Value change of subsidiary as depreciation? Please help.


E

explorart

Hello everyone. If company A owns company B and thus the value of company B
is included in Company's A balance sheet as other asset, how should be treat
the change in value of company B for tax purposes. For example, if at the
end of the year company B is worth 100K less than at the start of the year,
do we treat the 100K change in value as a depreciation and charge it against
the depreciation expense account? What do I debit and credit when entering
the value change? We have the asset set up as if it was a fixed asset with 2
subaccounts, the original value account and a "depreciation/value change"
account. Any help would be greatly appreciated. Cheers, XP.
 
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D

David Jensen

Hello everyone. If company A owns company B and thus the value of company B
is included in Company's A balance sheet as other asset, how should be treat
the change in value of company B for tax purposes.
How much of B does A own?
For example, if at the
end of the year company B is worth 100K less than at the start of the year,
do we treat the 100K change in value as a depreciation and charge it against
the depreciation expense account?
No.

What do I debit and credit when entering
the value change?
If the change is in market value, there is no entry. If the change is in
net value of the operating unit, it will be handled during the
consolidation.
We have the asset set up as if it was a fixed asset with 2
subaccounts, the original value account and a "depreciation/value change"
account. Any help would be greatly appreciated. Cheers, XP.
I have no idea why it would have been set up that way. Please see your
tax accountant or tax attorney soon.
 
E

explorart

Thanks David, company A owns 100% of company B. The change of value is not
a market change but a net value change. Both companies are LLCs. In 2005 the
ownership of B was transferred from its owners to company A as a capital
investment. The net value change is from the time the company A became
owner of B to dec 31. This is all within 05. Any ideas as to how we should
treat the value change. I'm sending all the paperwork to our accountant but
want to have a basic idea of the options. We can easily change the type of
asset account we should use. Thanks.
 
D

David Jensen

Thanks David, company A owns 100% of company B. The change of value is not
a market change but a net value change. Both companies are LLCs. In 2005 the
ownership of B was transferred from its owners to company A as a capital
investment.
I see. Whether the LLCs are taxed at full passthrough or had elected to
be taxed as corporations, my understanding is that a wholely owned
subsidiary of this sort would have to be consolidated, not treated as an
investment.
The net value change is from the time the company A became
owner of B to dec 31. This is all within 05. Any ideas as to how we should
treat the value change. I'm sending all the paperwork to our accountant but
want to have a basic idea of the options. We can easily change the type of
asset account we should use. Thanks.
It is not a depreciable asset. The value will change as the book value
of the two LLCs change. You will most likely be consolidating the two
companies for tax purposes. I haven't lectured on consolidations for a
few years, and that didn't touch the tax aspects, so I'm unwilling to
start guessing exactly how you will be expected to handle it these days.
 
E

explorart

Thanks David. I remember our accountant stating that we could not
consolidate because we (Comp A) was not treated as a corp but instead as a
partnership.

Would this make more sense:

Setting up the B company as Other Asset and entering the new net value as a
a new entry and offsetting it against each owner's unrealized
/accumulated gain/losses account for the right proportion?

I think I will set it up this way and they have our accountant change it.
Thanks.
 
P

Paul Thomas, CPA

David Jensen said:
I see. Whether the LLCs are taxed at full passthrough or had elected to
be taxed as corporations, my understanding is that a wholely owned
subsidiary of this sort would have to be consolidated, not treated as an
investment.

Agreed. That seems to be how things should be.



It is not a depreciable asset.


And that is for sure.

Don't know the reasoning behind booking it that way.
 
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D

David Jensen

Thanks David. I remember our accountant stating that we could not
consolidate because we (Comp A) was not treated as a corp but instead as a
partnership.
If your tax treatment is partnership, then the income or loss from
Company B will pass through to the partners. It will be consolidated for
the tax purposes of the partnership, since the partners (owners of the
LLC) do not have any direct interest in Company B.
Would this make more sense:

Setting up the B company as Other Asset and entering the new net value as a
a new entry and offsetting it against each owner's unrealized
/accumulated gain/losses account for the right proportion?
Did the company have an operating loss?
 

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