lodging, and Meals
When partnership business takes you away from your tax home overnight, lodging and airfare qualify. Business meals are deductible at 50 percent of the actual cost.4Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses Keep itemized receipts and note who attended and what business was discussed. Credit card statements alone won’t survive a challenge.
Home Office
A dedicated space used exclusively and regularly for partnership business supports a home office deduction as UPE, covering the business percentage of utilities, insurance, repairs, and depreciation.6Internal Revenue Service. Publication 587 (2024), Business Use of Your Home The IRS reads “exclusively” strictly. A spare bedroom that doubles as a guest room doesn’t qualify, even if you work there most of the time.
How to Report UPE on Schedule E
UPE is reported on Schedule E (Form 1040), Part II, alongside your K-1 partnership income. After entering your share of partnership income, put the UPE on a separate line of line 28. For nonpassive activities, enter the amount in column (i) and write “UPE” in column (a) so the IRS can identify the deduction.3Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040) Don’t combine UPE with your K-1 income on the same line. The IRS wants it broken out.
If your partnership interest is passive (you don’t materially participate), the UPE goes in column (g) instead, and if Form 8582 applies to you for passive activity loss limitations, the UPE is handled through that form rather than directly on Schedule E.3Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040)
Limits That Can Reduce or Suspend the Deduction
Three limits apply in a specific order: first the partner’s adjusted basis in the partnership interest, then the at-risk rules, and finally the passive activity rules.7Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules If your basis in the partnership is low, confirm you have room to absorb the UPE before claiming it. The general view is that paying unreimbursed partnership expenses increases your outside basis, but the analysis is partnership-specific, and large UPE amounts relative to basis are worth reviewing with a professional.
Passive partners face an additional hurdle: UPE that creates or increases a passive activity loss may be suspended until you have passive income to absorb it, or until you dispose of the entire partnership interest.7Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
Self-Employment Tax Savings and the QBI Trade-Off
UPE reduces your net earnings from the partnership, so it lowers both your income tax and your self-employment tax on that income. The SE tax rate is 15.3 percent (12.4 percent Social Security and 2.9 percent Medicare), meaning every dollar of legitimate UPE saves roughly 15 cents in SE tax on top of the income tax savings.
There’s a trade-off. UPE also reduces your qualified business income, the figure used to calculate the Section 199A deduction of up to 20 percent of QBI.8Internal Revenue Service. Qualified Business Income Deduction Because UPE shrinks that income, it shrinks the QBI deduction too. For a partner in a lower bracket with significant UPE, the lost QBI deduction can offset part of the SE tax savings. Run the numbers both ways before assuming UPE is the better path in every year.
Records the IRS Expects
Travel, transportation, and entertainment expenses require documentary evidence: receipts, canceled checks, or bills showing the amount, date, place, and business purpose.4Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses Vehicle expenses need a log with miles, dates, and destinations. Reconstructing from memory at tax time doesn’t meet the standard.
Keep a copy of the partnership agreement with the expense provisions highlighted. If the IRS questions your UPE, the written requirement to pay personally is the first thing they’ll ask for. Without it, organized receipts alone won’t save the deduction.
S-Corporation Shareholders Cannot Use UPE
If you’re a shareholder-employee of an S corporation rather than a partner, UPE is not available. Tax courts have consistently held that S-corp shareholders cannot deduct unreimbursed business expenses on Schedule E. The partnership agreement mechanism that authorizes UPE doesn’t exist in the S-corp structure, and the miscellaneous itemized deduction employees once used was eliminated by the Tax Cuts and Jobs Act.9Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions The workaround is an accountable plan under which the S corporation reimburses the shareholder for substantiated business costs, tax-free to the shareholder and deductible by the corporation.