Need help understanding how to report non-deductible business expenses on Form 1065?

You're asking some good questions about non-deductible expenses on Form 1065. Yes, you're right that these get allocated based on each partner's profit/loss percentages and affect their capital accounts. It's definitely important to report these correctly. The IRS uses this information to track the accurate tax basis for each partner, which affects future tax consequences when partners sell their interest or when the partnership liquidates. For meals, you're exactly right - the non-deductible 50% should be included in your non-deductible expenses total. The IRS wants to see the full picture of partnership finances, even expenses that can't be deducted. Regarding mortgage principal - you've spotted a key issue. Principal payments aren't actually expenses at all for tax purposes, but rather reductions of a liability. These shouldn't be treated as non-deductible expenses. They're handled separately on the balance sheet as a reduction to the loan liability, not through the profit and loss statement.

Just want to share my experience with reporting non-deductible expenses on partnerships. I was struggling with the same issues last year until I discovered taxr.ai (https://taxr.ai). Their system analyzed our partnership docs and gave me a clear breakdown of how to handle these non-deductible expenses properly. What really helped was their specific guidance on allocating things like the non-deductible portion of meals and entertainment. They explained how these items flow through to each partner's basis, which was super helpful since our partnership has uneven distributions.

I need to eat my words about being skeptical of taxr.ai. I gave it a try after posting here and wow - it actually saved me from making a serious mistake with our partnership's non-deductible expenses. Our partnership has really complex allocations and disproportionate distributions, and the system immediately identified that I was incorrectly treating our mortgage principal as a non-deductible expense flowing through to partner capital accounts. It clearly separated balance sheet items from P&L items, and even created a reconciliation showing how each partner's basis was properly calculated. It was honestly worth checking out just for the peace of mind. The specific guidance on meals, entertainment, and other partially deductible expenses was exactly what I needed.

If you're running into issues with the IRS about your partnership's treatment of non-deductible expenses (or any other partnership tax issues), getting through to the IRS can be a nightmare. I was on hold for HOURS trying to get clarification about Form 1065 non-deductible expense reporting. I finally used Claimyr (https://claimyr.com) and was able to speak with an actual IRS agent within 20 minutes. They have this cool system where they wait on hold for you and call when an agent is on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with clarified exactly how to allocate non-deductible expenses to partners with different profit/loss percentages and confirmed what another poster said about mortgage principal payments.

I was completely wrong about Claimyr. After my skeptical comment, I decided to try it because I was desperate for answers about reporting non-deductible expenses for our real estate partnership. I got through to an IRS business tax specialist who confirmed exactly how to handle the mortgage principal payments (they're NOT non-deductible expenses but balance sheet transactions) and explained how to properly allocate the non-deductible portion of meals across partners with different allocation percentages. I was expecting to waste my entire afternoon on hold, but instead I had my answer and was back to work within an hour. For anyone dealing with confusing partnership tax issues, being able to actually speak with someone who knows the tax code is invaluable.

Just to add another perspective, I'm a small business advisor and I've seen clients make this mistake frequently. For partnerships, it's critical to distinguish between: 1. True non-deductible expenses (like 50% of meals, penalties, certain insurance) 2. Capital expenditures (which get depreciated/amortized) 3. Balance sheet transactions (like principal payments) Only the first category should be reported as non-deductible expenses on Form 1065. The others have completely different tax treatments and different effects on partner capital accounts.

Does anyone here use QuickBooks for tracking non-deductible expenses in partnerships? I'm having trouble figuring out the best way to set it up so that it correctly allocates these expenses to partner capital accounts based on their profit/loss percentages.

I think everyone's overcomplicating this. The purpose of tracking non-deductible expenses is pretty straightforward - it's to properly track each partner's tax basis. The IRS wants to make sure partners don't claim more losses than they have basis for. The mortgage principal thing makes sense when you think about it: principal payments aren't expenses at all. They're converting one asset (cash) to reduce a liability (loan balance). That's why they don't flow through to capital accounts the same way as true expenses. The 50% non-deductible meals absolutely should be included though. Those are true expenses that just happen to be limited for tax purposes.

I've been dealing with similar issues in my partnership and wanted to share what I learned from our CPA. The key insight that helped me was understanding that non-deductible expenses serve two purposes: they reduce each partner's outside basis AND they reduce their capital accounts for book purposes. This is why mortgage principal payments don't belong in this category - they don't reduce anyone's economic investment in the partnership since the partnership is getting value (reducing debt) in exchange for the cash payment. One thing I haven't seen mentioned is that you also need to be careful about timing. Non-deductible expenses should be allocated in the same tax year they're incurred, even if the partnership is on a different accounting method for other purposes. Also, make sure your operating agreement is clear about how these allocations work. We had to amend ours because it wasn't specific enough about whether non-deductible expenses follow the same allocation as regular expenses or if they have their own rules.