How to categorize a transfer?

System

This discussion was created from comments split from: How do I categorize transfers?.

dryoung711

My wife has an IOLTA account (a trust account for lawyers to hold retainer funds in escrow until earned). I create a set of bills in her billing software and then "write a check" from the IOLTA account as income. When we deposit that check into her personal checking account, it is now earned income BUT for accounting purposes, I must categorize this as a "transfer" so the IOLTA and personal checking accounts balance.

How can I also categorize this as "schedule c gross wages" at the same time for reporting purposes, etc???

volvogirl

Do you have the IOLTA accounts in your personal data file?  Sounds like you need to have a separate data file for it.  

NotACPA

I agree with @volvogirl.  Your wife does NOT automatically own the funds in the IOLTA. It's a Trust, not personal property, until earned.

When it's earned, you record the Expense in the IOLTA data file and INCOME in your personal file ... and the whole "transfer" issue goes away.

dryoung711

OK this makes sense. The IOLTA would be a liability account vs an asset since the funds are "in escrow" until they are earned. Moving it to a separate data file makes a bit more work but not a big deal since there are typically no more than 10 transactions each month anyway. thank you @volvogirl and @NotACPA

NotACPA

Yes the IOLTA account itself is a liability ... but that Liability is offset by the funds in the bank (an Asset).  Giving the entire IOLTA data file a Net Worth of $0.

Rocket J Squirrel

Being a non-accounting type who likes to keep things simple, I might just set up a Tax Line Item for transfers out of the IOLTA and classify the IOLTA as a "Separate" account.

NotACPA

@Rocket J Squirrel , are you suggesting keeping the IOLTA in the OP's personal account?

Because, if the IOLTA is in it's own file (as it should be ... it isn't the OP's property), then this isn't needed.

All that would be needed is to create an appropriate Income category in the personal account to record the income.

AND, the 1st time that the Court Auditors come thru, there's gonna be a LOT of 'spllainin to do if it's in the OP's personal data file.

Rocket J Squirrel

@NotACPA , that was me, not @q_lurker . I fully expected to get slapped for that suggestion. But a transfer from a  Separate account is simpler and easier than opening 2 Quicken files to record the withdrawal in one file and the deposit in another.

NotACPA

@Rocket J Squirrel  Typo corrected.  Thanks for the heads-up. I've corrected it.

Yes it's simpler.  But the OP stated "10 transactions a month" in the IOLTA ... so how much is REALLY being saved ... vs. the risk of a really nasty audit.  "Commingling of funds", which is how this would be seen, is a BIG No, No!

And could cost the wife her law license.

Rocket J Squirrel

I think you're getting your knickers in a knot over knothing. Quicken is a representation of money, it's not the actual money. Classifying the account as Separate represents that it's not co-mingled.

NotACPA

You gotta remember that I'm a former Bank Audit VP.

Merely recording the IOLTA is the same file is enough to arouse  suspicion.

And the fix is so simple, that it's not worth the risk to the wife's law license. OR the nuisance of an Audit.

Rocket J Squirrel

Well, then, Mr. Former Audit VP, how audit-worthy is Quicken data? Has anyone in authority actually accepted Quicken data for an audit?

A ledger with permanent ink on paper is difficult to alter. But anyone can change Quicken data at any time to cook the books prior to an audit and not leave a trace.

I have always assumed that the IRS would scoff at my Quicken data if it were to audit my income taxes. Being unwilling to keep every paper document and receipt for 7 years, I'd just roll over and pay.

NotACPA

Ever heard of "duplicate ledgers"?  So, how "audit worthy" is pen and paper?

AND, I do keep my receipts for 7+ years.  The plus is because the free service that provides mass shredding comes annually in  the Spring.

Tom Young

I'd opt for the KISS principal here and keep all the accounting in the law firm's Quicken file. 

I assume the cash really is deposited in a bank account that's separate from the law firm's corporate bank account.  IMHO that's enough legal "separation,"  if that's required.

So, receive a retainer:

Debit (increase) IOLTA Checking Account   $XX,XXX
Credit (increase) IOLTA Liability Account     $XX,XXX

Earn some of that retainer:

Debit (increase) Law Firm's Checking Account  $Y,YYY
Credit (decrease) IOLTA Checking Account       $Y,YYY

Debit (decrease) IOLTA Liability Account            $Y,YYY
Credit (increase) Legal Fees Earned Category   $Y,YYY

KISS

NotACPA

"I'd opt for the KISS principal here and keep all the accounting in the law firm's Quicken file.  "

AGREE

But that wouldn't be the personal Quicken file of the couple.

Tom Young

"When we deposit that check into her personal checking account, it is now earned income BUT for accounting purposes, I must categorize this as a "transfer" so the IOLTA and personal checking accounts balance."

So clearly the two Accounts are currently in one file and if the wife is reporting the legal practice on Schedule C - which she is -I don't see any need to change that.