Discussion:Petty Cash
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Discussion Forum Index --> Basic Tax Questions --> Petty Cash
Discussion Forum Index --> Tax Questions --> Petty Cash
| 18 January 2008 | |
| For the past 10 years I have been handling the books and taxes for a client of mine. He recently formed a friendship with a man that calls himself a tax consultant although this man has never prepared a tax return in his life. He just goes around giving tax advice without any qualifications other than being an attorney. This man has told my client to write himself checks for petty cash to himself and sometimes to his employees to cash and that he can write these off and doesn't need to account for them. The petty cash account is now up to a balance of about $7,200 and I don't have anywhere to expense it to. After discussing this with my client I am passing his tax return preparation onto another CPA that his new friend knows. I am very leary of all of this and was wondering if anyone has heard anything about what I feel is a tax scam that could get my client into big trouble? I would like to show my client some hard facts on this so as to deter him from doing this any longer. I feel he has been misled and he is not listening to me. Can anyone help me to find some IRS information I could show him? The only thing I found in the IRS website was a discussion on petty cash records, but I would rather find some information on how not being able to account for it could be trouble. | |
| 18 January 2008 | |
| you have much more common sense than the attorney
the obvious solution would be to send the attorney a 1099 for the amount that solution is as good as any other | |
Rgtaxservice (talk|edits) said: | 18 January 2008 |
| Transfering funds from checking into petty cash is not an expense. You can classify it as an 'owners draw' if it's a sole prop (sch C). He'll pay the inc and SE taxes. He's just hurting himself. | |
| 18 January 2008 | |
| Maybe a dumb question, but if petty cash has a balance (debit I would assume) of 7200.00 then it is a receivable. Are you saying petty cash has a credit balance of 7200? | |
Rgtaxservice (talk|edits) said: | 18 January 2008 |
| It's not a receivable. It sounds like the money went to Petty Cash but there was no accounting as to were it went from there. | |
| 18 January 2008 | |
| The client might want to do a little public records search on this attorney besides just taking his word for his past life. Did he once do returns, and now has been barred from practice before this IRS, is that public? I think it is. Check with State Bar also: is he in fact an attorney; what is his disciplinary history if he is an attorney? It's really not your job to play nursemaid, just a suggestion you may want to make to him. | |
| 18 January 2008 | |
| Still if you have a debit balance of 7200.00 then you have already either expensed it or capitalized it. Or you are then reconciling petty cash and you have on hand 0 which then would then require you to make adjustments for where the cash went. The poster said it had a balance of 7200.00...so I assumed it was a dr balance :). If it were for employees, then employee advance (receivable) and s/h advance or loan (also receivable) can write it off and get to the actual petty cash balance. Could be all b/s account and c/f adjustments; I don't want to call the tax consultant an idiot without further info.... | |
Death&Taxes (talk|edits) said: | 18 January 2008 |
| I assumed it was an asset account, for if it were an expense, that would be a powerful lot of petty cash in one year that this expert is taking......and the poster did note he's been doing these books 10 years. We could call it like the politicians do, WAM, or 'walking around money.' | |
| 18 January 2008 | |
| My sentiments exactly D&T. If an asset, and there is cash, then what is the beef? | |
| 18 January 2008 | |
| I think he meant a credit balance, Sandy (I agree, it normally should have a debit balance as an asset account, "normally"). Sfb's fourth sentence seems to be the key: in the end, you can't write off anything but a valid Sec. 162 expense. So, if audited, it will be characterized as a draw to owner, potential bonus to employee (without required withholding). [I guess it's possible you could loan employee a little, but to keep holding it over, get a note and account for that properly]. So, they either need to fish the receipts out of the glovebox, or face the fact that they are fooling no one. | |
Death&Taxes (talk|edits) said: | 18 January 2008 |
| Huh? Debit Petty Cash, Credit Cash in Bank | |
| 18 January 2008 | |
| All true...but if someone tells me they have a balance....I would assume they know it should be a debit balance or a credit balance. Not real good at reading between the lines....:) | |
| 18 January 2008 | |
| does it even matter if this is a Sole Proprietorship and the DR/CR is on the balance sheet instead of the income statement?
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Rgtaxservice (talk|edits) said: | 18 January 2008 |
| My point regarding Sole Prop was that if it's a Sole Prop and there's no accounting for any petty cash expenses and there isn't $7200 in PC, why keep it on the books as $7200 in PC? Just record them as Owner draws. As a SP, this isn't a big deal. | |
| 18 January 2008 | |
| I get the impression that the $7200 was taken out of the checking acct, called p/c and pocketed by the owner. | |
| 18 January 2008 | |
| The Petty Cash account is a cash account on the balance sheet. I post the checks written to replenish petty cash there as a debit (increase to asset account), but I have no corresponding credits to petty cash to make it reconcile to what they have on hand...which is pretty much ZERO.
Thanks. | |
| 18 January 2008 | |
| This is an S corporation client and I believe his tax consultant attorney is calling this "walking around money" and I believe my client just pockets it. I am getting real suspicious with why he would have it made out to his employees for them to cash and bring back. This whole thing stinks! | |
| 18 January 2008 | |
| That's right, there are no receipts etc. so you can't post expenses at the time of replenishment. We are all saying the same thing!!
The funny thing, if you think aoubt it, is that it's the strategist lawyer that is not taking into account double entry bookkeeping. He thinks you can take and take with nothing to post an expense to. We are all saying the same thing, the man's got to have a valid expense in order to have a valid expense. Otherwise, it's a draw (or at least 99% of the time, its a draw). | |
| 18 January 2008 | |
| I see it as cr checking, dr petty cash and what do they have on hand? | |
| 18 January 2008 | |
| LOL same answer in the end, no free lunch. Strike that, likely non-taxable distribution with the S., but why is THAT a strategy? He's paying for that profound advice? | |
Rgtaxservice (talk|edits) said: | 18 January 2008 |
| As S Corp it would have to stay on the books unless you can just make shareholder distribution for Petty Cash. We are all talking about the same thing...the $7200 in PC on the books that isn't really there. | |
Death&Taxes (talk|edits) said: | 18 January 2008 |
| I was right, it's W.A.M. Charge it off to that, or to another account a CPA I knew used to use: 'Street Expense' or then there is the good old fashioned "Plugs and Fillers." | |
| 18 January 2008 | |
| Yes, petty cash is not there and I hate to have a balance sheet that shows a balance in an account that really isn't there. When I pass along the financial information to his new CPA, I guess I will leave the petty cash balance of $7200 there with a notation that he will need to verify this balance with the client. | |
| January 18, 2008 | |
| Crow's got the right idea; check out the attorney's credentials. I'd also check out the credentials of the new "CPA" for whom he is pimping. | |
| 18 January 2008 | |
| I agree, post it to "Street Expense" for right now (ultimately, it's a distribution). lol. If he's doing this with employees too, it is a problem. I mean, it's a taxable bonus or a loan unless they have a receipt for a valid expense, and account for that. | |
| January 18, 2008 | |
| What are the employees doing with the cash? Bringing it back to the office so they can give it to the boss? Or spending it? I think I would leave it in petty cash, note that the balance in the cash box is $x and that not enough information has been provided for you to properly adjust the account to the actual balance. At least that way you won't get accused of trying to record deductible expenses as distributions (if that is the case).
"Plugs & Fillers." LOL Sounds like auto parts to me. | |
Bottom Line (talk|edits) said: | 19 January 2008 |
| You'd think that after having done business with you for 10 years, your client would respect your opinion. May be time to reconsider your relationship.
Where's this "expert" suggest that this petty cash show up on the tax return so that the money is tax free? Is he going to put it in Miscellaneous Expense (audit flag) or overstate some other expense category? | |
| 19 January 2008 | |
| I have had clients who wrote checks to cash to reimburse the petty cash account but never recorded the actual expenses. The thing is that there is only two things that can happen: the accumulated excess debit balance in petty cash will be reclassified into distributions or the client will provide records to subtantiate deductible expenses that were paid with the cash. You can't simply "write off" this balance into expense if you don't know what the underlying expenses were. Anything else is cheating and you don't want to have anything to do with this client. | |
| 19 January 2008 | |
| We all understand what the client is doing … You said “The only thing I found in the IRS website was a discussion on petty cash records, but I would rather find some information on how not being able to account for it could be trouble.” Go to the IRS website and look at Audit Techniques Guide (ATG) for the industry segment that the client is in. You may not find a reference in all the segments to petty cash because it is such a basic for auditors to look for receipts, etc to substantiate expenditures. | |
Seaside CPA (talk|edits) said: | 23 May 2008 |
| I have a similar situation as above. My clients purchased S corp during year. Beginning Petty cash was about $5,000, is now about $6,000 (on books) at year end. All payments to petty cash were posted into the account without expensing anything (this has obviously been the way this has been being recorded for a while). I can handle getting recaps for this year to expense, but what do I do with the other roughly $4500 adjustment that needs to be made to bring the balance down to the correct amount (has about $500 on hand at year end). Books are a mess! If I show as a distribution to old owner, then we have a problem with unequal distributions. Any suggestions?
By the way, this was a bookkeeping company that did all of this. Also, books were kept on Accrual basis; T/R on supposedly on cash basis. Tax preparer, different company, just took the numbers and put them on T/R. | |
| 23 May 2008 | |
| I think y'all need to get out more often. :) This is obviously one of two things that I would think everybody sees on a regular basis. Either the client is incompetant (big surprise) and doesn't understand how petty cash is supposed to work, in which case you just reconcile petty cash and reclassify to the appropriate expense account; or, it's the obvious scam of writing checks for fictitious expenses and running it through "petty cash" or "miscellaneous" or some other account in order to hide the fraudulent activity.
One you can fix, the other you walk away from. | |
Seaside CPA (talk|edits) said: | 23 May 2008 |
| Like I said, I can fix this year. But what about the other year's that the account kept growing. The previous owner was not my client, & now I have this balance I need to get rid of! | |
RoyDaleOne (talk|edits) said: | 23 May 2008 |
| This sound like an imprest fund that ain't. Imprest funds, you all remember them?
Write the balance as a non-deductible expense. | |
Seaside CPA (talk|edits) said: | 23 May 2008 |
| Thanks RoyDaleOne. Why didn't I think of that? I like it better than distributions! | |
| 23 May 2008 | |
| I'm pretty much thinking that the CPA is going to reclass bs petty cash to I/S petty cash expense and attorney is saying that the petty cash amounts are minimal and IRS won't look at them. very bad bad idea | |
Seaside CPA (talk|edits) said: | 23 May 2008 |
| You lost me Fsteincpa. I'll reclass part of the Bal.Sht. petty cash to I/S nondeductible expenses. No deduction will be taken on T/R. Where does the attorney come in? | |
| May 23, 2008 | |
| Welcome to TA Seaside. To understand Fred a little better, you should do a search for "Hooters," "tequila" or "Freddy's World" and also check out the "Fred for President campaign" discussion.
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| 24 May 2008 | |
| I'm not always joking there Nats. The attorney gave client bad idea. Attorney meant for posting of expenses to petty cash. bookkeeper posted them to a B/S account. Attorney giving advice meant for bookkeeper to post the petty cash to a deductible expense account, giving client an illegal deduction. Thought process being that IRS is going to ignore petty cash expenses because they are minimal. In this case they are not minimal.
We are telling him what should be done, I am explaining thought process of the attorney giving bad accounting advice <is this an oxymoron Crow?> Comprende signorita, stop thinking of me in only one light, I am good for other things besides that <EG> | |
| May 24, 2008 | |
| Perhaps you did the same thing I do sometimes Fred. The top part of the discussion, which is what you responded to, started and ended five months ago. I think Seaside was confused by the attorney part because all of the other responses were addressing his question. Of course, if I'm totally off base, I'm sure you'll let me know. (Personally, I don't like it when I start reading a thread and then realize it's from a year ago.) | |
| 24 May 2008 | |
| Seaside -
This issue should have been resolve at the time your client purchased the S corporation. You'll want to double check any agreements that were signed in conjunction with the purchase. If you don't find anything, you need to discuss the treatment with your client. You can suggest you ask the seller whether he has receipts to submit for out of pocket expenses in an amount of the $5,000 petty cash starting balance. If he doesn't, the $5,000 is either expense reimbursements that don't fall into the definition of being under an accountable plan (i.e. wages), or distributions. Check out the regulations regarding equal distributions from S corporations. There's a provision allowing for disproportionate distributions after a change in ownership (the distribution ratios are allowed to reflect the ownership percentages prior to the change in ownership), so I think you're OK in that regard. The distribution route would insure that the $5,000 adjustment impacts the seller, not your client. Was there an agreement to close the books as of the date of the sale, or will all of the year's transactions be prorated using the per share/per day method? | |
Seaside CPA (talk|edits) said: | 24 May 2008 |
| Thanks for the comments all. Smokeytax, my client was an employee of the S corp. As stated above, the books are a mess. No agmt. to close books on date of sale. Basically all that was done was that purchasers pd a purchase price and owner left. The only paperwork is a form that states what the purchase price is; it doesn't breakdown what exactly was purchased or for what amount. It's going to be interesting working out everything. I will take a look at disproportionate distributions after a change in ownership. I definitely think this adjustment should not impact my client. | |
| 24 May 2008 | |
| ok Nats, you are right, should have been a new post. I responded to last years post. me bad | |
Seaside CPA (talk|edits) said: | 24 May 2008 |
| Oh! Now I see where the attorney comes from! Lesson learned. Next time I'll start a new thread! | |
Actionbsns (talk|edits) said: | 24 May 2008 |
| My personal favorite for the petty cash distributions when a client has done this is "Just expense it the standard way." Anyone know of a "standard way" for PC? | |
