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winktax
winktax, Enrolled Agent
Category: Tax
Satisfied Customers: 425
Experience:  18 years experience as an Enrolled Agent, insurance agent, stock broker and financial advisor.
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Hi I had a new question as we discussed one of our LLCs and

Resolved Question:

Hi I had a new question as we discussed one of our LLCs and now I want to check the accounting for the other one.
As we discussed before, the US LLC owns 2 LLCs, one which makes the software lets call it Europe2 LLC.
How is the money the US LLC sends to pay Europe2 LLC expenses to be accounted?
Europe2 LLC writes the code that forms the basis of the product sold by the US LLC and the Europe1 LLC.
Europe2 has no revenue other than the money sent from the US office.
Before Europe2 was formed, expenses were paid directly to contractors, etc.
Now, Europe2 sends a monthly statement listing expenses requesting payment to the Europe2 office to cover those expenses.
The US office makes payments to the Europe2 office when its convenient in large transfers.
Europe2 is accounting for the money the US LLC sends them as income.
Europe2 does a P&L which includes asset depreciation, expenses and income
from the US office which is then included on the US income statement.
How is this situation normally handled where a US company owns a development center-that
just has expenses and no sales?
Should the US be recording this as buying something from Europe2
like purchasing the software product at a given price from them or its okay to think
of it as paying the expenses?
Submitted: 2 years ago.
Category: Tax
Expert:  winktax replied 2 years ago.

winktax :

let me read and think for a few.

Customer:

sure

Customer:

I'll wait

winktax :

Which LLC was charged a royalty, Euro 1 - sells or Euro 2 - makes

Customer:

sorry I don't understand

Customer:

let's say Euro 1 sells

Customer:

and Euro 2 makes

Customer:

We discussed Euro1 yesterday

Customer:

I am clear on that

Customer:

sorry if confused you

Customer:

so US and Euro1 sell the product

winktax :

You mentioned earlier that CA LLC charged a royalty to one of the other LLC's to cover the expenses of the second foreign LLC.

Customer:

yes, you told me yesterday

Customer:

that US should book as CA sales

Customer:

from Euro 1

Customer:

we charge Euro 1

Customer:

for the software

Customer:

and we pay the expenses of Euro 2

Customer:

from the CA LLC

Customer:

I don't know if there is a better way to do this

Customer:

but basically Euro sells but doesn't make

Customer:

sorry Euro1

Customer:

and Euro2 makes but doesn't sell

winktax :

that's ok, just keeping the story clear.

Customer:

sure, that is why I need your help, its confusing to me

Customer:

but I want to be sure its clear for you

Customer:

so I can get the accounting straight

Customer:

so Euro 1 sells our product

Customer:

US sells our product

Customer:

Euro 2 makes our product

Customer:

how do we account for this

Customer:

as we need to send money to Euro 2

Customer:

to pay their expenses

Customer:

right now US sends the money to Euro2

Customer:

and Euro 1 sends money to US

winktax :

got it, writing an answer.

winktax :

Euro 2 LLC, what type of tax return does it file

Customer:

can you explain?

winktax :

CA LLC files a partnership return, Form 1065. The Euro 2 LLC is owned 100% by CA LLC, it can file a partnership return, a corporate return, or no return as an disregarded entity.

Customer:

In Europe it files a return is that what you mean?

winktax :

Is Euro 2 llc a US formed and based LLC. ie. set up in CA and received a tax id from the IRS

Customer:

no it was set up in Europe

Customer:

if that is what you mean

Customer:

it was not set up here

winktax :

ok

Customer:

same thing with Euro 1

Customer:

they are in 2 different countries

Customer:

The US LLC is a CA based LLC

Customer:

is that what you meant?

Customer:

the others were set up in their countries

winktax :

I would look at Euro 2-makes as a type of non-profit subsidiary, (it is not subsidiary but in effect it is as it is 100% owned by CA LLC) This LLC will not ever make a profit.


 


Since the two LLC’s are legally separate entities, I would show the payments from CA LLC to Euro 2 as purchasing software, an expense on CA LLC’s books. Income on Euro 2’s books. The income on euro 2 will equal euro 2’s expenses resulting in no profit.


 


CA LLC is able to show the expense for the software.


 


You do not want to show the payments to Euro 2 as an investment, they would not be deductible by the CA LLC and in effect Euro 2 would always show a loss, due to lack of income.


 

Customer:

I see

winktax :

in this case the cost of the software is determined by the expenses of Euro 2

Customer:

yes,

Customer:

they do have assets and depreciation - i.e. tables ,chairs, computers

Customer:

so their PandL has a slight difference from sales in = expenses

Customer:

so I am just trying to understand the accounting for them

Customer:

and how it should be

Customer:

are we doing it correctly?

winktax :

in any given year there could be some differences to adjust for as tax wise not all expenses are fully deductible as a 100% expense. ie. deprecation takes place over time but the expense takes place once. These items you would have to adjust for with the goal of having euro 2 year end profit be zero.

Customer:

can you explain

winktax :

yes

winktax :

Euro 2 buys a desk for 100 euro, cost year 1 is 100, cash flow 100. (CA LLC needs to send over 100) But tax wise it is depreciated over 5 years. so the P & L only shows an expense of 20. so you need to be aware of the tax differences for profit vs cash flow and make adjustments accordingly.

winktax :

Goal is over time to have euro 2 not show a profit or large loss.

Customer:

thats right

winktax :

so you may have to come up with a figure over the course of the year of what these differences are and show the difference as a capital contribution rather than as an income item euro 2 and expense CA LLC. However in looking at both LLC's the differences would cancel each other out. Euro LLC shows extra income of 80 in year one, but CA LLC shows an extra expense of 80 in year one, would cancel each other out. Only downside would be tax issues with reporting income on euro 2 llc. Euro 2 llc could owe taxes in its base country

Customer:

yes, that is what happens

Customer:

they owed some taxes

Customer:

small

Customer:

in general

winktax :

ok, so to eliminate those taxes you would have to come up with a figure of what the differences are and lower the invoices by that amount and show the balance as a capital contribution.

winktax :

with an estimate you could get very close to having the euro 2 llc be as close to zero as possible.

Customer:

okay can you review what we should do?

Customer:

Its correct

Customer:

to have them send us their expenses

Customer:

we expense

Customer:

and then record their PandL

Customer:

as for Euro1

Customer:

and pass through them on the taxes

Customer:

or is there something i am missing?

winktax :

"Euro 2 - makes", invoices CA LLC based Euro 2's expenses. CA LLC shows as an expense. Euro 2 shows as income. End of year Euro 2 shows small profit/loss which CA LLC shows as income. With the possiblity of a small capital transfer to euro 2 (which reduces the invoice costs) so as to get euro 2 as close to no profit/loss as possible.

Customer:

okay can you explain the part about the small capital transfer/

Customer:

how is that done?

winktax :

If over the course of the year, euro 2 had cash paid expenses of 20,000 but tax wise euro was only allowed to deduct 19,000. then euro 2 would need to make an invoice adjustment of 1,000 (lower the invoice amount) and show the 1,000 as a capital contribution from CA LLC. This lowers the euro 2 income to match tax usable expenses, resulting a no profit or loss. removing any tax due by euro 2 to some country.

Customer:

okay I see, they invoice us for a certain amount showing that as income

Customer:

the other money they need

Customer:

to pay their bills

Customer:

came from our captial contribution

Customer:

is that right?

winktax :

yes

winktax :

the tax rules in euro country dictate what the expenses are, the expenses that are currently deductible.

Customer:

yes

Customer:

just to check our on return their net result is treated as Euro 1 as

Customer:

a pass through right

winktax :

yes, euro 2-makes and euro 1-sells are treated as pass thru, any Net profit/loss goes on CA LLC

Customer:

I meant that it shows up as partner's share of investment in pass through entities

Customer:

right?

Customer:

on the 1065

winktax :

yes.

Customer:

okay I see

Customer:

I think I am clear now, I just wanted to check one thing you said

Customer:

"You do not want to show the payments to Euro 2 as an investment, they would not be deductible by the CA LLC and in effect Euro 2 would always show a loss, due to lack of income."

Customer:

since we are showing the payments to them as expenses

Customer:

and not investment its consistent with what you said right?

Customer:

or am I confused

winktax :

yes, i was pointing out that there are two ways to show money going to euro 2, either pay an invoice or show as an investment. If shown as an investment, euro 2 would never have any income, only losses and doing it that way would be very ugly accounting/tax wise.

Customer:

yes, in fact their accountant said we can't do it that way as they would be nonviable entity

Customer:

in their country

Customer:

I don't understand this as many companies have development centers

Customer:

in foreign countries

winktax :

yes, but it gets to the specifics on how the development centers are owned and what those countries allow.

Customer:

I see well I think are good

Customer:

sorry I think we are good

Customer:

and you have answered my question

Customer:

would you have some time on Friday

winktax :

ok, good luck, will make you a junior account eventually.

winktax :

yes friday I;m open right now before 12 est, and between 2-4:30 est.

Customer:

okay great, I have some smaller issues

Customer:

but these were the big ones

winktax :

ok

Customer:

wish I had studied tax law and not physics in school!

Customer:

but working with you has been great

winktax :

if your good physics probably pays better. talk to you on friday.

Customer:

okay see you

winktax :

ok

winktax, Enrolled Agent
Category: Tax
Satisfied Customers: 425
Experience: 18 years experience as an Enrolled Agent, insurance agent, stock broker and financial advisor.
winktax and 3 other Tax Specialists are ready to help you

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