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5 Replies Last post: Apr 28, 2008 4:13 PM by nytaxguy

Question about reconciling expenses

Jan 21, 2008 5:57 PM

Click to view littlefish's profile Start-up littlefish 4 posts since
Jan 21, 2008
I have a tax question related to two small businesses that I operate on
a cash accounting basis. One of the businesses is a Sole
Proprietorship and the other is an LLC. During 2007, I purchased
inventory and incurred expenses for my LLC, but I paid for some of it
out of my Sole Proprietorship checking account.

I'm not sure how to account for this discrepancy. I could consider
these transactions as the purchase and sale of goods and services from
my Sole Proprietorship to my LLC. However, there seems to be a couple
of problems with this approach.

One problem is that some of the expenses were for non-tangible
items like legal advice. I'm not sure whether the IRS allows the
transfer of those kinds of non-tangible expenses as a sale from one
business to another.

The second problem is that I did not transfer funds from my LLC to my
Sole Proprietorship during calendar year 2007 for the value of these
goods and services, and I am unclear whether I can do it now and still
have it count for tax year 2007. Can I simply backdate a check to
December 31st, 2007?
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Click to view CEO Space's profile Mogul CEO Space 262 posts since
Jan 13, 2008
1. Re: Question about reconciling expenses Jan 21, 2008 7:55 PM

Do you own both companies 100%?
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Click to view LUCKIEST's profile SCORE LUCKIEST 4,680 posts since
Aug 6, 2007
2. Re: Question about reconciling expenses Jan 21, 2008 8:42 PM
Question about reconciling expenses. First of all welcome to the website...
You operate on a cash accounting basis. Do you have an Accountant??
Being on a cash basis, transactions end on the last day of the year.
Yes you can simply backdate a check to December 31st, 2007 until you are audited.
Then you have a problem.
Operating on a cash basis means just that. Cash that comes in up to Dec 31. and
Cash that goes out up to Dec 31.
Talk to your accountant.
LUCKIEST
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Click to view littlefish's profile Start-up littlefish 4 posts since
Jan 21, 2008
3. Re: Question about reconciling expenses Jan 21, 2008 10:01 PM
in response to: CEO Space
I own 100% of the Sole Proprietorship. The LLC is co-owned with my wife.
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Click to view dublincpa's profile Mogul dublincpa 86 posts since
Jan 29, 2008
4. Re: Question about reconciling expenses Feb 8, 2008 10:08 AM
in response to: littlefish

You do not have a problem.

Sole Proprietorship - You and the business are the same person for tax purposes. You pay tax on all the net profit regardless of whether you withdraw any money from the bank. Any money you put into the business is still yours. Any money borrowed is your personal responsibility to repay. Any money you take out is yours. You can spend, lend, donate or save it as you choose without any consequence.

LLC - You and the business are separate tax entities. You would record either a Capital Contribution or Loan from Member. A contribution would increase your basis in the business. If you treat it as a loan, be sure to draw up a basic note.

If you have more specific questions, feel free to email me dublincpa@gmail.com.

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Click to view nytaxguy's profile Authority nytaxguy 15 posts since
Apr 28, 2008
5. Re: Question about reconciling expenses Apr 28, 2008 4:13 PM
I am a CPA in NY. The easiest and perhaps best way to account for the money movement is to call it a loan in both entities. Loans payable on the books of the sole proprietorship and a loan receivable on the books of the LLC. I presume you account for the LLC as an S-corp? You should be very careful about transferring expenses from one entity to another. What may be considered deductible for one business may not be considered deductible for the other business. Loans are OK for all businesses. The accounting entry for the Sole Prop would be to debit the inventory/expenses and credit loans payable.
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