If you run a small or a startup business, you know that cash is king. Especially in the early stages of trying to keep a business going, it can be a daily struggle to keep the money coming in at least as quickly as it goes out. So what is an entrepreneur to do when he sells to the State of California and gets an IOU rather than a check?
Bank of America is currently accepting California IOU's as deposits from existing customers, but has indicated it will stop this practice after July 10. Wells Fargo and Chase banks have also been accepting the IOU's on a limited basis, but have not indicated any plans beyond July 10.
USA Today reports there are some small credit unions around the state that will accept the IOU's and they are more likely to continue accepting them. The problem for larger banks is most of their money moves electronically now. While banks promote their online banking as a customer service, which it is, electronic transfers represent a huge expense savings for the banks. Banks clear paper transactions through the Automated Clearing House, you have probably heard the term ACH. What ACH does is allows banks to quickly and efficiently transact business with other banks all across the United States through electronic accounts that do not require dollar bills and coins to actually change hands. It also allows the bank employees to handle a lot more transactions than if they had to manually add, sort and process a bunch of paper checks, currency and deposit slips, which of course means the bank can cut their payroll cost.
The problem with California IOU's is the ACH system is not set up to handle these types of transactions, so the banks themselves have to actually hold onto the IOU's until sometime in October when the IOU's come due. That means probably several employees of the banks will have to accumulate and store the IOU's and keep track of them until October. In return the bank, or any IOU holder for that matter, will be paid interest of 3.75%.
Bank of America is currently paying 1.25% interest on their "High Yield" CD's when you deposit your money for a year, but they obviously don't think 3.75% is worth them waiting to get their money from California.
Of course individuals can hold on to their IOU's and cash them in themselves when the state has sufficient money to cover the payments. The California State Controller expects to begin repaying the IOU's on October 2. One piece of good news, if you do receive a California IOU the interest earned is exempt from state and federal income tax.
If you use Outright for your bookkeeping, I suggest you create a separate income category for California IOU’s. After logging in, click on the settings tab at the far right. In the left hand column, point and click on Categories. You will see a section for My Income Categories, in that section click the Add a Category button. You will be able to give your new category a name, such as "California" and select save. Now when you enter income in Outright, you enter the customer and then below customer you can select the California category for any income paid with IOU’s.
On the report tab you will have a line for California under income, so you can easily track how much you have been paid in IOU’s and how much you hopefully will have to cash in come October. When you cash in your IOU’s, you will not have to re-enter the income, but be sure you enter the interest you are paid as income. You may even want to follow the steps above to create another income category for tax exempt interest income.
The California State Controller's Office is responsible for administering the state budget. You can learn more about California IOU's on their website at California State Controller.
