I'm really looking forward to this, Ira! 

Could you please address the issue of foreign taxes paid on dividends from ADR's? Are the taxes deductible (from federal)?  In my experience, the Club Accounting software doesn't correctly handle them when placed into the "foreign taxes" category. In order for our accounts to balance, the foreign taxes must be placed into the "expenses" (evenly distributed) category. If I put the foreign tax paid into the foreign tax category, the balances do not match the broker's. How will this affect the books when I close out the year?

Thanks in advance for your help!

Carol Ross

Hi Carol,

I guess Joe took your post out of the queue about Ira's workshop so that it could be answered before the workshop starts. For federal income tax purposes, foreign taxes are a credit, not a deduction. That is to say a persons federal tax is computed, and then the foreign tax credit is deducted. That differs from a deduction, where an amount is deducted from taxable income before computing the tax.

I believe you have been handling the foreign taxes incorrectly, and that is why you are having trouble. Take an example of a $100 dividend, with $25 foreign tax withheld. In Club Accounting, you should enter the NET amount of $75 as a dividend. Then you should enter $25 as a foreign tax withheld. The program will then add $25 to the dividend, making it $100, and keep the $25 to be allocated as a credit among the members. The reason that you have not been balancing with the broker is probably because you are entering the gross, not the net dividend. Done properly, the foreign tax entry will not affect cash. In fact there is no cash account on the entry form. The net amount that the broker has received is entered in one dividend entry.

Rip West

Our club uses Club Accounting Online and we made this same mistake with a TEVA dividend. We might have missed the mistake if it had not been for this discussion. Thanks for the question and response.

Can the dividend entry interface in Club Accounting be changed to help prevent this mistake? In the case of TEVA, the company name includes ADR. If all ADRs are identified in this way then it seems possible that the software could detect it, display an explanation and prompt for the two amounts on the same entry screen.

Thanks,

Steve