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diversion
Level 2

Guaranteed Payments and COGS

We have a 2-member LLC partnership with inventory and without employees.  Both members receive a guaranteed payment.  Because of our small size, about half the work performed by the members is labor for producing inventory.  No two pieces of inventory are alike, so it is important that we track our COGS accurately and set prices accordingly.  Note we keep internal timesheets for tracking labor put into each inventory item.

 

In Quickbooks we have been entering two components for each member's "salary".  We first enter each members' timesheet data as COGS using an hourly rate, and then enter the remaining balance as a guaranteed payment expense.  So for example, if one member has a GP of $5,000 per month and logs $3,000 worth of internal labor for producing inventory, we put that $3,000 towards COGS and the remaining $2,000 towards GP.

 

Is there a better / more accepted way of doing this?  And how might this get entered on our 1065 partnership return?  I have to imagine there are other small partnerships in this same predicament, whereby if everything is just entered as a guaranteed payment then the company will show artificially high expenses and low inventory valuations.  Thank you in advance.

 

2 Comments 2
Rustler
Level 15

Guaranteed Payments and COGS

Salary or labor costs are not COGS. I know it seems like it should be, buy it is not. in a sole proprietor or a partnership the owners are not paid for anything they do.

If you have a guaranteed payment listed in the partnership agreement, required for it to be legal, then that is an expense for the business.

diversion
Level 2

Guaranteed Payments and COGS

Thank you for the reply.  We may just have to track our inventory costs separately, outside of QB.  As a similar question, suppose two lawyers opened a partnership and received guaranteed payments.  When they do work for a client, their time must be somehow assigned to that particular job in order to bill properly.  How would this  non-inventory accounting be performed?  Or is the labor for the job just "free" in QB and balanced out by the GP expense?  I think knowing how that situation is handled would help my understanding of GP bookkeeping.

 

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