Join Us for a Free Starting an Investment Club Webinar and Invite a Guest!

Click Here

                                 

Bookmark and Share




Search     

1. The most beneficial (tax-wise) “payout” for a withdrawing club partner is a transfer of appreciated stock. The withdrawing partner’s cost basis in the stock is their cost basis in the club. Withdrawing members do not realize a gain or loss until they sell the stock. The remaining partners do not realize a current gain. When remaining partners withdraw, they will realize a gain or loss based upon the difference between their cost basis and the current value of their account in the club.

2. “Don’t try to keep club partners ‘Equal’”. It is almost impossible to maintain “equal” ownership. Ownership percentages will vary as members come and go, make a late payment, have financial difficulties or need to make a partial withdrawal. All of the club accounting software products make it very easy to account for unequal ownerships. It also makes it easier for new members to join without having to pay a large amount of money to “buy in” at the same level of older members.

3. All partner payments, except penalties, need to be posted as “payments”. “Fees” should only be used for penalties, such as late fees & non-sufficient funds reimbursements. All payments “buy” units for members, fees do not.

Posting funds received as “fees” can cause problems when expenses are recorded “equally”, especially for new members who may own fewer units.

4. When allocating expenses to your club members, your partnership agreement dictates the method that should be followed. Otherwise, the IRS takes the position that all expenses shall be allocated in proportion to ownership (see Publication 541). If you want to allocate expenses “equally”, your partnership agreement must spell it out.

5. Why do we need club accounting? One word explains it…TAXES! We are required by the IRS to make an annual accounting of our club income & expenses. Once the income is taxed, we don’t have to pay taxes again on the same money. So we need to keep track of how much of our share of the club’s value has already been taxes and how much is yet to be taxed. The year-end “closing of the books” process does all of this for us. It provides the necessary allocation of income & expenses to each member of the club and updates each partners “basis” in the club.

6. There are two kinds of “allocation” methods used in club accounting for distributing income & expenses. “Snapshot” (or non-time based) and “Time-Based” allocation. The “time-based” allocation is recommended. All income and expenses are allocated using the ownership percentages on the date the income/expense items are realized. Members only receive allocations for the part of the year that they were members of the club. With the “snapshot” method, the member who joins the club mid-year will share in income & expenses for the entire year. Computers & club accounting software make the numerous calculations painless.

This article was submitted by Candace Baker (candaceb@charter.net).  Candace is her own club's treasurer, and has taught many classes on club accounting as a long time director with the St. Louis Chapter of BetterInvesting.  She makes herself available for individual questions at the above email address.




Learning Events Near You:

Find a Chapter Near You

Corporate Partners

Learn more about

companies supporting

BetterInvesting's mission