Allocation of Fees and Expenses
A question about individual dues to NAIC has been raised.
I have become the treasurer of a newly formed club and have a question about year-end distributions. At the first meeting in October, we all contributed $20 towards start-up fees (i.e. no valuation units distributed) for a total of $120 (6 members). The fees went for $40 for NAIC club membership and $50 for corporate filing fees. We now have a balance of $30.
Three of the six club members were not NAIC members already, so three people needed to add $14/each ($42). This amount was paid by the three "new" NAIC members and was sent to NAIC.
If you don't mind, I am going to change some of your terminology. Instead of year-end distributions, let's talk about year-end expense allocations. Nothing will actually be distributed to the members.
Now, still with a $30 balance, we all contributed $25 in December ($150) for a balance of $180. Each valuation unit was set at $10 so everyone bought 2.5 units (total of 15). If I understand correctly, the units are now valued at $12/each (adding the $30 in) upon the next valuation date (year-end).
That is correct.
On 12/31 when yearly distributions are done, how are the fees disbursed? Everyone is responsible for the $90 for filing fees and NAIC club membership, but what about the three people who paid $14 extra?
Again, let's say 'yearly allocations' and 'fees allocated'. You are pinpointing a problem that keeps coming up in partnership accounting. In the NCA software, the conventional solution has been to do as you have done - assess each member a fee or the $14. The problem is that unless steps are taken, a portion of these $14 payments will be allocated to those who have not paid them. This is not a tremendous problem, because usually the amounts involved are quite small, and the situation does rectify itself when the member leaves the club. However, it is annoying.
The NAIC software shows that everyone's share of the $132 in expenses at $22/each. Shouldn't the share be different for three new members vs. the three who were already NAIC members?
When you say everyone's share of the $132 of expenses is $22 each, I assume that you are talking about the tax allocation. Yes, that would be the equitable way to do it. Unfortunately, no software on the market has the ability to allocate the expenses specifically to one or two members. There is a way that this could be done, however, and it probably represents the actual facts in the case.
Instead of showing the $42 received from the individual members as fees, show it as a transfer from the Suspense account to your Broker/Cash account. Then when you pay the actual expense to NAIC, do not show this $42 as an expense, but rather as a transfer back to the suspense account. Then tell the affected members that they should deduct this expense on their individual 1040.
Treating the transaction in this manner reflects the fact that you are including the members' payments as an accommodation to them, not as an expense of the partnership.
Rip West
Saint Paul, MN