Equal Allocation of Expenses
The is the second and last [well, we can all hope] article on the current status of fees and expenses for investment clubs. You can read the first in the series at.......
Sorry, Gotta Talk About Fees Again
In this article, we are going to talk about ways to allocate expenses equally between members, regardless of the ownership percentages.
A little history. In the general scheme of things, accounting programs for investment clubs have been on the market a relatively short time. The first one did not offer equal allocation of expenses. Therefore, clever users designed a way that this could be done - at least partially.
There are two things to consider here. When we talk about equal allocation of expenses, are we talking about the allocation of the deduction for tax purposes, or are we talking about spreading the burden for the expenditure equally among the members. Ideally, we should be talking about both. The work-around, referred to in the previous paragraph, only accomplished the equal spreading of the burden. Tax deductions were allocated on the basis of ownership. So you had this situation. Assume a 90% partner and a 10% partner. They are going to spend $100 on a hot computer program, and have agreed to split this expense equally. The old way was to assess each of them a fee of $50. Then, after the expense of $100 was recorded, it could be seen that each partner's value had decreased by $50, thus proving that this method spread the 'burden' equally. However, at the end of the year, Partner A received a $90 tax deduction, and Partner B got only $10. So Partner B put is $50 and got a $10 deduction - not a good deal for him, but great for Partner A. The rationale was that it would all even out in the end. When Partner B got out of the club, the basis for his partnership interest would be overstated by $40, so he would report that much less of a capital gain. This rationale, of course, ignores the fact that Partner B might have to wait 20 years to get that deduction, and that he might be trading an ordinary deduction for a capital loss.
bivio to the rescue!!!! Using this accounting system, a club can allocate expenses equally between members both for 'burden' and 'tax' purposes. No complicated work-arounds. Just select the box  entitled 'allocate equally' when recording the expense, and it is all done for you.
One caveat. You have to apply a standard in determining whether an expense is to be allocated equally or proportionately to ownership. Your method should be spelled out in the partnership agreement.
So, do we ever assess fees anymore? As the previous article, referred to above, points out, fee assessments can be used for withdrawals, penalties, and new members [to make up for start-up costs]. They don't have to be used [and shouldn't] to spread the burden of an expenditure equally between members.
I promise that I will not write another column about fees for at least two days. <g>
Rip West
Saint Paul, MN