Recording Non-Taxable Dividends

[Anthony]

On Sat, Jan 2, 2010 at 6:04 PM, J. Alex Aycinena <alex.aycinena at gmail.com>wrote:

> > From: Anthony <gnucash at inbox.org>
> > Because it's not income.  At least, it's not income to him.  It's income
> to
> > the trust.
> >
>
> Of course it's income, and his income - but you're free to not record
> it if you like. Mike's answer is my personal preference; I also like
> to record the reinvestment details. But there is no 'right' answer
> here.
>

Money earned in an IRA for which he is the owner is no more "his income"
than money earned by a corporation for which he is the sole shareholder.

Is there a right answer?  I suppose you can call something "nontaxable
income" even though it isn't income to you.  But don't show it to your
accountant at the end of the year, because that definition just doesn't
coincide with the language of accountants.

Don't
> confuse someone else's reporting requirements with your accounting
> requirements (although they may be one of many factors in defining
> those accounting requirements).


I'm not confused about it at all.  An IRA is a separate legal entity.  It
should have its own set of books.  That has nothing to do with reporting
requirements, though it does help with reporting requirements (e.g. you
certainly wouldn't want to count your IRA's income as "nontaxable income"
when calculating your income for the purpose of the sales tax safe harbor).


> The fact that the US tax laws allows
> you to defer income recognition for US Income Tax reporting purposes
> doesn't change what you may want for your own financial analysis
> purposes.


Well, it might change it.  But then, it might not.  Whether you are
reporting taxes on an accrual basis or a cash basis might affect how you
decide to record your books, or it might not.  In any case, this is *not*
income which US tax laws allow you to defer.  It's income of another entity,
which US tax laws don't require you to treat as your own (which they do in
the case of other trusts).

Besides, your state income tax reporting requirements may
> differ from the federal ones. Or you may need to report in more than
> one national tax system. If they are in conflict, which one is the
> 'right' one?
>

I'd say the right one is to let each legal entity have its own set of
books.  And if tax laws require you to report the income of a separate legal
entity, then you should do that at tax time.

For practical purposes sometimes people ignore that.  For instance a husband
and wife who regularly co-mingle funds might set up a single set of books
for the two of them.  I guess that's fine, if it works for them.  But I'm
not sure I'd say it's "right".

I can understand why people seem to look for some single external
> authority for the 'right way' to do these things but, unfortunately,
> this doesn't exist. You have to stop and think about your own
> requirements from the system and structure your accounts, transaction
> processing practices and reports accordingly and there's no short-cut.
> Using one external 'authority' (like the IRS, or your bank) as a
> surrogate for this is, in my opinion, a mistake that should be
> avoided.
>

I'm not sure it's quite as bleak as that.  There are lots of books that have
been written on best practices for setting up accounting systems.  You don't
have to reinvent all that yourself.  But of course I agree that the IRS is
not the place you should look to set up your accounts.  And I'm not even
sure what it would mean to expect your bank to do so.