A rash of support requests during tax season made me realize it’s time to remind clubs to audit their accounting records regularly. These requests came because major differences between the club’s accounting records and the ICLUBcentral Tax Printer or the Form 1099 were causing problems. Although a club’s records aren’t required to match the information on a 1099, there are only a few instances in which the records would be more accurate than the 1099. These instances tend to be when a market value is needed to allocate cost basis between companies.
Examples where legitimate differences can occur include spinoffs and mergers in which the merger consideration consisted of stock and cash. Also, if the security was purchased before brokers were required to track cost basis, the club records can be more accurate. For stocks, brokers were required to track customer cost basis starting with purchases made after Dec. 31, 2010.
There are some clues that a transaction didn’t get processed properly. Finding these clues often involves comparing items on two reports. Here are some items whose values should be identical on two reports. Differences indicate an error somewhere.
The total paid-in-plus earnings amount on the member status report and the member capital accounts amount on the income statement/balance sheet. Both report the sum of the cost basis of all current members. The total cost amount for the portfolio on the valuation statement and the investments line of the income statement/balance sheet should be equal. These represent the cost of acquiring the current portfolio. The total value of the club shown on the valuation statement should equal the club value on the member status report.
If you see differences in the amount reported in these reports, where do you look for transactions that caused the problem? One of the common culprits is sell transactions for companies for which the club has enrolled in a dividend reinvestment plan. The telltale sign is a cost basis that isn’t exactly zero after the full position is liquidated or the number of shares owned isn’t zero. Usually, deleting and re-entering the final sale allows the program to choose the blocks sold.
If all the shares weren’t sold, leaving a DRIP with small fractional shares remaining, use the Sell All button or link in the ICLUBcentral program to be sure all shares are sold. This is a good practice whenever selling the full position of a company in a DRIP. On a related note, if you sell all shares in a DRIP and your broker reports it as two sales, one for the whole shares and one for the fractional shares, you don’t need to record it as two sales. You can use the Sell All function and enter the sale as one transaction. Be sure to combine the proceeds from the two transactions in the broker’s report of the sale. This process helps prevent misidentifying blocks sold.
Another item to check is the nonsurviving company in a merger. The cost basis for this company should be zero. Check it using the security ledger. In Club Accounting 3, use the security transactions history.
Withdrawals can also cause some of the problems listed above. Incomplete full withdrawals can result in a member with small fractional units. If the value of the units is small enough, the member won’t appear on the member status report. When doing a full withdrawal, check the member unit ledger in myICLUB.com (individual valuation units ledger in CA3) to be sure this member has zero units. This person’s paid-in-plus earnings should also be zero. A common mistake is to use the value on a recent member status report as the value withdrawn. Go with the amount shown on the withdrawal entry page.
If necessary use the withdrawal fee area to decrease the payout. Changing the displayed total value will cause an incomplete full withdrawal. Incomplete withdrawals combined with allocating some individual expenses by member can result in units owned to go negative. Unless your partnership agreement specifically states which expenses can be allocated equally, Section 704 of the tax code states expenses must be allocated by partnership interest. This is why I recommend clubs never allocate any expense by member.
A withdrawal for which the announcement date and payout date are in two tax years can cause problems. Keep full withdrawal announcement dates and payout dates in the same tax year. Do this by having the dates the same and choosing the suspense account to pay the withdrawal. Use a cash transfer entry when the payout is made where the receiving account is the suspense account.
I’ve outlined some common transactions that can cause problems with your records, how to spot them and some ways to avoid them. These aren’t all the ways problems can arise. Misunderstanding a transaction and entering how you think it should be entered isn’t always a good idea. If you have doubts about a transaction, ask for help. You can get this from the BetterInvesting Treasurers’ List forum and ICLUBcentral support.
Check for errors regularly. This past tax season I tracked down several errors that were nearly 20 years old. Don’t put your club in that situation. Find errors soon and get them corrected quickly.