Still Paying Out of Pocket for Your Business? Here’s How to Write It Off Properly

Many small business owners pay for business expenses out of their own pocket — because it’s faster, easier, or just how they’ve always done it.

But what if we told you those out-of-pocket expenses might not be properly deducted on your taxes?

And that could be costing you money every year — money you’re entitled to keep.

This is especially common among self-employed individuals, partners in small LLCs, and first-generation entrepreneurs who haven’t yet built formal expense systems or don’t want to “bother” their accountant with the small stuff.

The IRS has a name for this: Unreimbursed Partnership Expenses (UPE) — and if you’re not tracking and reporting these the right way, you might be missing out on thousands in deductions.

What Are Unreimbursed Partnership Expenses?

If you’re a partner in a business (such as an LLC), and you spend your own money on business-related costs that the business doesn’t reimburse you for — those are considered Unreimbursed Partnership Expenses.

Common examples include:

• Travel and transportation related to business
• Office supplies or software subscriptions
• Personal vehicle usage for business
• Trainings or conferences
• Professional dues and work-related education
• Legal fees or work clothing/uniforms
• Home office expenses
• Business meals (subject to 50% deductibility)

For these to be deductible:

• They must be ordinary and necessary in your field.
• They must not be reimbursable under the partnership agreement or practice.
• You must maintain proper documentation (receipts, purpose, date, and amount).

Why This Is a Problem

Because these expenses don’t show up on the business’s books, they often get overlooked on your tax return.

So you end up paying taxes on income you didn’t truly keep — because some of it went straight back into your business. This can reduce your self-employment income and also affect your Qualified Business Income (QBI) deduction, a key tax-saving opportunity.

Who This Affects Most

• Service-based entrepreneurs who split costs with partners
• Contractors managing their own client relationships
• Childcare, wellness, creative, and food businesses
• First-generation immigrant business owners
• Women entrepreneurs running lean operations

In short, it affects the exact kinds of business owners we serve every day.

How to Fix It — and Protect Yourself

1. Track Personal Payments for the Business
   Even if it’s just a few transactions a month, keep a simple spreadsheet or app-based record.
2. Provide Proof and Purpose
   Save receipts and document the business purpose for each item. This is critical for audit protection.
3. Confirm Non-Reimbursement
   Review your partnership agreement. If it requires you to pay certain expenses out-of-pocket, you may be eligible to deduct them. Better still, request reimbursement — and if denied, get a written statement from the partnership confirming the expenses are not reimbursable.
4. Report Correctly on Your Tax Return
   These expenses should be reported on Schedule E (Form 1040). Consult your accountant before filing — they must be handled properly or the deduction could be disallowed.
5. Understand the Broader Tax Implications
   These deductions reduce both your taxable income and your self-employment income — affecting your QBI deduction as well.
6. Set Up a Reimbursement Policy Going Forward
   To streamline this in the future, consider creating a basic reimbursement policy so expenses go through the business directly.

Risks to Watch For

• If your partnership agreement doesn’t explicitly require you to cover certain expenses, the IRS may disallow the deduction.
• If your business is classified as a passive activity, your deduction may be limited by passive activity loss rules.

Why It Matters Now

In today’s economic climate, every dollar counts. If you’re footing business expenses personally, make sure you’re not missing out on legitimate tax savings.

Too many small business owners — especially from underserved communities — carry the financial burden silently, without knowing they can reclaim some of that investment.

With proper documentation, guidance, and the right tax strategy, you can legally reduce your taxable income and reinvest in what matters most — your business and your future.

Contact us here!

The Article “Still Paying Out of Pocket for Your Business? Here’s How to Write It Off Properly” was originally posted Here.