Hey BP,

How do mileage deductions work in a partnership structured as a multi-member LLC? Are the miles I drive only deductible to my share of the rental income or is it deducted from the total income of the LLC first?

My partner in this new LLC is the "money guy" and I'm running the operations for a 50/50 split. I hope I explained my question clearly. For example:

Total Gross Annual Income: $20,000

Partner 1: drove 500 miles (2000 x .575 = $1,150 deduction) and earned $10,000 (50%)

Partner 2: Drove 0 miles and earned $10.000 (50%)

Would Partner 2 be able to deduct the business' miles driven or do those miles only get deducted from Partner 1's income? 

Thanks!

To make it real simple, in your example it seems that Partner 1 could claim unreimbursed partnership expenses on his personal tax return / schedule E. Nothing would be reported on the partnership return itself or related k-1 from that partnership.

Or did the partnership did actually reimburse for mileage?

@Navid A.

If the partnership agreed in its operating agreement to reimburse partners for driving, then it should reimburse Partner 1, and the mileage ends up a partnership deduction and split 50/50, in the year of the reimbursement. This is rare and not recommended for partnerships.

Normally, it is what @Kory Reynolds described.

@Kory Reynolds , just to confirm/clarify...The business miles driven under the operational scope of the LLC are not deductible from the LLC's annual gross income? How can I or should I claim the mileage deduction on my portion of the K-1 rather than my personal tax return? ...I guess it wouldn't really matter either way because it's still being deducted from my total income.

The reason I ask is because my partner wants to know if he would get the benefit of the miles I drive daily to manage the properties and ongoing projects. The thought is that those are business miles and the deduction should be deducted from the gross annual income before being split 50/50. I assume this isn't possible? 

@Michael Plaks , that makes sense, thanks for clarifying. I'll continue to log my miles and deduct them from my personal tax return then. The LLC will not be reimbursing for mileage related expenses.

@Navid A.

Might want to amend the operating agreement to expressly disallow reimbursement for auto expenses and require the members to incur and pay these expenses outside of the partnership.

UPE can't be taken on expenses the partnership could have reimbursed.

Your tax professional should be discussing this with you.

@Eamonn McElroy

So if we amend the operating agreement to reflect that auto expenses will not be reimbursed, we could then claim UPE on our personal return?

That's the way I advise my clients, yes.

What does your CPA say?

Originally posted by @Eamonn McElroy :

That's the way I advise my clients, yes.

What does your CPA say?

This once again confirms the fact that not all CPAs are made from the same cloth...I think I need to find a better tax "expert" as this is the 2nd time I was given the wrong information. Perhaps my current CPA doesn't specialize in RE, but something like the mileage deduction would apply across multiple industries. I was advised to deduct mileage from the total gross income of the LLC, but failed to mention the reimbursement part.

A lot of CPAs are "jack of all trades" generalists.

While the topic of this thread isn't complex, a CPA not experienced with partnership tax law may struggle.

Deducting on the 1065, as your CPA suggested, is not correct (nor it is a choice).

Either (a) establish an accountable plan and have the partnership timely reimburse you (and take the deduction on the 1065) OR (b) get an appropriate expense reimbursement amendment in the operating agreement (signed by all applicable members) and begin taking mileage as UPE on your 1040.

(a) is generally not a good idea for mileage in non spouse-spouse partnerships.  It would only mean you're getting a fraction of the tax benefit for the wear and tear on your vehicle while the rest is being allocated to the other members, as Michael noted.  This is not equitable.

You'll also want to make sure you have the appropriate records for mileage, as mileage is subject to higher record keeping requirements.