Petty Cash and Deductible Expenses
Deductible expenses with or without the use of petty cash continue to be a source of confusion for many investment clubs. Let's take the topic of petty cash first.
As originally envisioned by the NAIC accounting manual, petty cash was not to be used for any expense that was deductible by the club. Petty cash does not figure into the calculation of unit value. Petty cash expenses are not allocated for tax purposes. With the advent of NCA software, users found that you could get a nice report from petty cash which categorized the various expenses. These users started, in effect, to keep two sets of books - petty cash for certain deductible expenses and NCA for everything else. A report was given to members at year end showing the expenses, and members were told to deduct their share on their individual tax return.
This, in my opinion is not a good idea. In fact it is a very bad idea. Aside from the complication of two sets of books, and the very real possibility of errors creeping into the personal deductions of members, you could easily have a situation where the IRS would take the position that if an expense is not deductible as a partnership expense, it is not properly deductible by the individual.
The solution is to forego the use of the petty cash account for anything. If you spend money on party hats or some other non-deductible item, take up a collection for it, but do not record it and try to keep track of it. These expenses are usually quite small in the general nature of things, and are certainly not worth all the words that have been written trying to explain what to do with them. I will repeat my personal, iron-clad rule - Do not use the petty cash account for any reason.
bivio is taking steps that will help to alleviate this vexing (to me, anyway) situation. Soon, bivio will implement categories of non-deductible expenses. This will allow clubs to pay these items out of general funds and not claim them on the tax return. This step in conjunction with allowing multiple cash and other asset accounts should clear up this problem once and for all.
So, you ask, as people often do, what expenses are deductible by an investment club and which ones are not. The best source for this is the IRS Publication 550, which can be found at
In general, expenses necessary to produce income are deductible, and more indirect expenses are not. For instance, the cost of attending an investment seminar is not deductible according to Publication 550. Conventional wisdom has been that postage, office expenses, subscriptions to investment magazines and services, clerical help, etc. are deductible. Food, refreshments, and celebration parties are not.
A member's share of deductible expenses gets passed through to the individual, and is deducted as a miscellaneous expense on the individual 1040 tax return. It should be noted that all such miscellaneous expenses are grouped together and are deductible only to the extent that they exceed 2% of adjusted gross income.
I recommend that all treasurers read Publication 550 carefully.
Rip West
Saint Paul, MN