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#1 Posted : Sunday, May 26, 2019 2:06:50 AM(UTC)

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In the first versions of Club Accounting all expenses would always be allocated by ownership. After some requests the ability to allocate specific expenses equally among members was added. The rationale for such an allocation process is that some expenses benefit all members equally. One example was the cost of filing club tax returns. This ability to choose is still available in all versions of our accounting software.
Tax regulations require the tax consequences to match the economic consequences. To do this for equally allocated expenses the program will process the equivalent of a small partial withdrawal for each member's share of the equally allocated expense. This can have the effect of penalizing partners with small ownership percentages. There is a reverse Robin Hood effect where members with small percentage ownership get their percentage reduced while larger owners have their percentage ownership increased. This is especially pronounced if a club has a policy of assessing fees for paying expenses.
There is another wrinkle in this allocation story. It turns out partnership tax law has a provision that the Partnership Agreement shall be the determining document for the allocation of expenses. If the partnership agreement is silent on the issue then expenses MUST be allocated in the same manner as income and the default in this case is by ownership interest. I have not seen any model partnership agreement for investment clubs that states a method for allocating expenses other than by ownership interest. Any club that used a model agreement with ownership allocation could be technically in violation of partnership tax law when allocating expenses equally. If your club had done this in the past I would not worry about the issue. The differences will probably be small. Trying to edit all past expenses to be by ownership might trigger the need to file amended club tax returns. I would just edit expenses allocated equally in the current tax year and continue this policy going forward. If your club is really adamant about wanting some expenses equally allocated then an amendment to the partnership agreement is in order.
Personally, I believe all expense should ALWAYS be allocated by ownership. Clubs allocate all income by ownership so all expenses should be also. It the the fairer way to gi.


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