Q:

Subject: Questions after reviewing your web site

 

Hello.  I ran across your web site while looking on the web for information about how to handle a specific issue.  I was unable to find something specifically on point, so I wonder if it would be acceptable to throw the question your way.  Three questions, actually.

 

1.  In a single member LLC, how should the owner's draw (payments for activities which are the basis for the LLC's existence) be accounted? What type of QB "account" is Draw?

 

2.  I often receive payments from clients that comprise both professional fees and reimbursed expenses.  Based on advice I received some time ago, I have been grouping them together.  Yes, that results in tax payments based in part on the reimbursement, but it is balanced by the deductions taken on the expenses; besides, I was informed that was the appropriate way to handle it.  Your web site discusses contra expenses, and indicates that the reimbursements should be allocated to the same account as the expenses.  Is the difference between the way you're handling it and the way I'm handling it a matter of tidiness, or are there different consequences?  (It also seems to me that there is a question of how clients would report the payments if they issue a 1099, since my reporting ought to match theirs.)

 

3.  On a related point, if I charge a surcharge on advanced expenses, is there any reason that those payments cannot be grouped with fees (assuming that there is no sales tax issue)?

A:

If you have truly reviewed my websites, you should know how important I believe it to be that business owners work directly with qualified professional tax advisors before deciding which kind of entity to use, as well as how to operate with the one that is selected.

As is far too often the case, it appears that you set up an LLC without understanding how they function.  Now that it is established, you still have the choice of how it is to be taxed, as a Schedule C on your 1040 or as a corporation (C or S).  That choice should only be made with the assistance of a tax pro. 

The treatment of owner's draw will be different depending on how the LLC is taxed.  Your personal tax pro should be able to explain the differences.

With reimbursements received, there are different ways in which they can be handled on the books.  Because some entities have taxes based on gross revenues, I am a fan of keeping that figure down to the lowest legally allowed.  The way I usually handle it depends on a number of factors.  Generally, we post the receipts back to the original expense account only if they are separately designated on invoices and if they are for the exact same amounts.  If those costs are marked up when passed along to the customers, all amounts received should be processed through the revenues account.

In regard to the 1099 matching issue, you should understand that payments to most corporations are not required to be reported on 1099s, while payments to unincorporated businesses are.  However, from your email signature, it appears that you may be an attorney, in which case payments to your corp are required to be reported to IRS on 1099s.  IRS has singled out incorporated attorneys for tighter reporting that for any other kind of corporation.  This may or may not influence your decision as to how to tax your LLC.

Good luck.  I hope these comments help.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/17/2006 06:37:00 PM Send this post: