Husband and wife partnership

I have a business with my wife registered as a partnership in which we are the only partners. We run the business together and account for our share of the profits in accordance with the partnership agreement. We have one business bank account and one joint personal bank account. We would like to draw money as and when required from the business bank account into the personal bank account. Likewise, we may sometimes add funds to the business from the same personal bank account and make the odd expense claim from time to time.

Is it preferable to have two capital accounts in Manager (one for each partner) or can we simplify the chart of accounts for this business and set it up for a sole proprietor as we do not need to track the equity difference between the partners?

From a tax perspective we would still be able to complete the partnership tax return including the profit made by the partnership and a statement of each partner’s share of the profits according to the partnership agreement. This is because the tax is due on profits and not on equity. Provided we have a snapshot of the equity of the business at any one time, we are not concerned about the individual equity of the partners.

I understand that partners who are not as closely related and do not share personal bank accounts would need to have separate capital accounts to reflect their own drawings, funds contributed, expense claims and distribution of profits. However, I would value an opinion on whether that structure is necessary in our circumstances.

Thanks!

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Of course, your question has nothing whatsoever to do with Manager. But if the partnership agreement treats you as separate partners (not all would, though if there are no other partners, the business could not then be a partnership) you should set up separate capital accounts. The effort of doing so is trivial and will take you about 30 seconds, less than it took to compose your post. When it’s time for profit distributions, draws, or contributions, you will just need to add another line item to the transaction forms and split the amounts, hardly any more effort.

A large benefit of setting up separate capital accounts is that you will reinforce the concept of the business as a partnership. Depending on tax laws in your jurisdiction, that may be advantageous. And while you may not be taxed on equity, tax filings may require a partnership to specify account balances by partner. They do in some locations.

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I appreciate my question was not specifically related to Manager and was in essence a general accounting question. Thank you for replying in any event. I take your point that using separate capital accounts reinforces the concept of the business as a partnership.

I have added a separate capital account for my wife so there are now two capital accounts for this business in Manager. In the case of a single drawing from the business — for example, an ad hoc payment of £1,000 for myself and wife equally, is it preferable to split the drawing as it is entered on the transaction form so that £500 is allocated to me and £500 to my wife or would it be easier to allocate the payment to retained earnings and then do a year end profit distribution in accordance with the partnership agreement which is set at a 50% share for each partner?

If doing a year end profit distribution, is that done as a journal entry as follows?:

Debit - Retained Earnings
Credit - Capital - Partner - Share of Profit

Thank you again for your assistance.

Yes and it should be allocated to Capital > Partner > Drawings

Yes

You cannot do this, because you cannot select Retained earnings when spending money. Retained earnings is the net of all outflows and inflows since inception. If you want to take out money without making a distribution of profits (which is common), you would post the payment to Capital accounts > Partner > Drawing, including line items for both of you and allocating half the payment to each.

Depending on capital account balances, this may result in negative capital accounts, but there is nothing wrong with that, as it merely shows that at the moment you have withdrawn more than the sum of your contributions and distributions. At year-end, a single distribution from Retained earnings can resolve that.

Opps, yes you can
0000000 Bug 2

My bad. You are correct. I forgot that in the test company I checked, I had renamed the Retained earnings account.

@borisbravo, disregard what I said about not being able to post a payment to Retained earnings. A common method, however, would still be to post to Drawings and later enter your transfer when you have decided on the distribution amount. This gives more comprehensive information in the Capital Accounts Summary report. You will see separation of distributions, drawings, and contributions.

Thank you @Tut and @Brucanna. I have practised splitting the drawing and that appears to be straightforward. I will therefore allocate the single drawing transaction to Capital > Partner > Drawings so that the £1,000 is allocated as £500 to each partner. I have also tested the profit distribution by making a journal entry as discussed above, and that appears to work as well.

Following on from the allocation of drawings, I have a question about expense claims. As an example, if we rent premises with 4 rooms at a cost of £1,000 and use one of the rooms strictly for the business, I want to be able to record 25% of the rental cost as a business expense. If we pay the rent from our joint personal bank account (as 75% of the cost is private) how do we show this transaction in manager?

By creating an expense claim for £250 I have to select a Payer, which would lead me to believe that I would need to enter two expense claims, one for each partner for £125 each (as we are both equally liable for the payment).

Is this how it should be done or is there a better way? We have several payments with a mixed business and private element and, as I understand it, expense claims are the way to record the business element. However, would it be better to create some kind of bank account in manager to reflect these transactions rather than using the expense claims module?

Thank you again for your support.

Using expense claims is the easiest way to enter such payments of company obligations by personal funds into company records. Be sure you have read the Guide: Manager Cloud. Since you have capital accounts enabled, you have two choices for who you enter as the Payer.

You could enter yourself as Payer, then enter another claim with your wife as Payer. Both will appear automatically in the list of Payers because you have capital accounts. This approach will require two expense claims for everything paid from a joint account. But the advantage is automatic posting to capital accounts.

Or, you could create a defined Expense Claims Payer, Bob and Judy Smythe, or whatever your names are. Then you would select that “artificial” payer on expense claims. The advantage is that only one expense claim is needed per transaction. The disadvantage is those claims will post to the Expense claims liability account, from which they must be separately cleared, either by reimbursement (probably not the convenient choice) or transfer by journal entry to your capital accounts as contributions. Perhaps you would do this once per month, after all joint payments are made.

Be aware, however, that your tax jurisdiction may have separate regulations on how to account for mixed personal and business use. In my own, for example, expenses for business use of a home are first paid entirely by personal funds, with no business entries whatsoever. Then, pro rata costs, based on relative areas, are deducted from personal income on income tax filings. In the case of a partnership, income is passed through to the partners and taxed as personal income. So the same overall business deduction is obtained as if the prorated expenses were entered as business expenses. But the math occurs outside the books of the business. Consult local tax/accounting advisors on this.

@Tut, thank you for the explanation. I will experiment with the two methods suggested i.e., (i) entering two separate claims by each partner for the same amount and (ii) creating an “artificial” payer with corresponding requirement to clear the Expense Claims liability account.

Just thinking about your tax jurisdiction regulations which require that expenses for business use of a home are first paid entirely by personal funds, with no business entries whatsoever and the fact that pro rata costs are deducted from personal income on tax filings. The fact that the math occurs outside the books of the business must mean that the books do not represent the true position of the profits of the business, even though from a tax perspective there is no material difference. So, for example, if the books show a profit of £20,000 for the year but a sole proprietor or partner then has to account on his tax filings that there was a pro rata cost of £3,000 for using part of his home for business, then his true profit before tax was only £17,000.

The tax payer knows the true situation as does the tax man, but the books of the business paint a rosier picture.

It would be better (as I understand it) to allow the pro rata business element of the mixed use expenditure to be included in the books as it is, after all, a genuine business expense. I’m not sure what the rules of my jurisdiction are. Will check with a tax advisor in the UK even though (as you pointed out) it won’t make the slightest bit of difference to the tax position.

Then you could do a monthly claim for each partner which includes all those business expenses rather then an expense claim for each expense for each partner.

This way, each month you would “Clone” the previous months expense claim and just change the date and amounts as required.

I agree, even if it means on the 365th day you make adjustments just to satisfy the taxman. You could even duplicate your year end Manager business so that you have ongoing financial books (true position) and year end adjusted tax books - for current year income tax purposes.

Its pleasing to see that you have adopted the separation of recording each partner’s activities as why it may have seem convenient today to not do so, in the future it may have caused issues as you can’t predict future events - new partners, divorce, death.

Perhaps, but your or my personal opinion will never sway the tax man. For what it’s worth, the government’s perspective is that a proprietorship or partnership is an extension of the individual or the partners, not an entity owned by them.

Perhaps not, but you only have to be accurately compliant to the taxman on one day of the year as they don’t give an iota about the rest of the year as those days aren’t related to income tax filings. It’s just that some find it easier to be taxman compliant everyday.

It may not be an entity owned but it’s important that the trading entity reflects its true operating position. Its no point Manager showing that the business is profitable only to find out at tax filing time that after deducting the undisclosed privately paid business expenses the business is actually making a loss. Yes, a bit abstract.

I’m not an accountant and the only accounting experience I have is doing my own accounts for a small cleaning business.

Having read this discussion with interest it occurs to me that the books of the business and the tax filings will often show a very different situation for lots of people if genuine business expenses are not allowed on to the books because of the rules of the particular tax authority.

That raises another question for me and that is one of motoring expenses. In the UK, businesses are allowed to take advantage of approved mileage allowances, which mean that rather than accounting to the taxman for the actual cost of using a vehicle within the business, they can claim £0.45 per mile for the first 10,000 miles and £0.25 per mile for additional miles incurred within the business.

If I pay for the actual cost of the running of the vehicle out of personal funds and do not include them in the books of the business then this will have an impact on the true financial position of the business.

I understand that if I were to claim the business mileage in the tax filings in accordance with the approved mileage rates above and reflected this as an expense claim within Manager, the profits recorded on the tax filings would reflect the profit in the business books, all else being equal.

However, what if I want to claim the allowances (as they might result in a lower tax bill) but also want the business books to show the real financial position? As I understand it, I would need to account for the real running costs of the vehicle (business use element) within the books of the business so that Manager shows the true financial position and then disregard those expenses for the particular vehicle concerned and claim the approved mileage allowance on the tax filings instead.

For example, doing 10,000 business miles in a year in a 1960s American gas guzzler may have greater real running costs than I would be able to claim back in mileage allowances and therefore claiming real costs would be preferable.

Conversely, covering the same distance in a small modern electric car would likely have lower real running costs than I would be able to claim back in mileage allowances and therefore claiming mileage allowances would be preferable.

Please excuse me if the above has become an accounting question (again) and not one specifically concerning Manager.

I think you have slightly misunderstood the discussion, there is no question about genuine business expenses being allowed on to the books. The tax authority reference was in relation to “arbitrary” business expenses where there is a mixed personal and business element such as a house with a home office.

To quote from above “expenses for business use of a home are first paid entirely by personal funds, with no business entries whatsoever. Then, pro rata costs, based on relative areas, are deducted from personal income on income tax filings.”

There is no question - who owns the vehicle
If the vehicle is privately owned then you have the election as reimbursement of either (A) the pro rata of the actual costs or (B) the simplified mileage allowance model but not both.
If the vehicle is business owned then you will only have the full actual cost method less any private use deduction if applicable.

However with private ownership you also have another consideration. Lets say you work for an employer and you get reimbursed for private vehicle usage of say 1000, then that 1000 is also income (allowances received) on your tax filings as you have received a benefit, but normally else where on your tax filing you can also claim (work expenses) a contra for the 1000 so that it becomes neutral.

Now under your discussion of where the business reimburses you under one method (A)1000, so tax filing allowances received 1000, but under tax filings work expenses you claim under a different method (B) 1500 to take advantage of the differential, then that would be deemed as tax evasion.

I’ll add a couple thoughts to @Brucanna’s comprehensive explanation.

In some jurisdictions, this is not true. A business may have the option of choosing either the actual cost method or the mileage allowance method for vehicle operating costs. (There can be restrictions on this choice depending on several factors.) But the important distinction between business vehicle expenses and mixed business use of assets (like the home office that has been discussed) is that vehicle expenses are real costs attributable wholly to the business, no matter what accounting method is used to record them. This is true whether the business owns the vehicle directly or reimburses private owners for use of their vehicles. The bottom line is that the vehicle was driven for business purposes and the business incurred an expense for that. The same would be true if you rented a vehicle. (Note: the reimbursement for use of private vehicles mentioned above might be in the form of capital account adjustments, which an expense claim would handle.)

The home office, on the other hand, requires apportionment of expenses that would have been incurred regardless of whether you used part of the home for business purposes. You might have had rent or mortgage payments, utility bills, property tax, etc. The benevolent government allows you to deduct the business share of those expenses somewhere, either directly on the books of the business or—in a pass-through system—from personal income.

One final subject: There is no question accounting for the business share of mixed uses at the moment on the books of the business gives a better picture of performance. Unfortunately, in some jurisdictions, the determination on whether the pro rata business deduction will be allowed is not knowable at the time of the expense and may depend on factors unrelated to the business itself. For example, there may be tests that consider what fraction of overall income was derived by a taxpayer from the business, or whether the income-generating activity took place in the office or at some other site (such as a customer location), or even what occupation the business owner is engaged in. And tax filings may require that business figures be stated without consideration of the mixed-use deductions. So there may be no point (or legal possibility) in attempting to “improve” the books by including adjustments for mixed uses.

Unsure how this would work, where does the business allocate the surplus or deficit between the actual expense invoices and the allowance method.

If the business owns the vehicle then the expenses related to that vehicle are in the name of the business. I don’t know how they can substitute those purchase invoices for a mileage allowance calculation e.g.

  1. if the allowance calculation was less then the actual invoices why would you claim less.
  2. if the allowance calculation was greater then the actual invoices how can you claim for expenses that were never incurred.

Notice my wording: “…may have the option.” In the case I was thinking of, one of the restrictions is when the business is not a sole trader/proprietor situation. In other words, the vehicle must be the property of the owner, not the business (which is seen as an extension of the owner when a proprietorship). A corporation could use only actual costs, although it might reimburse employees for use of their vehicles under a mileage system. The reason is to resolve exactly the conundrum you pointed out.

The main thrust of the post in which I wrote that, however, was to draw attention to the different situations: (1) expenses entirely attributable to the business, however they are accounted for, and (2) mixed business/personal expenses.

Please don’t think I am defending such a system, because it’s fairly indefensible, especially when you complicate it with rule changes based on how many vehicles are owned, what type of vehicles they are, how many wheels they have, how much they weigh, whether people using them for business have access to other vehicles, whether they are owned or leased, whether they were placed into service as new or used, what type of depreciation schedule is employed, what trade is involved, etc., etc., etc.

A business which OWNS the vehicle never ever has the option regardless of it being a sole trader / partnership / corporation with regards to tax deductibility of expenses.

As you stated yourself “vehicle expenses are real costs attributable wholly to the business”.

Perhaps my initial comment wasn’t clear - “If the vehicle is business owned then you will only have the full actual cost method” for claiming expense deductions. (No aspect of reimbursement is implied)

We are circling around in agreement here, discussing aspects of posts focused on different things. Your statements about business-owned vehicles are correct. My statements about choices sometimes being available are also correct, remembering that in the case I was discussing, all business assets owned by a proprietorship are considered as being owned by the proprietor, because the tax authority considers the business an extension of the proprietor, not a separate entity. I know, it’s weird. But we have no difference of opinion as to what makes good accounting sense and practice. As you have said yourself many times on this forum, financial accounting and tax accounting are often not the same thing.