How are open market stock calls reflected on a Form 1065 balance sheet?

[CG2020 Tax Information]

I have an LLC (which is treated as a partnership) that is required to include a balance sheet on the Form 1065.  How are unexpired call options reflected on the balance sheet?  Call premium may be received in cash in one year, but that cash will not be treated as income until the following year when the option is exercised or the call expires. What entry is made to offset the cash on the balance sheet?

[tagteam]

You can offset that with Other Liabilities (probably does not much matter since it will be reversed).

It is actually, I believe, a contingent liability.

@Rick19744?

[Mike9241]

since income is not recognized until expiration or exercise and these are not LEAPS (long-term), I would report them under other current liabilities - something like short call options or short options positions.  

[Rick19744]

Since I have been tagged:

• Based on your facts, it appears that you are the seller of the call since you indicate that you are receiving a premium.
• I agree that what you have is a contingent liability (other liability, etc).

The accounting would be as follows:

Dr. Cash $100

Cr. Call Liability $100

To record the premium received for call option 

Dr. Call Liability $100

Cr. Income (gain) $100

To record expiration of call option

The accounting gets trickier if the seller has to make good on the call.

[CG2020 Tax Information]

So the cash premium received from the sale of a call will be reflected as an asset and a current liability will be entered to will offset that cash.  Is that correct?  What is the liability called - something like "unearned call sales price"?

As a related question, how are unsettled stock trades existing at year-end reflected in the balance sheet?  Sales that have not yet settled will be considered income for the year and reflected in the 1099 as occurring in that year, but the cash will not have been received until the subsequent year (and the stock at year-end will show as an asset but at the cost basis not the sales price that will be received).  Also, if a year-end purchase has not yet settled, the purchase date is considered the trade date. Is anything reflected on the balance sheet for such a purchase? 

Your input is much appreciated!

[Rick19744]

Response to your follow-up questions:

• The "asset" is the increase in cash that you received.  
• Just call the liability "unearned call premium"
• As far as the other questions, I am going to recommend that you find a tax professional that understands the trading area and you can have a one on one discussion.  Since you have set up an entity, and are filing a form 1065, it sounds as if you are attempting to be a trader.  As a result, there are many additional questions that come to mind; do you qualify for trader tax status (TTS), are you accrual method of accounting, have you made a mark-to-market (MTM) election, etc.  Just too many questions and unknowns to be able to go much further in-depth.

[TahoeJeff]

You're final 12/31 statement should show a credit balance on open short option positions. That gets netted against the long stock positions (or entered separately) on the balance sheet to reflect the liability. Its really a reduction of your assets vs a traditional liability, but depends on the overall net asset position.

Also the guidance is WRONG on the TTax '22 Bus Software for the 1065 balance sheet requirements. You can avoid it up to $10m as I recall, check the irs website.

[TahoeJeff]

No, it is a liability, more accurately a credit against other account holdings

[TahoeJeff]

True on the accounting transaction, but what it requires is net amounts of assets and liabilities. Short option credit balances would be a reduction of net assets, its not a traditional liability. So you would adjust there. However the instructions on TTax 1065 balance sheet are incorrect as to the total asset value cutoff on where it is required in the first place.

[TahoeJeff]

See my prior replies on this, just net it against the assets in your brokerage account. It is a reduction of overall portfolio value.

On your 2nd question, trades pending settlement are not yet reflected in your year end statement. You want to use the actual asset values from the statement, not pending trades. You'll pick those up next year.