A reserve fund is extra money set aside for expenses outside of the normal budget. It can help manage difficult-to-relate expenses, but there are potential dangers, such as not paying taxes on the funds. Proper management is key to avoiding liability.
A reserve fund is generally defined as some type of financial reserves that are held above and beyond normal accounting items, usually as some type of general item that can be used to track disbursements that do not meet the criteria for other funds. Businesses may have leftover funds set aside to manage purchases that are outside the scope of the basic operating budget, while individuals and families may use leftover funds for additional expenses beyond normal household expenses. There are several benefits to maintaining a secret money fund, as well as some potential liabilities, including the possibility of not paying taxes on the funds and getting into a lot of trouble with an IRS.
When properly managed, there are a number of professionals associated with operating a slush fund. The fund can function as a means to manage expenses that are difficult to relate to specific budget lines. By keeping extra money in the slush fund, it’s still possible to count every purchase, even if sorting it out is somewhat difficult. With this approach, there is no potential for money or purchases to be considered off the books, and therefore very little opportunity for transactions to go unaccounted for when calculating taxes.
Since the money held in a slush fund is not required for the day-to-day operation of the business or home, the funds can often be used for purposes outside the scope of that budget. For example, a household might establish and maintain a fund to use when the family decides to take a last-minute vacation or extended weekend, or make some type of impulse purchase like a new wide-screen television. Since the money in the fund is not earmarked for any particular purpose, the household can determine when and how to use the funds. Similarly, a company may decide to use the fund to finance participation in a business conference at the last minute, even though the budget does not provide funds for that particular purpose.
There are a couple of potential dangers associated with maintaining and using a slush fund. The temptation to keep extra money from books is always there. Assuming the funds transferred to the fund are already counted as income and included in the calculation of taxes due, there may be no problem keeping the fund off the books. Unfortunately, hiding the money can increase the chances of not paying applicable taxes, a situation that ultimately leads to fees and penalties when the money is discovered. Depending on the amount found in the slush fund, this could launch a full-scale investigation into all aspects of financial accounting, as well as damage the company’s reputation.
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