Cash donations

Cash donations

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Hi All,

Could you tell me what the double entry is for the transfer of cash (say £1000) from one company to another company?

The money does not need to be repaid.

Would this be treated as a loan which is written off or a donation?

Thanks

Replies (11)

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By johngroganjga
19th Jun 2013 09:40

Why is the transfer being made?  Do the two companies by any chance have the same shareholder(s)?

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By Tax1
19th Jun 2013 10:25

The transfer is being made to contribute towards a new property purchase.

Both companies have the same shareholders.

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By johngroganjga
19th Jun 2013 10:27

Is there any special reason why it is not to be treated as a loan, which would be normal?

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By Tax1
19th Jun 2013 10:37

The shareholder has provided a letter stating that the transfer should be treated as a donation. It does seem strange that they want to treat it as a donation?

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By johngroganjga
19th Jun 2013 10:41

Are you the external accountant advising the companies and their shareholder, or an employee of one or both of the companies?

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By Tax1
19th Jun 2013 11:08

Accountant of both companies however we have an intermediary who deals directly with the client.

Last year shareholder loan accounts in both companies were reclassified from debt finance to equity finance.

This makes me think that the transfers should go to equity as the new property purchase is also being funded by the shareholder?

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By johngroganjga
19th Jun 2013 11:33

Well if I were you I would advise that a simple loan is the best option as it preserves the opportunity to remove the funds tax free from the recipient company in the future.  It can't be in the interests of the "lending" company or its shareholder, to forego that opportunity.  So that is advice you need to give in any event.

If shareholder does not wish to take that advice that is up to him.  Next question then will be what alternatives are there.  One way is Dr DLA in "lending" company and Cr DLA in recipient company.  If there is a history of converting Cr balances on DLA to shares take instructions on whether the recipient company to issuing new shares.

The transfer in the "lending" company can't "go to equity" as it is a debit.

I would try and avoid having donations received and paid in the P&L accounts of the two companies.  This would look very odd, clumsy and not properly thought out.  The realty here is that the shareholder is withdrawing cash from one of his companies and investing it in another.

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By Steve Kesby
19th Jun 2013 11:53

Taking assets out of one company...
... and putting them in another company under the same control is a distribution, taxable as a dividend on the shareholders.

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Replying to Glennzy:
By johngroganjga
19th Jun 2013 12:52

Unless it's a loan

Steve Kesby wrote:
... and putting them in another company under the same control is a distribution, taxable as a dividend on the shareholders.

... unless it's a loan

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By Tax1
20th Jun 2013 09:34

Can the transfers be reflected
Thanks John.

The shareholder loans were reclassified from a loan (debt) to other reserve equity (donation).

Can the transfers be reflected as a reduction to the equity account in the lending company and an increase to the equity account in the recipient company?

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By johngroganjga
20th Jun 2013 10:50

That is precisely why it is not in the shareholder's interest to capitalise loans, and makes it all the more important that you cover yourself in writing by advising him of the problems it can lead to when he wants to take his money out again, so that he does not hold you responsible for the problems he has.

The difficulty here is that we don't know what steps were taken when the loans were "re-classified" and whether any of those steps preclude the loans still being loans for tax purposes.

What do the accounts say about the status of the "other reserves".  

If they are no longer loans for tax purposes the debit in the books of the paying company is either a loan to the shareholder, which may have tax consequences, or, as Steve says, a distribution to him, which will be taxable income in his hands.

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