I just paid a bunch of vendor bills using credit memos that we have on file with that Vendor. There was a little left over on the final invoice, which was paid by check. However, the check stub only lists one invoice and one credit memo, but I know that’s not right.  How do I get a list of all the other invoices that were paid using the credit memos?

There’s no built-in/easy way to do it. It will require that you create and customize your own report to give you exactly the data you’re looking for and nothing else.  Here’s how:

• Do a “Find”  (Ctrl-F)  and go to the Advanced tab
• then click on “Date” in the Filter list and select “This week,” “This month,” etc., or choose the specific date you recorded the transactions
• then click on “Name” in the Filter list and select the name of the Vendor you’re working with
• then click on “Transaction Type” in the Filter list and select “Multiple”
• then in the “Multiple” screen select Bill, Bill Payment, and Bill Credit
• then go back to the main Find window and select “Paid Status” in the Filter list
• then check the button next to “Paid”

That should show you all the bills that were paid to that Vendor, and their corresponding payment method, whether by Credit Memo or Check.

Click the “Report” button to the right of the screen, and it will give you a printable report. You can also “Memorize” it (button at the top), in case you might need to perform a similar search in the future, for this or any other Vendor. You can further customize the report by clicking on the “Modify Report” button, also at the top of the screen.

-Veronica

Q: I noticed that Owner’s Draw is not showing up in the expense column of the P&L statement, is there a reason why?

Treatment of an owner’s compensation is determined by what type of entity/taxation structure your business is operating under.

When you are operating as a single-member LLC (taxed as a Sole Proprietor), Owner’s Draws are not considered Expense transactions. They are Equity transactions, which show up on the Balance Sheet, not the Profit & Loss.

In a single-member LLC (as well as a partnership LLC), all the profits/losses of the business flow through to your personal tax return and are considered to be the “Owner’s Equity” in the company. If you decide to take money out of the company, it is not considered an Expense — just as if you decide to put money into the company, it is not considered Income.

If your business entity were a Corporation or an LLC taxed as Corporation, then you would be taking a Salary instead of Draws. In that case your Salary, as well as all your company-paid Payroll Taxes, would show up as Expenses on the Profit & Loss.

If you really want to include your compensation on the P&L, we can create an Expense account for “Management Fees,” which will reflect all the Draws you take throughout the year. At the end of the year, we would need to make an adjustment to move that “Expense” back over to the Equity section of the Balance Sheet, since it is not allowed to be included as an Expense on your Federal Income Tax return.

I know this can be a difficult concept to grasp right offhand — but then again, so is most Tax Law. Let me know if you need any further explanation…

-Veronica

Q: I’m still learning QB, so can you walk me through merging the vendors?

Merging vendors is pretty easy:

• Go into Single User mode
• Then go to the Vendor Center and decide which vendor name you want to keep. I usually go with the one that’s either 1) oldest, or 2) has the most transactions posted to it.
• Double-click on that Vendor’s name in the list, copy the name as it appears in the top-most field of the Edit Vendor window, then close that window.
• Now double-click on the name of the Vendor you don’t want to keep, and paste the copied name into the top-most field. Click OK or Save (whatever the button is called) and QB will ask you to confirm that you want to merge the two Vendors.
• Say yes and you’re done.

The other option is to just make one of them inactive (right click the Vendor’s name in the list and choose “Make Inactive”), but that makes the Vendor’s name disappear from the list in the Vendor Center. If we ever want to see our complete history with that Vendor, we have to remember that there’s a second one that’s inactive, and search for it separately. Most of the time, if you’re looking for historical transactions and you find a Vendor that’s active, you’ll stop there and won’t bother continuing to look for duplicate/inactive Vendors that may provide additional history.

If you merge the two, then you will have all the transactions available to view under just one name, which will stay active and easily viewable without having to take any additional steps. 

-Veronica

Question:  I added three payments I received this week through “Receive Payments” and showed that I received all 3 through my PayPal account.  These payments are now associated to the A/R account, but I can’t seem to edit the account they are associated to (it should be Products/Services income, right?)

Perhaps you can explain how to do this?

A/R is the correct account to which payments should be posted. The Income account is affected when you create the initial Invoice and specify which Products/Services you sold to that person.

When the invoice is created, it posts “Income” to the Products/Services accounts, and an offsetting amount is posted to “Accounts Receivable,” since you have not yet received the actual payment. When you receive the payment, the appropriate amount is then moved out of Accounts Receivable and into your PayPal or your bank checking account (whichever account the payment originally posted to). This decreases your A/R account and increases your bank account.

The only time this workflow would be different is if you did not invoice the customer, but you did receive payment — i.e. the customer paid at the time of purchase, so you never issued an Invoice. In this case, there are two ways you can handle this:
1) Create a Sales Receipt (best/most “correct” way), by going to Customers > Create Sales Receipts
2) Enter the deposit directly into the PayPal or bank checking account, by going to Banking > Make Deposits

A Sales Receipt is just like an Invoice, but instead of issuing an Invoice and collecting payment later, a Sales Receipt combines the two and shows that the payment was received at the time of the sale. It’s filled out the same way as an invoice — you select the products/services the customer purchased, QuickBooks calculates sales tax, etc. You just don’t have to go back in afterward and do the Customer > Receive Payments step, as you would with an Invoice.

If you enter the deposit directly into the bank account, you are not able to select which items the customer purchased. You are only able to designate the name of the customer and which “type” of income you received — Sales of Products or Sales of Services. You also cannot auto-calculate Sales Tax using this method.

The proper way to do it would be to always enter an Invoice if they customer will be paying later; or to always enter a Sales Receipt if you collect payment in advance or if the customer pays in full at the time that the order is placed.

Until you’re routinely invoicing all customers through QuickBooks, there may be some discrepancies, but part of my weekly review process includes checking Accounts Receivable and Accounts Payable to make sure they are reflecting the appropriate amounts. If I do see a customer who has a balance due or a credit balance (meaning that you received payment against the A/R account but there was no invoice to match it to), then I will either fix it myself, or ask you for more details if it’s unclear.

Let me know if you need any more info on this process. It can be a little abstract to try to wrap your head around it, until you see it in action.

Let’s begin by defining what a small business expense is.  You spend money on your small business simply to carry on your business.  In other words, in order to trade whatever it is you trade, it costs you money.  If your business is designed to make a profit, the cost of operating your business is often deductible in the preparation of your tax return.

According to the IRS, a business expense is deductible if it is “ordinary and necessary.”  If your trade normally has a certain expense, for instance, a quilt maker’s fabric, then the cost of fabric is considered an ordinary expense.  If your business needs to spend money on something that is helpful to your trade, for instance, it helps if you advertise your quilts, then those advertising costs would be considered appropriate and helpful to your business, and necessary.

If you produce goods to be sold, you have expenses involved to produce those products.  Again, if you produce quilts, you have fabric, batting, and thread.  However, along with these raw materials, you may have the freight it costs you to receive your materials, costs to store your materials, factory costs, and possibly even labor costs.

There are complicated rules for determining what costs can be deducted as direct expenses.  Depending on your business, you may have indirect costs to consider such as rents, interests on loans, handling costs, and even administrative services.  Your tax accountant will sit down with you and make these determinations by reviewing the current laws and regulations of the IRS.

Some costs to your business are not considered “expenses” – at least when it comes to a simple deduction on your income taxes.  Capital expenditures fall under three classifications:

• Start up costs
• Assets
• Improvements

These three classifications make sense when you take a look at the items you have to create and maintain your business.  Getting back to the quilting business, you have sewing machines and tables, for instance.  You can see that those items are not going to go out the door to make you money. These items will not be deducted as expenses, but rather as a capital expenditure on an amortization schedule.

Business Expenses v. Personal Expenses

Small business owners often operate a portion of their business in their own home, using their own income, their own time, and their own car.  You cannot deduct your personal or family expenses, but you are allowed deductions for those costs that are exclusive to your business, even if those expenses occurred in your home. Two common examples follow:

• Business Use of Your Home – There is a strict division between personal and business expenses, and you must prove your square footage, utility bills, maintenance, and rent or mortgage, used for business purposes.

• Business Use of Your Car – Many small business owners use their own family car for business. If this is the case, the actual mileage must be tracked in order for the business mileage costs to be deductible.

There are many deductible expenses that fit within these direct expenses categories.  You’ll need to sit down with your tax accountant to work through the differences between business expenses to be deducted directly and those expenditures that should be capitalized.  Follow your accountant’s advice, keep good records, and tax time should go smoothly.

Picking the right accountant for your small business is similar to choosing the right doctor for your health care.  You want someone who is skilled and qualified and with whom you feel comfortable.

When you choose a CPA, you are putting your financial security in the hands of a person who is supposed to be certified and up to date on every rule and regulation that applies to you and your business.

So, how can you choose the right accountant for your business needs?  Let’s take a look at a few items to get you started:

Interview Yourself

You need to find out who you are and what you want. Put yourself in your prospective accountant’s office chair. What will you expect from your accountant? What kind of things will be deal makers and deal breakers? It is a good idea to know who you are and what your expectations are before you begin the next step.

Ask Friends and Family for Recommendations

Friends and family are often a good resource, so why not ask them? Find out if their tax professional is taking any new clients or if they have time to give you advice. Be honest with them.  If Uncle Al says his accountant is still using paper spread sheets, tell Uncle Al you need someone with a computer.  Then move on to the next opinion.  Get at least three good recommendations of accountants to interview.

Don’t just ask friends and family for a recommendation, ask them why with a few specific questions like:

• Why do you like using this accountant?  Be specific.
• What kind of business advice and tax advice have they offered you recently?
• Was their advice helpful in saving money?

Interview the Accountants

Twenty or thirty years ago, accountants were often considered bookkeepers. Today, they are much more involved with business rules and regulations and many have specified training in small business and taxes to help set them apart from other CPA’s. The trick is to figure out exactly what you should look for in an accountant.

What kind of questions should you ask your CPA to keep yourself out of trouble come tax season?

• What kind of creative business advice will you offer me? – Sure they can crunch numbers but can they offer creative ways for you to save money now?
• Is your business tech-savvy? – Staying on the forefront of technology, as a business, is a great indicator of keeping up with the times. As technology is able to produce info faster, your accountant should be the first to know.
• Who are your other clients? – This indicates whether or not your accountant has dealt with businesses like yours and how busy they will be during tax time.
• Are you active in the local business community? – Can your accountant introduce you to people who can help make business changes they suggest?

Make Your Decision

After you have done some soul searching, asked people you trust for recommendations, and interviewed at least three accountants or accounting firms with the questions you needed to ask, it is time to pick your accountant.

Sit down and go over the qualifications of each accountant or team of accountants.  Weigh all the pros and cons and come to a decision on who would be the best accountant to hire.

Don’t forget to write each one you rejected a simple thank you note with one or two reasons why you did no choose their firm. This will show them that, although you appreciated their time, your decision was based on specific facts.  Don’t burn bridges – you never know when you could be back in their office.  Most professionals appreciate honesty, so don’t be afraid to tell an accountant why you didn’t choose their firm.

Now that your accountant has been hired, it’s time to get to know each other.  With the difficult part over, take a few minutes to visit your accountant and find out what he or she will expect over the year, leading up to tax time.  Maintain a close relationship with your accountant and you, and your small business, will benefit nicely for years to come.

In order to have a successful tax season, there must be year round planning to maximize your deductions in direct relation to the size and income of your small business. This means keeping the upcoming tax season in mind at all times, constantly looking for ways to decrease your bottom line while making the company more profitable.

Start-Up Expenses

The most commonly overlooked expense for small businesses to take advantage of during tax season is the one that got them where they are today – the expense of going into business. Capital expenses, the money used to pay for marketing, overhead and other related expenses, must be deducted over the first five years you are in business. One thing to remember is that these write-offs cannot be deducted before your doors are open and cash is beginning to flow through your business.

Continuing Education And Training

Any education related to your current business, can also be deducted. For instance, a veterinarian specializing in equine medicine can deduct the costs of attending a conference on new cancer treatments in horses. Because this course is related to the veterinarian’s field, the seminar is deductible from yearly taxes.  However, if the veterinarian specialized in small and domestic animals, the conference would not be deductible. There are strict rules to follow about which types of classes actually qualify for deductions.

Professional Service Fees

The fees charged by your accountant to do your taxes, are actually tax deductible. The only rule for this deduction is that if the work being done relates to future years, the deduction must be taken over the complete term of the benefit.  An example of this would be hiring an architect to help design a building that will take two years to construct. The fees for the architect must be spread over the two years in which the building is actually being constructed.

Bad Debts

If you are in the business of selling goods, and a customer doesn’t pay you for the goods you sold them, that debt is deductible.  However, businesses that provide services instead of goods cannot take this type of deduction because it would be difficult for the IRS to prove a bill was not “inflated” for services provided in order to claim larger deductions for the bad debts.

Other Deductible Expenses

There may be other expenses that are tax deductible in your business.  You can start by referring to the IRC § 162, which outlines different trade and business expenses. This section of the Internal Revenue Code is the basis for determining whether or not a taxable expense is deductible. If the wording is confusing, take the code to your tax accountant along with the expenses you are questioning. Your tax accountant will be able to point you in the right direction and clear up any confusion.

Don’t guess about your small business deductions.  Ask your tax accountant to be sure you’re handling every deductible properly on your small business tax return.

Imagine having this nightmare:  The IRS suddenly audits you for a mistake you made on your tax return ten years ago. It seems you transposed two numbers and now you owe the federal government because you filled in a box with the number 730 instead of 370.

If this happened to you, what would you need to bring to an audit?  Would you still have your documentation?  How long should you actually keep your tax documents? Good question.

Let’s take a look at a few situations and the suggested length of time to hold onto your documents.

If you have been withholding taxes from your paycheck but find that you still owe additional taxes when you file, the rule of thumb is to keep these records for three years. There is one exception to this rule and that is if you do not report income that should have been reported at the time you filed your tax return. If the additional funds are more than 25% of the gross income you reported when you filed, those records should be kept for six years.

There are times when tax information should be kept indefinitely. This procedure needs to be followed if you file an inaccurate return, fraudulent return, or if there is no tax return filed at all. The reason these files should be kept indefinitely is because you will need to show proof of income when the IRS requests it, which could be at any point in time.

Special consideration is required if you have a small business.  Employment tax records are important documents and require special handling. These records should be saved for at least four years from the date the tax is due, if paid on time. If the payment is late, the records need to be kept for four years after that date in order to verify employee incomes if requested.

Filing tax credits after filing your return can also add additional time to your record retention time. In order to determine how long you should keep the files, choose the latest date between when you filed your original return and when you actually paid the tax and keep the records for three years from whichever date is later.

When you file a claim for a loss from worthless securities or take a deduction for bad debt, you will need to keep the records for seven years. This allows the IRS ample time to investigate your claim. When filing a bad debt deduction, it’s imperative to hold onto the files and have adequate records to prove your bad debt claim.

The general rule of thumb is to keep your tax documents until the period ends when you are able to file a tax credit or refund, or, until the IRS closes your case file. In most cases, retaining records for about 4 years is adequate. There are some cases, however, that require tax documents be kept anywhere from three years to ‘indefinitely’ so check with your tax accountant before you discard any tax files.

The IRS is all about accuracy and proof, so make sure you keep impeccable records and retain all your records for the appropriate time frame. These steps will keep your finances safe and  make tax time go a little more smoothly year after year.

Recently a tax client was upset that their K-1 indicated that they had “Ordinary business income” of $1425, when they didn’t actually receive any cash from the business. This was my explanation..

“The K-1 doesn’t necessarily show money you received. It shows your share of the business’ income for the year. As one of three equal partners/owners, you are entitled claim to 1/3 of any losses the company may experience, but you are also responsible for paying 1/3 of the tax on any gains the company may experience.

“This does not mean that you actually received the money. The cash itself can stay in the business’ checking account. The place where each year’s gain and/or loss shows up is on the balance sheet. Each owner’s share of the gains and losses are reflected in that particular owner’s “Equity” in the company. If you were to take a draw (take money out), it would then reduce your equity in the company.

“So your share of the company’s 2009 gains was added to your equity in the business, on the balance sheet. If you want to take a cash draw, you will need to arrange that with your partners, since the business checking account may not have the funds available at this time.

“The tax on your portion of the earnings of the company needs to be paid whether you received the cash or not. In the future, you will not have to pay tax on any  draws you take, up to the amount of equity you hold in the business. If your withdrawals total more than your equity, then you would pay tax only on the withdrawals over and above the amount of your equity.

“For an LLC, the company’s gains and losses flow through to each owner’s personal tax return at the end of each year. If you want the gains and losses to stay within the business as a separate entity, you would need to convert the business from an LLC to a C-Corporation (the standard corporation type). Then, the gains and losses will stay within the business and be carried forward on the business’ tax return from one year to the next.

“However, keep in mind that if the business were to experience a loss during a particular year, that loss would not be able to be carried over to your personal tax return and you would therefore not be able to take the loss as a write-off on your personal taxes. A C-Corporation’s gains and losses cannot be transferred to the individual owner’s tax returns, until that owner sells or relinquishes their interest in the business, at which time, they may take the gain or loss (whatever the case) on their personal tax return.

“Again, the decision to incorporate is something you would need to discuss with your partners, since it would affect their tax status as well. Generally, it is not advised to incorporate for a business as “small” as yours, but if it really bothers you that the business’ gains and losses are flowing through to your personal tax return, then you may want to explore that option.”

Anyone who’s worked in an office at some point or another has had to “go to accounting.” They’re the people who manage the company’s income and pay the company’s bills that keep the business running. They do a lot more than that, though. Sometimes referred to as “bean counters,” they also keep their eye on profits, costs and losses. Unless you’re running your own business and acting as your own accountant, you’d have no way of knowing just how profitable – or not – your business is without some form of accounting.

No matter what business you’re in, even if all you do is balance a checkbook, that’s still accounting. It’s part of even a kid’s life. Saving an allowance, spending it all at once – these are accounting principles.

It would be hard to find any business where accounting is not a critical centerpiece. For example, even farmers need to follow careful accounting procedures. Many of them run their farms year to year by taking loans to plant the crops. If it’s a good year, a profitable one, then they can pay off their loan; if not, they might have to carry the loan over, and accrue more interest charges.

Every business and every individual needs to have some kind of accounting system in their lives. Otherwise, the finances can get away from them; they don’t know what they’ve spent, or whether they can expect to make or lose money in their business. Staying on top of accounting, whether it’s for a multi-billion dollar corporation or for your own personal checking account, is a necessary activity on a daily basis. Not doing so can mean anything from a bounced check to posting a loss to a company’s shareholders. Both scenarios can be devastating in their own right.

Accounting is basically the keeping of financial information. In a business, this information is published periodically as a profit and loss statement (P&L) and a balance sheet.