Equal Allocation of Expenses
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Equal Allocation of Expenses The is the second and last
[well, we can all hope] article on the current status of fees and expenses for
investment clubs. You can read the first in the series at.......
Sorry, Gotta Talk About Fees
Again
In this article, we are going to talk about ways to
allocate expenses equally between members, regardless of the ownership
percentages.
A little history. In the general scheme of things,
accounting programs for investment clubs have been on the market a relatively
short time. The first one did not offer equal allocation of expenses. Therefore,
clever users designed a way that this could be done - at least
partially.
There are two things to consider here. When we talk about
equal allocation of expenses, are we talking about the allocation of the
deduction for tax purposes, or are we talking about spreading the burden for the
expenditure equally among the members. Ideally, we should be talking about both.
The work-around, referred to in the previous paragraph, only accomplished the
equal spreading of the burden. Tax deductions were allocated on the basis of
ownership. So you had this situation. Assume a 90% partner and a 10% partner.
They are going to spend $100 on a hot computer program, and have agreed to split
this expense equally. The old way was to assess each of them a fee of $50. Then,
after the expense of $100 was recorded, it could be seen that each partner's
value had decreased by $50, thus proving that this method spread the 'burden'
equally. However, at the end of the year, Partner A received a $90 tax
deduction, and Partner B got only $10. So Partner B put is $50 and got a $10
deduction - not a good deal for him, but great for Partner A. The rationale was
that it would all even out in the end. When Partner B got out of the club, the
basis for his partnership interest would be overstated by $40, so he would
report that much less of a capital gain. This rationale, of course, ignores the
fact that Partner B might have to wait 20 years to get that deduction, and that
he might be trading an ordinary deduction for a capital
loss.
bivio to the rescue!!!! Using this accounting system, a
club can allocate expenses equally between members both for 'burden' and 'tax'
purposes. No complicated work-arounds. Just select the box entitled
'allocate equally' when recording the expense, and it is all done for
you.
One caveat. You have to apply a standard in determining
whether an expense is to be allocated equally or proportionately to ownership.
Your method should be spelled out in the partnership agreement.
So, do we ever assess fees anymore? As the previous
article, referred to above, points out, fee assessments can be used for
withdrawals, penalties, and new members [to make up for start-up costs]. They
don't have to be used [and shouldn't] to spread the burden of an expenditure
equally between members.
I promise that I will not write another column
about fees for at least two days. <g>
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