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    12 Replies Latest reply on Jun 4, 2009 2:57 PM by ArcSine

    Paying business expenses with another businesses money

    smyrnios4 Newbie
      I am currently working at Business "A" for an internship. I am helping them set up their books.
      I have come across an odd situation that I need some help with. The owners of Business "A" also own Business "B" and "C". They often pay for Business "A" expenses with Business "B or "C"'s cash, and all combinations of the three. Is their a way to record these transactions? Should they even be doing this?
        • Re: Paying business expenses with another businesses money
          amspcs Ranger
          I'm not an accountant,but I must say that sounds like sloppy business management and a real mess.
          Not to mention a potential future nightmare. How do they produce meaningful balance sheets and P&L's??
          How do they compute profit/loss for tax purposes?. In case of audit, sounds like the IRS would have a field day here. I think these people would be very wise to start running their business in a businesslike manner.
          1 of 1 people found this helpful
          • Re: Paying business expenses with another businesses money
            LUCKIEST Guide
            Paying business expenses with another businesses money, Welcome

            Good luck. YES it can be done. The simple answer is to set up a payable or inter company account.
            If Company A pays expenses of company B, Co B owes Co A the money sometime in the future.
            Same with the third company.
            It will be your job to set up the books and expenses correctly.

            • Re: Paying business expenses with another businesses money
              ArcSine Scout

              Congrats for taking on a daunting task...the good news is that when you get their stuff straightened out, you'll likely find yourself considered 'indispensible' around there!

              The scenario you've painted isn't terribly unusual. Having multiple entities (LLCs, corporations, etc.) under common ownership is pretty common, and a lot of times you'll find that one of 'em is the real cash-producing machine, while the other entities, well, not so much. In those cases you'll frequently find the profitable entity making advances to its sister entities to help fund their losses.

              That said, though, rock-solid bookkeeping is absolutely mandatory in that situation. As a previous poster suggested, make sure that all intercompany movements of funds, and all payments of one entity's expenses by another, are accurately captured on the books as intercompany receivables and payables.


              To make it even more credible in the event of an IRS examination, you could have the profitable entity set up a 'credit-line' from which the other entities could make draws as they need cash. Then the borrowing entities would pay their own expenses, with their own checks. That helps keep everything above-board.


              IRS usually won't have much of a problem with this arrangement, as long as everything is documented properly, AND if it's reasonable, on the face of all the facts, to expect that the borrowing entities will eventually have the chips to repay the debts. If that's NOT the case--i.e., if it's intended that these funds transfers are one-way trips, never to be repaid, then probably a different arrangement is called for. You could, for example, book the transfers as cash distributions from the transferor entity to the owners, followed by a cash contribution from the owners into the 'borrowing' companies.

              Just a few additional thoughts, in addition to the good advice from the previous posters. Best of luck!

     was early and I was full of no coffee...
                • Re: Paying business expenses with another businesses money
                  ArcSine Scout
                  Gotta qualify my meaning a bit about that 'credit line' angle....I do NOT mean that Profitable Company sets up a creditline with a bank, and then Loss Company borrows from it!!! I meant that the less-profitable entities borrow from the cash-machine entity (and then pay their own expenses), instead of the latter paying the expenses of the former.


         was early and I was full of no coffee...
                • Re: Paying business expenses with another businesses money
                  Santa Fe CPA Adventurer
                  This is not a good situation to be in. By my definition it is co-mingling of funds. When this happens an IRS examiner may double count the various transactions.
                  Luckiest, above has pretty well described to process for you. I would add that you need to analyze all the transactions fromthe check books registers and bank statement using old fashioned "T-Accounts" of debits and credits across a spreadsheet. This would be a "pointy pencil" :"green eye shade" process.
                  You may want to bail or convice the owner to hire an experienced bookkeeper to do teh job at an outragous but entirely justifyable price.

                  Richard G. Rovbinson, CPA
                    • Re: Paying business expenses with another businesses money
                      smyrnios4 Newbie
                      The company is now ending one of the buniesses, which make things easier. As far as business "c" goes... they do not plan on paying the company back. Would it be a bad idea to use the owners draw and investment accounts?

                      Example: Paying A expense with B cash

                      In Company B- Owners Draw for amount


                      In Compnay A- Owners capital account


                      Then just pay the expense like normal in comapny A
                        • Re: Paying business expenses with another businesses money
                          ArcSine Scout

                          I think the accounting approach you've described is the best one. If it's clearly intended that "C" will not be repaying what it's borrowed (either directly via advances, or indirectly via having another entity pay C's expenses), then your proposed accounting treatment would be advisable.

                          Just like you say, have the 'lending' company book it as a distribution to the owner, and simultaneously "C" will record it as a capital contribution from the owner.

                          Otherwise, by maintaining intercompany receivables / payables that'll never be settled up, you might run into the complication down the road of dealing with bad debt writeoffs, and debt forgiveness income (on the part of the 'lending' company, and "C", respectively).


                 was early and I was full of no coffee...
                            • Re: Paying business expenses with another businesses money
                              dublincpa Scout
                              If these entities are taxed as S Corps, the bigger problem that the shareholders will have in an audit is that the losses will be disallowed. There were a couple cases in 2006 where the Tax Court resolved that if the money doesn't flow through the Shareholders hands, no basis is allowed. Entity to entity payments journaled or otherwise recorded as having been attributed as distributions or shareholders loans are a big target. They won't win.
                                • Re: Paying business expenses with another businesses money
                                  ArcSine Scout
                                  smyrnios4, dublincpa makes a great point that's always worth keeping in mind: The IRS (and the Tax Court) can sometimes be pretty silly and arbitrary when in comes to meaningless intermediate steps. ('Meaningless' in the sense that, at the end of the day, the intermediate steps cancel out, and all they've done is waste checks and deposit slips.) Sometimes the court will insist that the intermediate steps be physically undertaken--at other times you'll be told the intermediate steps you did take will be disregarded since they, taken together, have no economic substance.

                                  The latter viewpoint, the 'economic substance' doctrine, makes a lot of sense. But what you can count on is that the IRS / courts will enforce it against you, or pretend it doesn't exist, depending on which position boosts Uncle Sam's tax coffers. But I digress.

                                  Don't know if you're dealing with S Corps, but if so, your thinking in your earlier post suggests you can guess what the necessary workaround is:

                                  1. Book the transactions as valid intercompany payables / receivables.
                                  2. Have the owners make (yes, physically make) cash infusions into the debtor entities. Record same as capital contributions.
                                  3. The debtor entities pay off the intercompany payables. Again, they actually write checks, and the creditor entity makes the deposits.
                                  4. The creditor entity makes cash distributions to the owners.

                                  What's important is that you keep the four steps above 'unrelated'. Make sure they are sufficiently separated temporally, and also that there's not much correlation in the dollar amounts.

                                  All you're doing thereby is precisely what many multi-business owners do, when one or more of their entities are cash-flow positive, and others are flowing red ink. In such case, the owner might be the only source of 'rescue' financing for the losing entities, and in turn the cash cows might represent the cheapest funds spigot for the owners.

                                  Best of luck!

                         was early and I was full of no coffee...