Reporting sweep account on 1065

[jasdlm]

Taxpayer (4 member LLC) uses a sweep account for its main checking account. Consequently, entering the bank accounts into QB actually shows deposits of $2,375,172.24 and related 'expense' of $2,374,893.68. (Very little actual income, but many transactions because of the daily 'sweep' in and out.)

This is the first time I've completed a business return that involves a 'sweep' account. What is the proper way to report this on the 1065 (i.e. do I just net out the two and report the interest under interest income?) or does something else need to be done?

Also, how do you experienced practitioners handle the QB entries?

Thanks so much.

jas

[JAinNC]

What kind of transactions? What is their main activity/business?
Jeannie

[Bees Knees]

Explain to us: What is a "sweep" account?

[Bees Knees]

Learn something new every day. A simple google search gave me this definition:

A sweep account links a commercial checking account with an investment account, such as a money market account or stock fund. It automatically keeps the checking account balance at a preset target level, by transferring funds to or from the investment account as needed. Sweep accounts allow small businesses to get higher returns on cash that might otherwise languish in commercial checking accounts. Because most small businesses don't have the time or capital to reap the benefits of more profitable investments, sweep accounts make a lot of sense.

Most sweep accounts require the business to maintain a minimum balance. The bank then "sweeps" the account (usually daily) and removes any funds in excess of the balance minimum. The bank automatically invests those funds in an account you select. When your checking account drops below its required balance, the bank automatically "sweeps" back enough cash to bring your account up to its required minimum balance.

[Bees Knees]

This is the first time I've completed a business return that involves a 'sweep' account. What is the proper way to report this on the 1065 (i.e. do I just net out the two and report the interest under interest income?) or does something else need to be done?

Also, how do you experienced practitioners handle the QB entries?

This illustrates the reason why you do not use QB if you do not understand accounting. I am not a very good carpenter. Besides shooting myself in the foot with a nail gun, I also cannot get the boards very straight, regardless of how good my tools may be.

QB is no substitute for the knowledge needed to do accounting. I will tell you the proper accounting entries needed for this transaction. You will need to understand double entry bookkeeping to translate the following into English.

Lets say your business checking account is set up under a current asset account numbered 101. Lets say your business sweep account (money market account) is set up under a current asset account numbered 102. Lets say your interest income account is set up under an income account numbered 302.

When money is transferred from the business checking account into the money market account, you debit account 102 and credit account 101. When money is transferred from the money market account into the business checking account, you debit account 101 and credit account 102. When the money market account earns interest, you debit account 102 and credit account 302.

Most of the transactions will simply be reflected as balance sheet transactions. Only the interest income will show up on the income statement. Numbers from the income statement flow to page 1, 2, and 3 of the 1065. Numbers from the balance sheet flow to page 4 of the 1065.

[jasdlm]

Thanks, Bees. I did put only the interest on the 1065 page 1, but I'm working this case for a divorce attorney right now. The other side sees all the 'sweep' deposits and is demanding 'accounting' for the income. I know that the daily deposits are non-income deposits, but I wasn't doing the QB correctly and so the P&L and Balance Sheets were not coming out accurately. I feel like an idiot now after reading your post. I will adjust my QB entries. (Eeeks . . . there are tons of them . . . maybe I can figure out how to do it globally.)

Thanks again.

[Lion]

"Transfer Funds"

There's a QB tab, maybe under the Banking Menu, that's for Transfers between accounts. It'll debit one bank account and credit another to report a transfer between banking/investment/etc. accounts instead of new Revenue. If you don't have the interest breakout until the end of the year when you get the 1099-INT, then you can do a journal entry at that time to report Interest Expense. A Transfer between bank accounts shouldn't increase an Income account nor an Expense account; only new Revenues coming from outside, new deposits, increase Income; and only new disbursements/checks to vendors increase Expense accounts -- in your day-to-day transactions, that is.

You can run some reports until you find one that reports all the erroneous Income. Then, record the appropriate Transfers. (You should've now doubled the erroneous number in your operating bank account.) Then delete the erroneous deposits to get back down to the original bank balance. Maybe a QB guru can tell you the most simple method. Good luck.

[jasdlm]

Thanks so much, Lion. Your post is very helpful.

[Bees Knees]

Thanks, Bees. I did put only the interest on the 1065 page 1, but I'm working this case for a divorce attorney right now.

Actually, interest income from investment accounts should not be reported anywhere on page 1 of the 1065. It should be reported on line 5 of the Schedule K, page 3 of Form 1065.

[Lion]

And...

Good catch; forgot it was a pass-through entity. You'll want to make sure the bank accounts were reconciled before you begin, and save a copy on a flash or something if you have a lot of changes. Note the relevant account balances before you start making changes.