How to properly handle partnership expense imbalance for deductions in new art gallery business
I need some advice for a partnership I'm about to start with a friend for an art gallery. We're splitting everything 50/50 (contributions, draws, equity), but there's going to be a pretty significant imbalance in the expenses we each incur. I'll be handling the day-to-day operations of the gallery, while my friend will be spending most of their time cultivating relationships with artists and clients. This means they'll rack up way more travel costs, meal expenses, and client gifts than I will. My expenses will be much smaller, mainly just some tech upgrades for the gallery systems. Initially, I was thinking we could have regular operating expenses paid directly by the business, but then handle things like travel, meals, gifts, and tech upgrades as unreimbursed partnership expenses that we each deduct individually. I'm definitely going to talk to a CPA and lawyer before finalizing anything, but wanted to see if anyone here has dealt with a similar expense imbalance in a partnership and might have some creative solutions or advice. Is there a better way to structure this for tax purposes while keeping things fair between us?
18 comments
Join the conversation
Noah Torres
Having worked with several art gallery partnerships, I can tell you there are a few ways to approach this. The simplest solution would be to have the partnership itself pay for ALL business expenses directly, regardless of which partner incurs them. This keeps everything clean on the books and avoids any imbalance issues with deductions. If that's not possible, you could consider a "guaranteed payment" structure. Essentially, your partnership agreement would specify that your partner receives additional compensation specifically to cover their higher travel/entertainment expenses. These guaranteed payments are deductible by the partnership and taxable to the partner who receives them. Another option is to adjust the profit-sharing ratio to compensate for the expense imbalance while keeping capital contributions equal. This requires careful documentation in your partnership agreement.
0 coins
Natalie Wang
•Thanks for these options! The guaranteed payment structure sounds interesting - would that essentially be like a salary above our equal draws? And would my partner still be able to deduct those expenses on their personal return, or would the deduction happen only at the partnership level?
0 coins
Noah Torres
•The guaranteed payment works somewhat like a salary, yes, but it's not exactly the same for tax purposes. It's a payment guaranteed regardless of partnership income. The partnership deducts these payments, and your partner reports them as ordinary income (subject to self-employment tax). Your partner would not separately deduct the business expenses on their personal return if the guaranteed payment is intended to cover those costs. That would be double-dipping. The partnership gets the deduction for the guaranteed payment, and your partner gets compensated for incurring higher business expenses.
0 coins
Samantha Hall
Hey there! I was in a similar situation with my photography business partnership last year and discovered taxr.ai (https://taxr.ai) which saved us so much headache with our partnership deduction issues. We were also dealing with uneven expenses between partners and weren't sure how to properly document everything for the best tax treatment. The site analyzed our partnership agreement and expense records, then gave us specific recommendations about how to structure things. We ended up going with a combination approach where some expenses were partnership deductions and others were covered through special allocations. Might be worth checking out before you meet with your CPA so you have a better idea of your options!
0 coins
Ryan Young
•How exactly does this work? Does it just give general advice or does it actually help with the specific paperwork and documentation needed for partnership expenses? My business partner and I have been struggling with this exact issue.
0 coins
Sophia Clark
•Sounds interesting but I'm skeptical. How is this better than just talking to my accountant? My partner and I have a medical practice and our expense imbalance has been an ongoing issue with our tax prep.
0 coins
Samantha Hall
•It analyzes your specific situation rather than giving general advice. You upload your documents and it identifies the optimal structure based on your particular expense patterns and goals. It looks at everything from your formation documents to your projected expenses and gives tailored recommendations about guaranteed payments, special allocations, or expense reimbursement policies. It's definitely not a replacement for your accountant, but more of a complement. I brought the analysis to my CPA who was actually impressed with the detail and said it saved us both time because it organized everything and highlighted specific tax code sections relevant to our situation. It helped us have a much more productive conversation because we already understood our options better.
0 coins
Sophia Clark
I have to follow up about taxr.ai that I mentioned in my skeptical comment above. I actually tried it after posting and was genuinely impressed. Our medical practice partnership had been struggling with how to handle the fact that I incur way more continuing education expenses while my partner handles more of the equipment purchases. Our accountant had just been having us track everything separately and it was a mess. The taxr.ai system suggested we implement an accountable plan for the partnership that would allow for reimbursement of properly documented expenses while maintaining our equal equity structure. It even generated the documentation we needed for our partnership agreement amendment. Didn't mean to sound so doubtful before - just surprised how helpful it was for our specific situation.
0 coins
Katherine Harris
After reading your post, I'm reminded of my own struggle trying to get specific guidance from the IRS about partnership deductions last tax season. Spent DAYS trying to get through on the phone. Finally discovered Claimyr (https://claimyr.com) and watched their demo (https://youtu.be/_kiP6q8DX5c) - they actually got me connected to a real IRS agent within 15 minutes who answered all my partnership expense allocation questions. My situation was similar - my partner and I had very different expense profiles but equal ownership. The IRS agent clarified exactly how we should document special allocations in our partnership agreement to make them respect the substantial economic effect rules. Saved us thousands in potential audit issues!
0 coins
Madison Allen
•How does this service actually work? Does it just call the IRS for you? Seems like I could just do that myself but I've never been able to get through.
0 coins
Joshua Wood
•Yeah right. Nobody gets through to the IRS in 15 minutes. I've been trying for weeks to get clarification on K-1 reporting for my partnership. This sounds like snake oil to me.
0 coins
Katherine Harris
•It essentially works by navigating the IRS phone system and waiting on hold for you. They have a system that maintains your place in the queue and then calls you once they have an actual IRS agent on the line ready to talk to you. So you don't have to waste hours listening to hold music. It's definitely not snake oil - I was extremely skeptical too. But it really does work. Their system is apparently optimized to connect during times when wait times are shortest, and they handle all the phone tree navigation that usually trips people up. I literally got a call back telling me they had an IRS agent ready to talk about partnership tax issues, and I was connected within seconds.
0 coins
Joshua Wood
I need to eat my words. After commenting above, I was desperate enough to try Claimyr since I'd been trying to reach the IRS for weeks about partnership special allocations. I figured what the hell, can't be worse than what I've been doing. No joke - got a call back in about 25 minutes saying they had an IRS agent on the line. The agent walked me through exactly how to document our disproportionate business expenses to satisfy the "substantial economic effect" test in our partnership agreement. Apparently the key is making sure the partnership agreement explicitly addresses the expense imbalance rather than each partner trying to deduct things separately. The agent recommended using either special allocations or guaranteed payments depending on the specific nature of the expenses.
0 coins
Justin Evans
Something nobody's mentioned yet - have you considered an expense reimbursement plan? We use this in our consulting partnership where travel expenses are wildly different between partners. Basically, the partnership adopts a formal "accountable plan" that meets the IRS requirements. Then ALL business expenses get submitted to the partnership and reimbursed. This keeps everything at the entity level, maintains the equal partnership split, and avoids the complexity of special allocations or guaranteed payments. The key is having good documentation policies that meet the IRS requirements for an accountable plan. Your partnership agreement should reference this plan and have clear guidelines about what qualifies as a business expense.
0 coins
Natalie Wang
•That's interesting! Do you find it creates any cash flow issues since one partner is essentially "borrowing" more from the business than the other through these reimbursements? Or does it all even out in the end?
0 coins
Justin Evans
•It doesn't create cash flow issues for us because we view it as partnership expenses rather than one partner borrowing more. The expenses are necessary business costs regardless of which partner incurs them. We do track the reimbursements for transparency, but since they're legitimate business expenses that benefit the entire partnership, we don't consider them advances or draws. The partner traveling to land clients is generating value for everyone just like the partner handling local operations. Different roles, different expenses, but equal contribution to the business.
0 coins
Emily Parker
Has anyone considered just ignoring the expense imbalance entirely? If you're truly 50/50 partners, then why not just have EVERYTHING be a partnership expense regardless of who incurs it? Seems like you're overthinking this.
0 coins
Ezra Collins
•That approach can work fine until you get audited. The IRS looks carefully at partnerships with uneven expense allocations. You need proper documentation in the partnership agreement to support why expenses are allocated differently than the general profit/loss splits.
0 coins