Go on, dive into your Partnership Book and Tax Capital Accounts!

……but do it safely with John L Mottram CPA, LLC. Certified Public Accountants.

Book Capital Accounts

Each partner has separate capital accounts that represent the equity that a partner has in the partnership. The partners share of equity is the amount that would be received if the partnership were liquidated and all of the assets were sold at book value, all liabilities paid, and the net proceeds distributed.

As the partnership carries on trade or business, these capital accounts will change depending on the agreement between the partners as to how they will share in the profits and losses. The capital account should reflect the economic arrangement between the partners.

This balance should be reflected on the tax return balance sheet and Item L on the Schedule K-1 of Form 1065. This can be a negative figure because the liabilities are not included.

Tax Capital Accounts

Many times, the books will be maintained on the tax capital account basis that will reflect the adjusted basis of the assets contributed, instead of FMV. Because the tax capital account reflects the adjusted basis, barring any transfer of partnership interests, there is a close relationship to a partners outside basis for tax purposes.

This account can also be a negative figure because the liabilities are not included.

How book capital accounts compare to tax capital accounts:

1.    Book capital accounts reflect fair market value of the property at time of contribution and tax capital accounts reflect the adjusted basis of the property at the date of contribution.

2.    Book capital accounts reflect the market value of the property at the date distribution, and tax capital accounts reflect the adjusted basis of the property at the date of distribution.

3.    Book capital accounts and tax capital accounts do not include liabilities of the partnership. Both are reflected net of liabilities.

4.    Book capital accounts and tax capital accounts may both reflect a negative balance, however, it is important to note that outside basis cannot have a negative balance since outside basis includes liabilities.

5.    Generally, non-deductible expenses will reduce the capital accounts.

Partners capital accounts can be maintained on GAAP basis, a tax basis, and certain other bases specified by the Tax Code IRC $704(b).

The method used to maintain capital accounts on the tax return should be consistent with the partnership financial statements.

Capital accounts are adjusted when property is contributed or distributed. Unlike basis, which is calculated by using the adjusted basis of the contributed or distributed property, a capital account is increased or reduced based on the faire market value of any property contributed or distributed.

At John L Mottram CPA LLC, Certified Public Accountants, we make sure that we create and maintain for each partner both book capital accounts and tax capital accounts prepared in compliance with all provisions required by the US Tax Code.

Contact us at 214-390-7446 or go to our website at www.mottramcpas.com.

BTW - more on a partner's "outside basis" in an upcoming blog!

New FASB Accounting for Revenue Recognition

New FASB Guidance on Lease Accounting

FASB Foreign Currency Accounting

When did you become a resident of the US for tax purposes?

Establishing you as a resident or non resident of the US can make a big difference to your US tax liability and the amount of work you and your CPA have to do.

Citizens and residents are taxed on worldwide income and allowed a credit for foreign taxes. Income subject to tax is determined under tax accounting rules, not financial accounting principles, and includes almost all income from whatever source

The US is one of only two countries in the world tax that tax non-resident citizens on their worldwide income.

Let’s deal with the simple issues first

If you are citizen or green card holder of the US, you are subject to US tax on worldwide income and it doesn’t matter if you ever set foot in the US.

If you are undocumented in the US you are still subject to the tax laws that apply to residents with a requirement to report income from all sources worldwide.

Now it starts getting complicated

Substantive Presence Test

You are also a resident of the US if you meet the “substantive presence test”.  You meet this test if you have been resident in the US for 31 days in the current year AND 183 days in the immediate previous two years.  These 183 days are calculating the actual days in the current year, plus 1/3 of the days in the preceding year and 1/6 of the days in the year before that.

OK so far, now lets deal with some exemptions

There are special rules if you are a resident of Canada or Mexico and compute regularly to the US to work.

You do not count days if you are in the US working as an exempt individual such as an employee of a professional government, teacher or a professional athlete. This also applies to immediate family members of these people.

Closer Connection to a Foreign Country

Even if you meet the substantial presence test, you can be treated as a nonresident alien if you:

• Are present in the United States for less than 183 days during the year,
• Maintain a tax home in a foreign country during the year, and
• Have a closer connection during the year to one foreign country in which you have a tax home than to the United

Tax home.  

Your tax home is the general area of your main place of business or employment, regardless of where you maintain your family home. Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual.

If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you do not fit either of these categories, you are considered an itinerant and your tax home is wherever you work.

Establishing a closer connection. 

You will be considered to have a closer connection to a foreign country than the United States if you or the IRS establishes that you have maintained more significant contacts with the foreign country than with the United States.

In determining whether you have maintained more significant contacts with the foreign country than with the United States, the facts and circumstances to be considered include, but are not limited to, the following.

1. The country of residence you designate on forms and documents.
2. The types of official forms and documents you file, such as Form W-9, Form W-8BEN, or Form W-8ECI.
3. The location of:
1. Your permanent home,
2. Your family,
3. Your personal belongings, such as cars, furniture, clothing, and jewelry,
4. Your current social, political, cultural, professional, or religious affiliations,
5. Your business activities (other than those that constitute your tax home),
6. The jurisdiction in which you hold a driver's license,
7. The jurisdiction in which you vote, and
8. Charitable organizations to which you contribute.

It does not matter whether your permanent home is a house, an apartment, or a furnished room. It also does not matter whether you rent or own it. It is important, however, that your home be available at all times, continuously, and not solely for short stays.

When you cannot have a closer connection. 

 You cannot claim you have a closer connection to a foreign country if either of the following applies:

• You personally applied, or took other steps during the year, to change your status to that of a permanent resident, or
• You had an application pending for adjustment of status during the current year.
• 
  

Effects of Tax Teaties

The rules given here to determine if you are a U.S. resident do not override tax treaty definitions of residency. If you are a dual-resident taxpayer, you can still claim the benefits under an income tax treaty. 

A dual-resident taxpayer is one who is a resident of both the United States and another country under each country's tax laws. 

The income tax treaty between the two countries must contain a provision that provides for resolution of conflicting claims of residence (tie-breaker rule). 

If you are treated as a resident of a foreign country under a tax treaty, you are treated as a nonresident alien in figuring your U.S. income tax. 

First Year of Residency

If you are a U.S. resident for the calendar year, but you were not a U.S. resident at any time during the preceding calendar year, you are a U.S. resident only for the part of the calendar year that begins on the residency starting date. You are a nonresident alien for the part of the year before that date.

There are also certain rules that apply to specifying the actual date of residency.

Deciding if you are resident or non-resident of the US can make significant changes to the preparation of your tax return.

Contact us at www.mottramcpas.com for help with resident and non-resident tax services.

Business’ fail because the right questions are not asked and researched.

It's often said that more than half of new businesses fail during the first year. According to the Small Business Association (SBA), this isn't necessarily true. The SBA states that only 30% of new businesses fail during the first two years of being open, 50% during the first five years and 66% during the first 10. The SBA goes on to state that only 25% make it to 15 years or more. However, not all of these businesses need to fail. With the right planning, funding and flexibility, businesses have a better chance of succeeding.

We know the facts and we’ve seen the lists but you have to be a detail freak to avoid being a failed business statistic.

Let’s suppose you have the right personality, you have proven management and leadership qualities and on top of that you understand that cash control is critical. 

With all these important attributes in-place what can go wrong?

Well, honest errors in decision-making can go wrong. 

These errors have their origin in the following areas.

1.    Not investigating the market

2.    Business Plan Problems

3.    Too little financing

4.    Bad location, Internet Presence, Marketing

5.    Rigidity

6.    Expanding too fast.

It is easy to keep this list in your mind but each item can stretch into a very broad topic and leave everything very mushy in your mind..

It seems to me, you make the list work when you take a narrower view of each item on the list, at least initially, and then dig very, very deep into each one.. 

The list doesn’t attempt to explain what you can do to avoid the pitfalls of each. You have to do challenge yourself to ask all the questions and promise yourself to answer all the questions fully.

You often need a trusted mentor or advisor to help you with this part. Not to tell you want the answer is, but to help you formulate the questions and then sign-off on the completeness of the information you need to collect. This will form the basis of your  decision-making.

Asking the penetrating questions and not stopping until you have gotten all the facts that counts.

For example, when a business fails you can go back and ascribe broad causes from the list above. For sure you will see the cracks in the foundations of the business were clear well before the business succumbed.

Take “too little financing”. When the business finally closes, of cause there was “too little financing” to keep the doors open. However, was the demise set in motion much, much earlier when a plan to commit funds to an investment hadn’t been thought through well enough and the business could not afford to have lost that money when the project partially or completely failed.   Well the unfortunate decision to proceed resulted from insufficient depth of study.  The company was weakened by not going into sufficient detail in a combination of  areas incluing  “not investigating the market”, “business plan problems “and probably “too little financing”.

It’s asking the right questions at a detailed enough level that really counts, exhaustively collecting information and then completing the decision-making work implied in each item on the list.

We know how much your business means to you, your family and the employees, vendors and customers that relay on you.

It is our passionate mission to have your small business survive and prosper and not be an early statistic to failure.

We have a wide range of tools including decision-making processes that will keep your company healthy and alive.

Contact us for a free consultation. 

Will a CPA offer a start-up business free services?

I recently invited two young tech entrepreneurs to lunch. I wanted to know the role a CPA provided in the start-up of their various ventures.

I was somewhat deflated to hear that they had never consulted with a CPA when beginning their new ventures.  They did say it would have made sense for them to consult with a CPA and even said they wished they had had a CPA advising them from the beginning.

Yah …….but they didn’t actually do it, right?

So why didn’t they and does that mean there is no market for CPA services in the highly active technology start-up world?

I pondered the question and it seems the answer may be simple…….there was start-up activity but no real business start-up. There was a business idea, there was a decision to do market research, a decision to develop a business, a website launched, even product software design started…….but……there was no actually business started.   

These tech entrepreneurs may have formed a company, obtained a tax identification number, opened a bank account, spent money but unless they had repeatable sales of any significance or had significant sales contracts in-hand…….there is no business, there is no start-up business.  It’s a project, a bobby activity or a business in the making.

 This doesn’t mean they don’t need CPA services. They agree this was an important time to seek the advice of a CPA. However, the high cost of the CPA services, the need to conserve funds and the risk in the entrepreneurs mind that there may never be a real business means that a simple return on investment calculation in the mind of the entrepreneur fails the test and the decision to call on a CPA is deferred.

There are a growing number of extremely motivated individuals that are developing mobile software application so solve known and unknown problems. There is a tendency for the CPA anxious for new clients to interpret these efforts to be business start-up activities when they are not. Even when the developer has formed a company, opened a bank account, obtained an EIN and has a website that describes and announces the App, it is still far from a business.

 It most cases the software developer has no successful track record or even worked in a company that has developed and launched successful Software Apps.

However, all may not be lost for the CPA or the Entrepreneur.

A thinking CPA may be willing to provide some time to assisting the entrepreneur at no cost, such as a 1 or 2 hour presentation on  what is needed to start a business successfully. This might include tax implications of the different business legal structures, the importance of a business plan, how to price products and services, how to manage cash flow, the operational outsource cost model plus a whole lot more. The CPA may also be willing to invest a few hours of his time to outline general direction and provide reference sources. The CPA may also be willing to be on call when the entrepreneur or partners have financial questions.

The CPA is prepared to do this because he wants to acquire the future tax, accounting and consultancy work.  This work may be worth many thousands of dollars for a successful company over a number of years.  For the CPA the free time he or she is willing to invest has a positive ROI if he has confidence the entrepreneur has proven business start-up experience, a well articulated business model , necessary start-up funding and effective leadership that portends well  for success.

The CPA also has to feel that the entrepreneur will consider the CPA a very strong candidate to be signed-up for exclusive fee paying work down the road.

During this business development stage the CPA is unlikely to provide customized written work or advice that would be billable in the normal course of the firm’s normal business hours. However, as previously mentioned the CPA may often be willing to make a presentation and take short telephone calls, even respond with texts or a short email, be on an advisory committee or be a financial mentor.  These limited more generic services are valuable to the business start-up.

So there you have it…….forming a business is most likely not a start-up business. The CPA who is anxious for new clients can establish an early relationship with what maybe a potential client. The CPA can allocate limited time at little or no charge if the CPA has evaluated the entrepreneur and the new venture with a more likely probability of success than not. In this way the CPA improves his ROI on time allocated to the venture and is able to establish  an early relationship that very often will be sufficient to secure fee based work down the road.