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let me read and think for a few.
Which LLC was charged a royalty, Euro 1 - sells or Euro 2 - makes
sorry I don't understand
let's say Euro 1 sells
and Euro 2 makes
We discussed Euro1 yesterday
I am clear on that
sorry if confused you
so US and Euro1 sell the product
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.
yes, you told me yesterday
that US should book as CA sales
from Euro 1
we charge Euro 1
for the software
and we pay the expenses of Euro 2
from the CA LLC
I don't know if there is a better way to do this
but basically Euro sells but doesn't make
and Euro2 makes but doesn't sell
that's ok, just keeping the story clear.
sure, that is why I need your help, its confusing to me
but I want to be sure its clear for you
so I can get the accounting straight
so Euro 1 sells our product
US sells our product
Euro 2 makes our product
how do we account for this
as we need to send money to Euro 2
to pay their expenses
right now US sends the money to Euro2
and Euro 1 sends money to US
got it, writing an answer.
Euro 2 LLC, what type of tax return does it file
can you explain?
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.
In Europe it files a return is that what you mean?
Is Euro 2 llc a US formed and based LLC. ie. set up in CA and received a tax id from the IRS
no it was set up in Europe
if that is what you mean
it was not set up here
same thing with Euro 1
they are in 2 different countries
The US LLC is a CA based LLC
is that what you meant?
the others were set up in their countries
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.
in this case the cost of the software is determined by the expenses of Euro 2
they do have assets and depreciation - i.e. tables ,chairs, computers
so their PandL has a slight difference from sales in = expenses
so I am just trying to understand the accounting for them
and how it should be
are we doing it correctly?
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.
can you explain
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.
Goal is over time to have euro 2 not show a profit or large loss.
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
yes, that is what happens
they owed some taxes
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.
with an estimate you could get very close to having the euro 2 llc be as close to zero as possible.
okay can you review what we should do?
to have them send us their expenses
and then record their PandL
as for Euro1
and pass through them on the taxes
or is there something i am missing?
"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.
okay can you explain the part about the small capital transfer/
how is that done?
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.
okay I see, they invoice us for a certain amount showing that as income
the other money they need
to pay their bills
came from our captial contribution
is that right?
the tax rules in euro country dictate what the expenses are, the expenses that are currently deductible.
just to check our on return their net result is treated as Euro 1 as
a pass through right
yes, euro 2-makes and euro 1-sells are treated as pass thru, any Net profit/loss goes on CA LLC
I meant that it shows up as partner's share of investment in pass through entities
on the 1065
okay I see
I think I am clear now, I just wanted to check one thing you said
"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."
since we are showing the payments to them as expenses
and not investment its consistent with what you said right?
or am I confused
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.
yes, in fact their accountant said we can't do it that way as they would be nonviable entity
in their country
I don't understand this as many companies have development centers
in foreign countries
yes, but it gets to the specifics on how the development centers are owned and what those countries allow.
I see well I think are good
sorry I think we are good
and you have answered my question
would you have some time on Friday
ok, good luck, will make you a junior account eventually.
yes friday I;m open right now before 12 est, and between 2-4:30 est.
okay great, I have some smaller issues
but these were the big ones
wish I had studied tax law and not physics in school!
but working with you has been great
if your good physics probably pays better. talk to you on friday.
okay see you