Are You Missing Deductions on Your Own Business Expenses?

July 16, 2026

If you’re a partner in a business — retail, real estate, contracting, or anything in between — there’s a good chance you’ve covered a business expense out of your own pocket at some point. Mileage between job sites, supplies grabbed on the fly, a client lunch, home office costs. It feels like a deduction. It might not be.

Here’s the rule that catches a lot of people off guard.

The Question That Actually Matters

It’s not “did you pay for it yourself?” — it’s “would your partnership have paid you back?”

  • If your partnership agreement (written or unwritten) says partners are expected to cover certain costs themselves, you can deduct those unreimbursed expenses on Schedule E of your personal return.
  • If the partnership would have reimbursed you had you asked — you cannot deduct it yourself. Even if you never asked. Even if you paid it out of your own pocket.

That distinction is the whole ballgame.

What It Actually Looks Like in Practice

Say your partnership doesn’t reimburse partners for local marketing or client outreach. You spend $7,000 of your own money on advertising and client development. Here’s what you might be able to deduct:

  • $3,500 in qualifying meal-related promotion costs (50% of eligible expenses)
  • $4,000 in unreimbursed vehicle expenses driving between job sites or property showings
  • $6,000 in home office expenses

That’s $13,500 in deductions — reported on line 28 of Schedule E, marked “UPE” for unreimbursed partner expenses.

One detail that’s easy to miss: these deductions also reduce your self-employment tax on Schedule SE. It’s a small line item that makes a real difference.

The Home Office Angle (This One’s Worth Paying Attention To)

If your home office qualifies as your principal place of business — meaning it’s where you handle the administrative side of things like scheduling, billing, bookkeeping, or client prep, and you don’t do that work anywhere else — something useful happens.

Your drive from home to job sites, properties, or your firm’s main office suddenly counts as business mileage instead of a personal commute.

In one real example, this shift moved a partner’s business mileage from 30% to 87% — a 57% jump in vehicle deductions, just from properly establishing the home office.

You can also use the simplified safe-harbor method for the home office deduction itself, capped at $1,500. Just note: if your partnership already reimburses your home office costs, you can’t also claim the safe harbor.

A Real Case Where It All Went Wrong

In McLauchlan v. Commissioner (558 Fed. Appx. 374, 5th Cir. 2014), a partner at a law firm lost his deductions for meals, travel, entertainment, and more — and the details are worth paying attention to.

His firm’s partnership agreement did require partners to cover certain expenses themselves — but it also provided for reimbursement of those same expenses if approved by a managing partner. McLauchlan never submitted a single expense for reimbursement. The court’s position was straightforward: if the partnership would have paid you back and you didn’t ask, you don’t get to deduct it yourself. Choosing not to seek reimbursement doesn’t turn a partnership expense into a personal one.

His auto expenses were denied on entirely separate grounds — he had kept no records at all. No mileage log, no dates, no documented business purpose. The IRS strict substantiation rules for vehicle use require all of the above, and without them, the deduction simply doesn’t exist.

What makes this case particularly striking: McLauchlan was a practicing attorney of over twenty years who prepared his own returns. The court factored that directly into its decision to uphold accuracy-related penalties. This isn’t a trap that only catches people who don’t know better — it catches people who assume they do.

Note: McLauchlan is an unpublished 5th Circuit opinion and is not binding precedent, but it illustrates how these rules play out in practice.

The Short Version

  1. If your partnership would reimburse you — get reimbursed. You can’t deduct expenses you chose not to submit.
  2. If it’s genuinely unreimbursed, deduct it properly on Schedule E — and make sure it’s also applied against your self-employment income.
  3. Get it in writing. A clear firm policy on what is and isn’t reimbursed is your best protection if the IRS ever asks questions.

One more thing: these same rules apply to LLC members who are taxed as partners — so if that’s your structure, this applies to you too.

Not Sure Where You Stand?

Every partnership agreement is a little different, and the line between “reimbursable” and “legitimately unreimbursed” isn’t always obvious. If you want a second set of eyes on your situation — whether that’s reviewing your partnership agreement, cleaning up your documentation, or just making sure you’re capturing every deduction you’re entitled to — we’re happy to help.