Petty Cash and Deductible Expenses
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Petty Cash and Deductible Expenses Deductible
expenses with or without the use of petty cash continue to be a source of
confusion for many investment clubs. Let's take the topic of petty cash first.
As originally envisioned by the NAIC accounting manual, petty
cash was not to be used for any expense that was deductible by the club. Petty
cash does not figure into the calculation of unit value. Petty cash expenses are
not allocated for tax purposes. With the advent of NCA software, users
found that you could get a nice report from petty cash which categorized the
various expenses. These users started, in effect, to keep two sets of books -
petty cash for certain deductible expenses and NCA for everything else. A report
was given to members at year end showing the expenses, and members were told to
deduct their share on their individual tax return.
This, in my opinion is not a good idea. In fact it is a very
bad idea. Aside from the complication of two sets of books, and the very real
possibility of errors creeping into the personal deductions of members, you
could easily have a situation where the IRS would take the position that if an
expense is not deductible as a partnership expense, it is not properly
deductible by the individual.
The solution is to forego the use of the petty cash
account for anything. If you spend money on party hats or some other
non-deductible item, take up a collection for it, but do not record it and try
to keep track of it. These expenses are usually quite small in the general
nature of things, and are certainly not worth all the words that have been
written trying to explain what to do with them. I will repeat my personal,
iron-clad rule - Do not use the petty cash account
for any reason.
bivio is taking steps that will help to alleviate this
vexing (to me, anyway) situation. Soon, bivio will implement categories of non-deductible expenses. This will allow clubs to pay these items out of general
funds and not claim them on the tax return. This step in conjunction with
allowing multiple cash and other asset accounts should clear up this problem
once and for all.
So, you ask, as people often do, what expenses are deductible
by an investment club and which ones are not. The best source for this is the
IRS Publication 550, which can be found at
In general, expenses necessary to produce income are
deductible, and more indirect expenses are not. For instance, the cost of
attending an investment seminar is not deductible according to Publication 550.
Conventional wisdom has been that postage, office expenses, subscriptions to
investment magazines and services, clerical help, etc. are deductible. Food,
refreshments, and celebration parties are not.
A member's share of deductible expenses gets passed through to the individual, and is deducted as a miscellaneous expense on
the individual 1040 tax return. It should be noted that all such miscellaneous
expenses are grouped together and are deductible only to the extent that they
exceed 2% of adjusted gross income.
I recommend that all treasurers read Publication 550
carefully.
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