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Allocation of Income and Expense
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A part of the closing the accounting books at year end is the Allocation of Income and Expense process. There are practical reasons for doing this step such as the tax printer software performing smoothly when this process has been completed in the accounting records. There is also a very important legal/accounting reason to perform this task.
Tax law for partnerships requires each partner's share of income and expense to be determined and reported to the IRS. Each partner then reports this income/loss on their personal tax returns. In addition, each partner's cost basis in the partnership must be adjusted by their share of partnership income. This prevents double taxation on gain from your withdrawal from the partnership, once in the year the club earned income and again when a member withdraws. The allocation process adjusts each member's cost basis (Paid-In-Plus-Earnings or PIPE in the software) by an amount equal to their share of the partnership's gain or loss for the year. Failure to do so may make withdrawal gain amounts as reported on a withdrawal report inaccurate due to inaccurate cost basis information.
So make things easier to prepare the club tax return and keep your accounting records in compliance with partnership tax law and prevent possible future problems by completing the the Allocation process.
Russell Malley
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Allocation of Income and Expense
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