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    5 Replies Latest reply on Apr 28, 2008 4:13 PM by nytaxguy

    Question about reconciling expenses

    littlefish Newbie
      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?
        • Re: Question about reconciling expenses
          CEO Space Scout

          Do you own both companies 100%?
            • Re: Question about reconciling expenses
              littlefish Newbie
              I own 100% of the Sole Proprietorship. The LLC is co-owned with my wife.
                • Re: Question about reconciling expenses
                  dublincpa Scout

                  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.
              • Re: Question about reconciling expenses
                LUCKIEST Guide
                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
                • Re: Question about reconciling expenses
                  nytaxguy Wayfarer
                  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.