TREASURER’S WORKSHOP

February 8, 2003

Presented by
NAIC
Minneapolis/St. Paul Chapter

Instructors:
Bruce Reed
Pat Borchers

Agenda

Welcome and Introductions
Year End Duties
Tax Information
Verification of Club Books
Frequently Asked Questions
Resources
Club Accounting Concepts

Welcome and Introductions

Treasurer’s Workshop

Bruce Reed
Pat Borchers

How many of you are club treasurers?
How many of you are doing club taxes this year?
How many of you doing club taxes for the first time?

Buddy system

This presentation is available at www.brucereed.com/Presentations/index.htm

Welcome and Introductions - Expectations

What do you expect to get out of this class?

Welcome and Introductions - Disclaimer

Statements made in this workshop are not official statements from either NAIC or the IRS.
We believe that our statements are accurate information but they are not intended to replace professional tax or accounting advisors.
When in doubt follow the advice of your tax advisor or accountant who is familiar with your particular circumstances.

Certain portions of this presentation are subject to NAIC and I-Club copyright, but the presentation itself is copyrighted by Bruce Reed.

Feel free to use all or part of this presentation for any Investment Club Treasurer activities
Feel free to reuse all or part of this presentation in other presentations
Do not feel free to laugh at or ridicule this presentation - we all have our limitations

Year End Duties

Update Software and Settings
Enter all data
Enter closing stock prices
Verify Club Info
Audit
Distribution Earnings
Tax Filing

Year End Duties - Update Software and Settings

Update your software to the latest version.

NCA is V2.3.0
NOCA is always up-to-date.
Other software packages?
Manual methods - remember to get more paper!

Update your Distribution settings

Utilities, Distribution settings
Allocation - time based vs. non-time based. IRS mandates time-based allocation. If you have already run distributions and need to change this setting for 2002, go ahead and change it and just re-run the distributions for the change to take effect.
Accounting Methodology for year-end distributions. ** This is something new. ** Recommendation is to set this to year 2002. This applies to NOCA; it does not apply to NCA yet.

Year End Duties - Enter all data up to 12/31

Member deposits
Member fees
Stock purchases/sales
Automatic OCP purchases
Stock Dividends - wait for all 1099's
Broker/Money Market Dividends
Bank/Checking/Savings Dividends
Expenses

Year End Duties - Enter closing stock prices

Enter stock prices as of the last market closing of the year
Use a 12/31 date regardless of the actual market closing. If you don't you won't be able to distribute earnings.

Year End Duties - Verify Club Info

Verify that the club's Tax ID Number is entered correctly into your software.

Verify that all partners have signed the current Partnership Agreement.

Year End Duties - Audit

In NCA, perform an audit to ensure that all Unit Value and number of unit calculations are correct.

This does not apply to NOCA.

Year End Duties - Distribute Earnings

Utilities, Distribute earnings
Reports, Distribution of earnings
Don't forget to print the Distribution of Earnings report

Year End Duties - Tax Filing

Why file taxes
Federal forms
State forms
Methods for printing forms

Tax information available at www.iclub.com/taxes

Mailing via "Return Receipt Requested" is recommended.

Year End Duties - Tax Filing - Why file taxes?

Why must an investment club file taxes?

The IRS classifies investment clubs as partnerships.

There can be penalties for not filing. All partnerships must file tax forms, even if there is nothing to report.

Year End Duties - Tax Filing - Federal Forms

Federal Form 1065/Schedule K-1

File by April 15

Print 3 copies of Form 1065

One for IRS
One for state filing
One for club records

Print 4 copies of Schedule K-1

One for IRS
One for state filing
One for club records
One for members

Year End Duties - Tax Filing - State Forms

www.iclub.com/support/state_tax_forms.asp

MN, WI, MN, IA require state filing

Minnesota - Form M-3
www.taxes.state.mn.us/partners/forms/2002/partners.html
File by April 15

Year End Duties - Tax Filing - Methods for printing forms

Download PDF files and print blank forms

Download PDF files and use PDF form fill-in

NAIC Club Accounting Tax Printer

prints Form 1065
prints Schedule K-1
prints Schedule D, as needed

Tax Information

Should Investment Clubs file tax returns?
ID Numbers
Filling out the MN Form M-3

Tax Information - ID Numbers

Federal EIN

IRS SS-4 form - www.irs.gov/pub/irs-fill/fss4.pdf

MN ID Number

To get a MN ID number, call 651-282-5225
Or download form www.taxes.state.mn.us/misc/forms/pdf/abr.pdf
No 800 phone number because of budget cuts
Have Federal EIN and Member names and SSN numbers ready

Tax Information - Filling out the MN Form M-3

Investment club instructions

Name, ID, and Address information
Back side (Schedule A), enter zero on all lines under Column A
Sign
Attach Federal Form 1065 and Schedule K-1s

Tax Information - Should Investment Clubs file?

Yes, Yes, Yes

Clubs are Partnerships

Clubs have a Federal Tax ID number

Clubs can be subject to severe penalties for not filing

If you have further questions of filing requirements, talk to your tax accountant or CPA.

Verification of Club Books

Pre-filing verification
Reports to print
Other documents
Procedures
NAIC Resources

Verification of Club Books - Pre-filing verification

Verification (audit) of the Clubs records is not generally tied to the filing of the Club's tax returns.

However, many clubs may benefit from having some kind of verification by another member before closing the books for the year and filing tax returns.

Verification of Club Books - Reports to print

print reports for 1/1/02 thru 12/31/02, or as-of 12/31/02

Journal (Complete Journal/Ledger)
Cash Journal
Transaction Summary
Individual Security Ledger
Individual Valuation Unit Ledger
Valuation Statement
Distribution of Earnings Statement
Income/Expense Statement and Balance Sheet

Verification of Club Books - Other documents

Broker Monthly and Transaction statements
Bank statements
Deposit slips
Canceled checks
DRP/OCP statements
1099-DIV and 1099-INT statements
Stock certificates held by the club

Include the last statements from the prior year for beginning balance verification.

Verification of Club Books - Procedures

Check bank and broker statements to verify against club records, including dates and beginning and ending balances.
Verify total number of shares of securities; verify total dividends for the year.
Verify recording of each member's payments.

Verification of Club Books - NAIC Resources

Verification procedures
- old.better-investing.org/clubs/verifying-books.html

Annual Verification Report
- old.better-investing.org/clubs/audit-report.html

Frequently Asked Questions

Company-paid fees and commissions
Is Fee for attending Treasurer's Workshop tax deductible?
Can one member buy out another, in part or in whole?
Options for total withdrawals
Does everyone have to be an equal partner?
Total Return and Compound Annual Return (C.A.R.)

Frequently Asked Questions - Company-paid fees/commissions

The club receives a quarterly Dividend Reinvestment Plan statement that shows the current dividend paid and also "Tax Reportable Company Paid Fees and/or Commissions". How are these fees recorded?

Company-paid fees and commissions are treated as additional dividends. They are reported as taxable dividend income on the 1099-DIV form that your club receives at the end of the year. Company-paid fees are added to the cost basis of the purchased stock. In Club Accounting, Charges Paid by Company is listed under securities, Enter New Transaction, Charges Paid by Company.

Frequently Asked Questions - Is Workshop fee tax deductible?

Is the fee for our Treasurer to attend a Treasurer’s Workshop a tax deductible expense?

IRS publication 550 lists Investment-related seminars. It states: "You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes."

The club must decide: Is a Treasurer's Workshop related to an investment partnership (club) the same as a "seminar for investment purposes?"

Frequently Asked Questions - Can one member buy out another?

May a new member buy out a withdrawing member? May current members subdivide the withdrawing member’s shares among themselves? Are there fees involved?

No, No, No.

You can’t have one member buy out another member because it involves complex accounting and tax consequences.

Your Partnership Agreement can spell out how other members can make deposits which match a withdrawing partner's value. This cash can be used to pay off the departing member.

If a withdrawal fee is charged, it works best of the new deposits are entered with a date before the withdrawal, because the withdrawal will change the unit value.

This should not be a problem if no fee is assessed.

Frequently Asked Questions - Options for total withdrawals

What are the options for members making a total withdrawal?

Club pays withdrawing member with cash on hand. This may or may not require the sale of securities to make enough cash available.
Club pays withdrawing member with less cash than the member's cost basis and the rest in stock.
Club pays withdrawing member with more cash than the member's cost basis and the rest in stock.

Frequently Asked Questions - Options for total withdrawals - Withdrawal paid with all cash

With cash payment, the club may have enough cash on hand, or may have to sell stock.

Selling a stock, at a gain or loss, has the normal ramifications of a loss or gain, but has no other direct effect on a withdrawal.

Frequently Asked Questions - Options for total withdrawals - Withdrawal paid with stock

If part of a withdrawal is paid with stock, the club is able to defer gain or loss from the stock until each member withdraws or the club disbands. There is never a sale of stock, all earnings are deferred until the member realizes a gain at withdrawal.

However, usually there is no good reason for a club to defer a loss.

If the amount of cash received is less than the member's cost basis in the club, then all taxable gains are deferred until the sale of the stock, at the member's discretion.

If the amount of cash received is more than the member's cost basis in the club, then the difference is taxable gain, and the stock has a cost basis of zero.

Frequently Asked Questions - Options for total withdrawals - Other Considerations

Convenience of stock transfer - does the member also have an account at the club's broker?

Does the Partnership Agreement allow payoffs with stock?

Frequently Asked Questions - Equal partners?

Does everyone have to be an equal partner? No!

All members may not pay at the same time - time-value differences.
Financial emergencies may require a partial withdrawal.
Members may want flexibility in the amount they pay each month.
Voting could be based on total units, but does not need to be. Things are simpler with "one-member, one-vote".
New members - as a club grows it gets harder for new members to buy in at the same level as existing members.

Frequently Asked Questions - Total Return, Compound Ann Ret

Total Return

This is the total rate of growth. 100% would be a doubling of value.

For stocks, this is the total return since the purchase date(s).
For members, this is the total return since the specified date.
This number is interesting, but doesn't mean anything. Look at the C.A.R. instead.

Compound Annual Return (C.A.R.)

This is the annual rate of growth. 15% would match NAIC target objectives.
Note that a Total Return of 30% for a 2-year period is not the same as a 15% Compound Annual Return.

For stocks, this is the annual rate of growth since the purchase date(s).
For members, this is the annual rate of growth since the specified date.

Resources

NAIC

ICLUB

Yahoo

IRS

Resources - NAIC

Local

Minneapolis/St. Paul Chapter NAIC
P.O. Box 18264
West St. Paul, MN 55118
Voice Mailbox: 952-932-9686

National

www.better-investing.org
Toll Free: 877-275-6242

Email Discussion Lists

lists.better-investing.org - click on Club Treasurers

Club Treasurer's Duties

old.better-investing.org/clubs/treasurer-duties.html

Other information

old.better-investing.org/clubs/clubs.html#corner

Resources - ICLUBcentral

Web Site

www.iclub.com

NCA

NAIC Club Accounting for Windows V2.3.0

NOCA

NAIC Online Club Accounting
www.naic-club.com

Resources - NAIC Software

Available from ICLUBcentral

NCA $169
NOCA $19/year
NOCA with Support $49/year
NAIC Club Tax Printer $49 (each year)

Resources - Yahoo Stock Information

Stock Quotes

finance.yahoo.com

Historical Stock Quotes

chart.yahoo.com

Resources - IRS

Web site

www.irs.gov ( NOT www.irs.com !)

Publication 541 - Partnerships www.irs.gov/pub/irs-pdf/p541.pdf

2002 Form 1065 fill-in form www.irs.gov/pub/irs-fill/f1065.pdf
2002 Form 1065 instructions www.irs.gov/pub/irs-pdf/i1065.pdf
2002 Schedule K-1 fill-in form www.irs.gov/pub/irs-fill/f1065sk1.pdf
2002 Schedule K-1 instructions www.irs.gov/pub/irs-pdf/i1065sk1.pdf

NAIC Club Accounting Concepts

This class is based on NAIC club accounting software and methods.

Other software and methods should have similar concepts.

Current NAIC software is NAIC Club Accounting for Windows (NCA) version 2.3.0, and NAIC Online Club Accounting (NOCA). NCA 1.04 is no longer supported.

The terminology in this presentation is from NOCA. NCA is slightly different in some cases. There is one main difference. With NCA you need to run an Audit to make any adjustments to units. With NOCA any adjustments to units are done automatically.

Custom Designed
Transaction Specific
Account Selection
Petty Cash Account
Record Deletion
Allocation of Expenses

NAIC Club Accounting Concepts - Custom Designed

designed for the specific accounting needs of investment clubs
for best results use the software as intended

NAIC Club Accounting Concepts - Transaction Specific

Transactions identified with a specific member or members should be entered as Member Transactions
Transactions identified with a specific security (stock) should be entered as a Security Transaction
Cash Account Transactions should only be used for transactions that don't directly apply to a member or a security, such as Money Market dividends, club expenses for software

NAIC Club Accounting Concepts - Account Selection

The source and/or destination of the transaction determines the Account to enter transactions.

You can create new Accounts to tailor the accounting to your club specifics, in addition to or in place of the provided accounts - Bank, Broker, Suspense. Examples are shown later in this presentation.

NAIC Club Accounting Concepts - Petty Cash Account

DO NOT USE PETTY CASH ACCOUNTS!

Any activity through the club checking account should be entered in the "Bank" account.

For non-investment monies, for example, club shirts:
   - Create a new Cash Account to work as an "accrual" account.
   - Enter deposited money as a Cash Transfer, from the Accrual account to Bank
   - Enter spent money as a Cash Transfer, from Bank to the Accrual account

Any money deposited into the club checking account should be entered into the Bank account.

Some clubs hold a little money as cash for small expenses, such as stamps, copy charges, etc. In this case a new Cash Account should be created. Avoid using the title "Petty Cash" to prevent confusion; use a specific title, such as "Cash in Box".

NAIC Club Accounting Concepts - Record Deletion

Every entry represents the history of your investment club. Records of withdrawn partners and securities no longer held are permanent records and should not be deleted.

Club Accounting provides a means of marking inactive records.

Records should only be deleted if they are entered in error, for example a deposit entered twice.

NAIC Club Accounting Concepts - Allocation of Expenses

Allocation of Expenses can be "By ownership share" or "By member".   If no special collection is made from members to pay for an expense, then the choice of which method to use is subjective.

However, if a separate collection is made for an expense, and each member is chipping in equally, then Allocation of Expenses should be "By member".   Note that such a collection should be entered as Member Deposits and should buy units for each member (see the example later in the presentation).

In NCA, Allocation of Expenses may be set by checking or not checking the "equal allocation" box.

Note that if your membership agreement dictates a method of expense allocation, that method should be followed.   Otherwise, the IRS takes the position that all expenses shall be allocated in proportion to ownership (see Publication 541).   To allocate any or all expenses "By member", your partnership agreement must spell it out.

Club Accounting Procedures and Tips

Unit Value Method
Cost Basis
Unit Value, Unit Calculations
Entering Dividends
Special Assessments for Expenses
Dates on Transactions

Club Accounting Procedures and Tips - Unit Value Method

Club accounting is based on the Unit Value Method.

Units are NOT shares.
Requiring equal values is not recommended.
Unit Value is Total Club Value divided by Total Club Units

Things that may affect Units and Unit Value

Member Deposits
Member Fees
Non-Club Transactions
Classifying Expenses

Club Accounting Procedures and Tips - Unit Value Method - Member Deposit transactions

Member Deposits buy units and add directly to the member's value in the club.

Member Deposits includes regular member investments as well as special assessments for expenses, if your club has any.

Some clubs try to keep expense money separate from investment money. This serves no purpose and there is no need to do this.

If your club insists on collecting separate money for expenses, enter it the same way as regular member payments, and when entering the Expense, be sure to mark the Allocation as "By member".

Member Deposits add to the member's cost basis in the club.

Member Deposit transactions don't affect the per unit value.

Club Accounting Procedures and Tips - Unit Value Method - Member Fee transactions

Member Fees don't buy units.

Member Fees do add to the club's total value, and increase the per unit value.

Member Fees do add to the member's cost basis in the club.

Member Fees can include things like late fees, and bank fees that apply to a specific member.

Member Fees should be treated like penalties. They should not be used for something that applies to all members.

Club Accounting Procedures and Tips - Unit Value Method - Non-club transactions

Non-club transactions are payments that don't directly relate to the club or club activities. For example, a club has a holiday party, and collects money from each member. This money is not related to the member's investment in the club, and does not add to the member's cost basis.-

When entering non-club transactions, they should not be directly associated with a member. They should be entered as Cash transfers between a special "suspense" account and the "Bank" account. The member's name can be entered in the comment area. These are considered "pass-thru" transactions.

For "pass-thru" transactions:

a special account should be set up, for example "SSG Seminar - Member costs"
all "pass-thru" money paid in should be paid out, for example Club covers member's seminar fee, member reimburses Club.
the net balance in the special account should be zero
when "pass-thru" money is spent, it is entered as a Transfer, not an Expense

Club Accounting Procedures and Tips - Unit Value Method - Classifying Collections, Expenses

Any money collected from members must be classified as one of the following

Member Deposit (affects cost basis and adds units)
Member Fee (affect cost basis, no units added)
"Pass-thru" money - no effect for member or club

Any money spent by the club must be classified as one of the following

Tax deductible expense
Non-Tax Deductible expense
"Pass-thru" money paid out

Club Accounting Procedures and Tips - Unit Value Method - Classifying Coll,Exp, cont.

Although there is some flexibility in how a club handles some transactions, it's alway best to keep things simple. Here are some guidelines that can be used:

If a single member pays it, it's probably a Member Fee
If most or all members pay it, it's probably a Member Deposit
If collected money is treated as "pass-thru", the same spent money must be "pass-thru", for the same total amount
If collected money is not treated as "pass-thru", then the IRS determines if the Expense is Tax Deductible or not

A club may consider some expenses to be club-related even though they are not Tax Deductible. In some cases this may actually be simpler.

Suggestions (some are obvious):

enter member investment collections as Member Deposits
enter member late fees as Member Fees
enter Accounting Software as a Tax Deductible Expense
enter money collected for club expenses as Member Deposits
enter "extra-curricular" expenses as Non-Tax Deductible Expenses

Club Accounting Procedures and Tips - Unit Value Method - Classifying Coll,Exp, Example

Here is a good illustration of a couple of the alternatives for treating special expenditures.

Club throws a party, cost is estimated at $100, but total spent is $90
10 Members, $10 per member
Club value $20,000, total units 1000, unit value $20

Method 1, treated as "pass-thru"

create new account "Club Party"
collect money, enter as Cash Transfer, From Club Party, To Bank
pay actual party expenses of $90, enter as Cash Transfer, From Bank, To Club Party
effect: none except for more work for Treasurer
note: money spent must exactly match money collected, in this case the remaining $10 must still be spent

Club Accounting Procedures and Tips - Unit Value Method - Classifying Coll,Exp, Ex. cont.

Method 2, treated as "normal" money

collect money, enter as Member Deposits, units are added for members, .5 units per member
pay actual party expenses $90, enter as Expense, not Tax Deductible, Allocation is By Member, reducing each member's units by .45 units
effect: unit value is not affected
effect: remaining $10 does not have to be spent
effect: each member ends up with .05 units more, which they paid for

This second method is simpler and is actually more fair.

Club Accounting Procedures and Tips - Unit Value, Unit Calculations

In relation to Units, there are three kinds of transactions:

Deposits/Withdrawals, which add/subtract units, but do not affect Unit Value
Fees/Expenses, which don't change the total units, but do affect the Unit Value
Cash Transfer, which have no effect on units or Unit Value

Unit Value, sometimes call per unit value, is simply total club value divided by total club units of all members.

When a Member Deposit is entered, units are calculated for the member by taking the payment amount and dividing by the Unit Value.

Club Accounting Procedures and Tips - Cost Basis

Everything in investing has a cost basis. Cost basis is the money you put into something. When you buy a stock for $1000, your cost basis is $1000.

When you sell the investment, you are taxed on the difference between sale amount and your cost basis. If you sold that stock for $1200, you have taxable gains of $200.

The same applies to your investment in the club.

When you make a regular monthly payment to the club, that adds to your cost basis.
When you pay a late fee to the club, that adds to your cost basis.
When you chip in for a party, that does not add to your cost basis.

Club Accounting Procedures and Tips - Entering Dividends

Dividends from stocks

dividend check - enter under Securities, Cash Dividends
reinvested - enter under Securities, Reinvest

Dividends from broker/bank

enter under Cash Accounts, Bank/Money Market Dividend or Interest, depending on how the broker labels it.

Club Accounting Procedures and Tips - Special Assessments for Expenses

Some clubs want to keep monthly collections dedicated to investment, and collect special assessments for expenses, such as software, dues, etc. This is strictly a subjective thing, there is nothing that requires it (except maybe your club agreement).

These addtional collections may not exactly match the expense.

For example, Tax Printer software costs $49, and a club has 10 members. The club could collect $4.90 from each member. Or they may collect $10 each and 'bank' the excess for the next expense.

What is the proper method to enter these collections, and the related expenses?

Enter member payments as "Member Deposit", which will add the same number of units for each member.
Enter expenses with Distribution Method=By Member, which will deduct the same number of units for each member.

Club Accounting Procedures and Tips - Special Assessments for Expenses - Example, purchasing software

$49 for Tax Printer, 10 members, Unit value=$10.00

example 1, each member pays $4.90

enter Member Deposit, $4.90 for each member
each member gains .49 units
enter expense in Cash Accounts, Expense, Dist=by member
each member loses .49 units

example 2, each member pays $10.00

enter Member Deposit, $10.00 for each member
each member gains 1 unit
enter expense in Cash Accounts, Expense, Dist=by member
each member loses .49 units
each member nets the same number of units (1 - .49)

Club Accounting Procedures and Tips - Special Assessments for Expenses - Example, NAIC dues #1

Club dues $45, Member dues $14, 10 members
one member pays NAIC membership thru another club
Member dues pass through club for submission to NAIC

Club dues are $4.50 per member
9 members pay $18.50, 1 member pays $4.50
create new Cash account "NAIC Membership"
enter $4.50 Member Deposit for each member, post to Bank account ($45 total)
enter $45 expense, post to NAIC Membership account, Tax status=Deductible, Distribution=By ownership share
enter $126 Cash Transfer from NAIC Membership to Bank, Comment="list of 9 members collected"
enter $171 Cash Transfer from Bank to NAIC Membership, Comment="payment of NAIC Duess"
members report $14 Member dues on their tax return

Club Accounting Procedures and Tips - Special Assessments for Expenses - Example, NAIC dues #2

Club dues $45, Member dues $14, 10 members
one member pays NAIC membership thru another club
Member dues are collected, then treated as a Club expense

Club dues are $4.50 per member
9 members pay $18.50, 1 member pays $4.50
enter $18.50 Member Deposit for 9 members, post to Bank account ($166.50 total)
enter $4.50 Member Deposit for 1 member, post to Bank Account
enter $171 expense, Tax status=Deductible, Distribution=By Member, comment="Payment of NAIC Dues"
members do not report NAIC dues on their tax return, they are part of the member's cost basis in the club.

Note - this will allocate some of the Member dues Expense to the 10th member, but this is the simplest method of including member dues in the club's books.

Club Accounting Procedures and Tips - Special Assessments for Expenses - Example, NAIC dues #3

Club dues $45, Member dues $14, 10 members
one member pays NAIC membership thru another club
Member dues don't pass through club

Club dues are $4.50 per member
10 members pay $4.50 to club
9 members write a separate check for $14 to NAIC
enter $4.50 Member Deposit for 10 members, post to Bank Account
enter $45 expense, Tax status=Deductible, Distribution=By Member, comment="Payment of NAIC Club Dues"
members report $14 Member dues on their tax return

Club Accounting Procedures and Tips - Dates on Transactions

For transactions that rely on unit value (Member Deposits, Withdrawals), if possible, avoid using the same date as any transactions that change the unit value. This will reduce doubt about which transactions will affect the unit value for transactions which have units.

Especially avoid entering withdrawals on the same day as a valuation. There have been reports of problems related to this.

Questions?

eMail me
This presentation can be found at www.brucereed.com
click on Presentations, then "NAIC Treasurer's Workshop - 2/8/03"

Special thanks to Rip West for his valuable input in refining (and correcting) this presentation.