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5500 Question, Profit Share Jan-2018


SJones

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Hello,

Am filing 5500 and trying to see how to account for a profit share for 2017 that was made in Jan-2018. Since it was made in Jan-18, the Dec 31, 2017 balance does not account for this. My business tax did account for this in 2017 taxes.

So, question is - Should I add this amount to 2017 ending balance or should I account for in 2018? 

Thanks,

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If you exclude it, you are said to be using cash basis accounting.  If you include it, you are said to be using modified accrual based accounting.  You can do either.  Some practitioners think that you should be consistent from year to year.  Others think there is no requirement to be consistent.  No matter which you choose, you can't get in trouble if you are consistent.

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Thanks Mike.

Should have mentioned that the Dec 31, 2017 balance is what I received from the paperwork from custodian.

So basically the question was:

Custodian year-end balance does not reflect profit share. Is this reported to IRS or is it just for my internal consumption (to prepare 5500)? 

If reported to IRS, then my Form 5500 with profit share included for 2017 would not match even though business return reflected this profit share for 2017.

If not reported to IRS, then I can include or not the profit share for 2017, as you said, and be consistent in future years.

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It is not reported to the IRS. Only IRA accounts are reported to IRS.  Since you said this is a profit sharing plan, and not an IRA, the financial institution reports only to you.

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if it helps, the instructions for the form 5500 are

 

Note. The cash, modified cash, or accrual basis may be used

for recognition of transactions in Parts I and II, as long as you

use one method consistently

 

there is no description of what 'modified cash' basis is.

the best I could find (and it is not really in reference to the 5500, but I suppose if the company books were done this way it might be used):

The modified cash basis method uses accruals for long-term balance sheet elements and the cash basis for short-term ones.

BREAKING DOWN 'Modified Cash Basis'

Because both accounting methods have limitations, a business may use a modified cash method to develop what it feels is a more accurate picture of its finances. The modified cash method may be used for internal purposes because it does not comply with the Generally Accepted Accounting Principles (GAAP), which outline what companies must follow when preparing their officially reported financial statements. As a compromise between cash and accrual base methods, modified cash basis accounting methods are a middle ground.

By borrowing elements from both techniques, the modified cash basis method can better balance short-term and long-term accounting items. Short-term items, like a regular monthly utility expense (a bill), are recorded according to the cash basis (as there is a related inflow or outflow of cash), which results in an income statement largely populated with items based on the cash basis. Long-term items which do not change within a given financial year, such as a long-term investment property, plant and equipment, are recorded using the accrual basis.



Read more: Modified Cash Basis https://www.investopedia.com/terms/m/modified-cash-basis.asp#ixzz5Kku5yBDB
 

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Interesting, I always thought modified accrual, for plan purposes, was simply cash basis for everything except accrual basis for contributions.  I guess that's what the more complicated description above boils down to.

Anyway, we almost always use that (modified accrual).  The benefit is that your plan tax return contribution ties in with your business return deduction, and it provides an aid in reconciling.  The downside is that it takes longer to complete since the contribution may not be known for many months.  It seems that the large bundled service providers tend to use cash, since in theory you can push a button on Jan 1 and complete the financials and not have the messiness of waiting for contributions to be determined.

Ed Snyder

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We do our 5500s on an accrual basis, so the 2017 contribution goes on the 2017 5500 no matter when it was made.  The bigger question is why is anyone on here on a weekend???  That's awful!!!

4 out of 3 people struggle with math

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