Law Firm Partners Want to Keep Track of Personal Expenses of Partners so There is Fairness Between Partners.

Jack and Jill are 50% partners in a small law firm. They want to keep track of their expenses so they can fairly allocate profits. Many partners become angry with the other partner for taking advantage by spending more on expenses that have some pleasure involved.

For example, if one partner likes to “live high on the hog” and fly to Maui for CLE while the other likes to take inexpensive courses, the frugal partner wants to make sure he is not being taken advantage of and wants to get the difference in payroll or through guaranteed payments.

Let us listen in on my telephone conversation with a partner who I will all “Jill”. Jack and Jill each own 50% each of Jack and Jill, PLLC, who is being taxed as a partnership.

Jill, you are concerned that you are not getting your fair allocation of cash from the partnership.

You would keep track of your expenses with the Non-shared expenses category If Jack has more Non-shared (NS) expenses than you do, you will be paid additional guaranteed payments (GP).

So for example, if you get the benefit of $30,000 and Jack gets the benefit of $70,000 then you would get additional guaranteed payments of $40,000 plus the payroll taxes on the $40,000.

Please set up the following procedure for 2014 and future years:
NS=Non-Shared Expenses. They are for the benefit of Jill or Jack and must be for legitimate legitimate Jack and Jill PLLC expenditures:

1. Make sure that they are paid directly by the Jack and Jill PLLC
2. However, if you and Jack pay these law firm expenses personally in 2014, JACK AND JILL PLLC must reimburse you before 12-31-14 or the deduction will not be allowed by Jack and Jill PLLC
3. When auto, travel (including hotel), meals and education and other expenses that have some personal benefit such as Office Admin Expenses (reimburse for home office expenses that are allowed if the rules I have spelled out for you or exactly followed)
4. Here are some accounts that should be set up on your chart of accounts and general ledger:

a. Auto expenses NS Jack
b. Auto expenses NS Jill
c. Travel expense NS Jack
d. Travel expense NS Jill
e. Meals and Entertainment NS Jack
f. Meals and Entertainment NS Jill
g. Furniture, fixtures and equipment-NS Jack (i.e. home computer)
h. Furniture, fixtures and equipment-NS Jill (i.e. home computer)
i. Office Admin Expense-NS Jack
j. Office Admin Expense-NS Jill

5. Quarterly (or sooner if Jack and Jill needs the cash), Jill and Jack PLLC write Jack and Jill personal checks to Jack and Jill to reimburse Jack and Jill for expenditures paid by Jack and Jill on behalf of Jack and Jill, PLLC.
6. Then Jack and Jill write checks back to the PLLC because the PLLC needs the funds to pay expenses to reduce the PLLC taxable income that will flow down to Jack and Jill personally via a K-1. The deposits their checks in to JACK and Jill, LLC. is classified debit to cash and credit-Partner Capital- Jack and Partner Capital-Jill for their respective checks to Jack and Jill PLLC.

Please set up the following procedure for 2014:

1. Jack and Jill PLLC have written checks to Jill and Jack, to reimburse them for their Jack and Jill PLLC expenditures. These checks are classified to the NS categories (see a to j categories shown above).
2. Jill and Jack write checks back to Jack and Jill PLLC (the deposit in Jack and Jill PLLC is not income. It is additional capital).
3. Jack and Jill PLLC classify the deposit as dr. cash and cr. Partner Capital-Jill and Partner Capital Jack.

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Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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