Episode 43: Can You Actually Write That Off? Practical Tax Planning in QuickBooks

“Can I write this off?” may be one of the most common questions business owners ask—but the answer does not begin with the card used to make the purchase or the account selected in QuickBooks.

In this episode of QuickBooks Mastery for Small Business Success, Erica Northrup and Lee Davis explain how to think more clearly about business expenses before tax season. QuickBooks can organize the financial story, but it cannot turn a personal purchase into a legitimate business expense. The transaction still needs a real business purpose, appropriate tax treatment, and records that support both the amount and the reason for the purchase.

You will learn the four questions to ask before treating a purchase as a possible deduction, how the Chart of Accounts supports tax planning, and why some categories deserve extra attention. Erica and Lee walk through meals and entertainment, vehicles and mileage, equipment and fixed assets, and the split between loan principal and interest.

They also clear up several common myths: a write-off does not make a purchase free, a bank statement does not necessarily prove business purpose, and buying equipment before year-end does not automatically guarantee a full current-year deduction.

Finally, Erica gives you an eight-step, 15-minute expense review you can complete in QuickBooks now—while there is still time to gather records, identify questions, and speak with your bookkeeper or qualified tax professional before year-end.

Key Takeaways

• A business expense generally needs to be ordinary and necessary for the business, with a genuine business purpose.
• Paying with a business account or categorizing a transaction as an expense does not determine whether it is deductible.
• A deduction generally reduces taxable income. It does not make the purchase free or create an automatic dollar-for-dollar refund.
• Before claiming an expense, ask: What did we buy? Why did the business need it? Was any part personal? What document proves the amount and business purpose?
• Separate business and personal activity so personal purchases do not accidentally land on the Profit & Loss.
• A clean Chart of Accounts gives the owner, bookkeeper, and tax professional a useful financial filing system.
• An LLC's federal tax filing depends on ownership, activity, and tax elections. The letters “LLC” do not automatically determine the return.
• Direct job costs may belong in cost of goods sold, while general overhead usually belongs in operating expenses.
• Qualifying business meals, including travel meals, are generally subject to a 50% limitation unless a specific exception applies. Entertainment is generally nondeductible.
• Mixed-use vehicles require documentation and an allocation between business and personal use. A logo on the vehicle does not replace a mileage or use record.
• Equipment expected to provide value beyond the current year may need to be treated as a fixed asset. The $2,500 de minimis safe harbor is conditional—not a universal automatic-expense threshold.
• Loan principal reduces a liability on the balance sheet; qualifying interest may be an expense. One payment can affect both the balance sheet and Profit & Loss.
• A bank or credit-card statement may prove payment, but it may not prove what was purchased or why it served the business.
• Attach receipts and record the business purpose while the transaction is fresh.

Questions to Reflect On

• What did the business buy, and why did it need it?
• Was any part of the purchase personal?
• Do you have a receipt or invoice that shows what was purchased—not merely proof that money left the account?
• Does your Chart of Accounts reflect how your business actually operates?
• Are direct costs separated from general operating expenses where appropriate?
• Do meal records identify who attended and the business purpose?
• Do you have a reliable mileage or vehicle-use record?
• Are large equipment purchases supported by invoices, purchase dates, financing details, and placed-in-service information?
• Are loan payments separated between principal and interest?
• Are unusual or unclear purchases sitting in Uncategorized Expense, Ask My Accountant, or Miscellaneous Expense?
• What questions should you bring to your bookkeeper or tax professional before year-end?

Mentioned in This Episode

• Ordinary and necessary business expenses.
• The four-question deduction test.
• Owner draws and personal purchases.
• The Chart of Accounts as a financial file cabinet.
• Schedule C and differing federal tax treatment for LLCs, partnerships, S corporations, and C corporations.
• Cost of goods sold versus operating expenses.
• Advertising, fees, subscriptions, insurance, professional fees, repairs, supplies, rent, utilities, travel, meals, automobile costs, interest, and depreciation.
• The general 50% limitation for qualifying business meals.
• Nondeductible entertainment and separately stated meals.
• Standard mileage versus actual vehicle expenses.
• Fixed assets, depreciation, Section 179, bonus depreciation, and the de minimis safe harbor.
• Loan principal versus interest.
• Receipts, invoices, business-purpose memos, and supporting records.
• The 15-Minute QuickBooks Expense Review.
• The free QuickBooks Clarity Scorecard.
• The upcoming QuickBooks course.

Recommended Resources

• Download the 15-Minute QuickBooks Expense Review
• Free QuickBooks Clarity Scorecard
• Listen to QuickBooks Mastery for Small Business Success
• Lee Davis & Company
• QuickBooks training and course information
• Questions or support: [email protected]
• IRS Publication 583: Starting a Business and Keeping Records
• IRS Publication 463: Travel, Gift, and Car Expenses
• IRS guidance on tangible-property regulations
• IRS guidance on records to keep

Timestamps

00:00 - QuickBooks Mastery Podcast Intro

00:56 - Episode 43: Can You Actually Write That Off?

02:46 - Important U.S. Tax Disclaimer

03:24 - What Makes a Write-Off Legitimate?

08:25 - What Makes a Business Expense Deductible?

09:57 - How the Chart of Accounts Supports Tax Planning

16:05 - Meals, Travel, and Entertainment

19:39 - Vehicles and Mileage

22:57 - Equipment and Fixed Assets

26:50 - Loan Principal Versus Interest

29:26 - Six Common Deduction Myths

31:28 - Records That Support a Deduction

33:11 - The Practical Habit to Begin This Week

33:56 - The 15-Minute QuickBooks Expense Review

37:06 - Why Deductions Begin Before Tax Time

37:39 - Clarity Scorecard, Course Waitlist, and Questions

38:45 - Final Sign-Off

38:55 - Podcast Outro

Call to Action

Open QuickBooks, set a timer for 15 minutes, and complete the expense review from this episode. You are not trying to prepare your tax return or reclassify every questionable transaction. You are identifying the places where the records, categories, or business purpose need more attention.

[Download the 15-Minute QuickBooks Expense Review](ADD PDF DOWNLOAD URL AFTER UPLOAD), then take your question list to your bookkeeper or qualified tax professional before year-end.

If you are unsure whether your QuickBooks can give you the information you need, begin with the free QuickBooks Clarity Scorecard.

Email [email protected] with your QuickBooks questions, subscribe to QuickBooks Mastery for Small Business Success, and share this episode with another business owner who has ever wondered, “Can I write this off?”

This episode provides general educational information for United States small-business owners. Tax rules depend on the facts, entity, activity, elections, and tax year involved. Consult your own qualified tax professional before making tax decisions.

Welcome to Quickbooks Mastery for small business success.

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I'm Erica Northrup.

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Lee: And I'm Lee Davis.

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Erica: I handle the tech,

and he handles the numbers.

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And together, as a father-daughter team,

we bring decades of experience helping

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small to medium-sized businesses thrive.

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Lee: We know that as a business owner,

your time is best spent mastering

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your craft and growing your business,

not getting lost in QuickBooks.

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Managing finances can be confusing,

and you don't have hours to waste

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sorting through spreadsheets

or fixing bookkeeping mistakes.

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That's where we come in, helping

you streamline QuickBooks so you

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can focus on building your business.

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Erica: Each week, we break it all

down into simple, actionable steps

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so you can focus on growing your

business, not fixing your books.

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Lee: Let's embark on this journey together

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Erica: Welcome back to QuickBooks

Mastery for Small Business Success.

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This is episode 43, Can You

Actually Write That Off?

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Practical Tax Planning in QuickBooks.

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I'm Erica Northrup, and yes, your ears

do not deceive you, I am fighting a cold.

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It's been quite the week, so my immune

system has not quite been up to snuff,

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but we are gonna keep moving forward,

and I'm here with my papa, Lee Davis.

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So last week we talked about

getting your QuickBooks ready

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before tax season arrived.

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Today, we're taking the next

practical step in answering one of

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the questions business owners ask all

the time, you guys, "Can I claim this?

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Can I write this off?"

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So Papa, you recently recorded a

walkthrough of the chart of accounts

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that was excellent, and the expense

categories people use in QuickBooks.

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You covered everything from advertising

and insurance to meals, vehicles,

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equipment, and loan interest.

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I won't use this recording as our

roadmap today, but translate it

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into the questions a business owner

should actually ask before putting

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something down as a tax deduction.

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Lee: Erica, that's right.

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I mean, we've explored the chart of

accounts, and we've looked at the

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various expense categories, but- Mm

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this is a bit of a deeper dive- Yeah

… in saying that if you want to make sure

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that your expense is deductible, the IRS

does have some rules- Mm … and that

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should be followed when you consider

is something deductible You know,

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QuickBooks can help you organize the

information, but the name of the account

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does not make an expense deductible.

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Erica: Okay.

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Lee: Okay?

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So you still need to understand

what the purchase was, why the

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business paid for it, and how it's

used, and what records support it.

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Erica: Yeah, so before we jump in, this

episode is general educational information

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for the United States small business

owner, because we have a lot of worldwide

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listeners, which I think is incredible.

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We're helping people all across

the world, but we are gonna

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focus on United States tax rules.

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So just be aware, so tax rules

depend on your facts, your

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entirety, and the year involved.

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So please work with your own

qualified tax professional

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before making any tax decisions.

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Okay, so Papa, let's start with the phrase

people use all the time, a write-off.

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What actually has to be true before a

business expense can become a deduction?

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Lee: The federal starting point

is that a business expense must

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generally be ordinary and necessary.

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Mm.

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Those are terms that you

can say, "Well, what are…

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What's ordinary and what's necessary?"

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Meaning that particular expense

has to fit the business.

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You know, if for example, have a

business, a service business, and

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you also have a rental income.

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Mm-hmm.

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A rental property.

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Those would not and should not be mingled.

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Mm.

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Those are separate tax filings

for each type of entity.

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So what is ordinary and necessary

depends on what your business is.

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You know, ordinary means common and

accepted in that type of business.

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Necessary means helpful and appropriate.

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It does not have to be indispensable.

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You know, I thought about, well,

what does indispensable mean?

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Meaning that when you look at

an expense, is it necessary?

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Is it indispensable?

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Mm-hmm.

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So you determine expenses based on what's

necessary to run your business, and so

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therefore, it's a little like what's

deductible for interest on a car payment.

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So, uh, the IRS does not determine if

you want a Mercedes, that necessarily is

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going to be totally all deductible, okay?

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Right.

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Because you could get along perfectly

fine with maybe a, a lesser car.

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Mm-hmm.

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And the IRS says, "Yeah, you know what?

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It's all right if you wanna buy that, uh,

but not all of it might be deductible."

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But anyway, that's really just a example.

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And there must be a real business purpose.

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Paying with a business credit card or any

type of card, entering the transaction

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in QuickBooks or choosing Expense

Account does not create that purpose.

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Just because you use a business

account to pay for it doesn't

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necessarily mean it's deductible.

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A deduction reduces taxable income.

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Erica: Yeah.

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Lee: And I think that's important.

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It does not make the purchase free- It

doesn't automatically produce a dollar

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for dollar tax refund, if any refund.

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So therefore, it's a deduction that

you take- Mm … against income.

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And so you need to ask four questions.

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So think about it.

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What did we buy?

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And in many ways, these questions

are what we have talked about, how

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you calculate whether something

is an expense and where it goes.

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You know, what do we buy?

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What did the business need it,

or why does the business need it?

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Was part of it personal?

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What document proves both the

amount and the business purpose?

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So having that document is extremely

helpful when taking a business deduction.

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If the owner would have incurred the

cost personally, even without the

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business, slow down and ask the tax

professional how the rules apply.

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If you make an investment, such

as an addition to your home, that

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would be used for both personal and

business, for the most part, that

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addition is not a deductible expense.

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Mm.

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Uh, you, however, can deduct

the home office expense.

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I think that clearly is, um, a tax

deduction, but you need to have that

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reviewed with your tax professional.

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And you, however, can deduct equipment

and furniture that is directly related

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to your business, such as items may

include furniture and equipment.

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Mm-hmm.

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Computer equipment, software,

normal type expenses that are

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deductible for your business.

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This is what I was interested in

when somebody says, "Well, you know,

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you can take the whole deduction."

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Right.

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No, you cannot take the whole deduction.

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And what you always want to be

concerned about is doing what's right

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and what's ethical, and you have a

responsibility To understand what is truly

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deductible and follow those guidelines.

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Yeah.

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And if you're audited, you know what?

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You're gonna be perfectly fine because

it's not that you can't make a mistake.

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Erica: Yeah.

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Lee: But in the spirit of a transaction,

if your accountant or the IRS, you

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know, were to work on an audit, then

you would know that, for the most

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part, you should be perfectly fine.

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Erica: Yeah.

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Absolutely.

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You know, I feel like those are four

really good questions that every

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business owner should ask themselves

about purchases they made to help

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them determine if they are good

things to kind of claim and to…

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That could be deductions.

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So again, those questions are,

number one, what did we buy?

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Question number two, why

did the business need it?

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Question number three,

was any part personal?

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Question number four, what document proves

both the amount and the business purpose?

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So I think those are really good

questions to ask yourself when you

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are thinking about could this possibly

be a deduction for the business?

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So we're gonna be breaking

these down into categories.

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So category number one, what makes

a business expense deductible?

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You know, QuickBooks reports

the story you give it.

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It cannot turn a personal

purchase into a business expense.

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Can it, Papa?

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Lee: No, it cannot.

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Erica: Absolutely not.

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Okay, so if I swipe the company card,

the transaction may be in the business

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bank feed, but have I still not answered

whether it belongs on the profit and loss?

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Is that the distinction, Papa?

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Lee: Of course.

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Exactly.

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I mean, the bank feed

proves that money moved.

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Mm-hmm.

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It doesn't necessarily prove

a tax deduction- Mm … or

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a tax treatment with…

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which would make it a deductible

expense for the business.

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A personal item paid by the company may

need to go and be charged as an owner's

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draw, and appear so on the balance

sheet, uh, rather than as an expense.

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The correct treatment depends on

the entity and the facts, okay?

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It's a little bit like detective work.

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You get the, uh, receipt, which is an

itemization of what the company purchased,

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and you attach that and look at it and

say, "Yes, that is a deductible expense."

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Erica: Mm.

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Lee: And if not, you should separate,

realizing that you need to separate

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business and personal accounts.

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And it makes it much easier and, you

know, you reduce the risk of taking

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personal expenses as a business deduction.

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Erica: Okay.

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So moving on, category number two, how the

chart of accounts supports tax planning.

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So in recording, Papa, you called

the chart of accounts the backbone of

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QuickBooks and compared it to a file

cabinet, which I think is brilliant.

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So how does the file

cabinet help at tax time?

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Lee: Because the file cabinet, back in the

old days, we used to have manila files.

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Erica: Yeah.

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That

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Lee: we labeled with all of the

vendors, and in the vendor file, each

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vendor, we put in copies of the bill.

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A- and for each bill, we wrote

the fact that if we paid it by a

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check and the date and so forth.

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Mm-hmm.

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And the amount.

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Mm-hmm.

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So in many ways, the QuickBooks

chart of accounts just kind of

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replaces that sort of file cabinet.

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Erica: Yeah.

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Lee: Because we would go, if somebody

wanted to see, uh, you know, had a

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question about a particular bill-

Mm-hmm … we'd go to the file cabinet.

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Erica: Yeah.

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Lee: Yeah.

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Now, we go to the QuickBooks chart

of accounts, and we pull up that

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account, and then we can go in and

look at the particular expense.

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And if we've scanned the

bill, it's right there.

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Erica: Yeah, absolutely.

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Lee: You know, it's, it's just

the chart of accounts is the file

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cabinet for- Right … for tax time.

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Erica: Absolutely.

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And I'm sure a good chart of accounts

helps you see the business clearly

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before the tax return is ever prepared.

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That seems to be the key about the

chart of accounts, doesn't it, Papa?

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Lee (2): Of course.

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Yeah.

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And you have to remember that an

applicable tax return can be a useful

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reference for major categories.

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Mm-hmm.

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But the chart of accounts should also

reflect the business actually, how

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the business actually operates and how

management needs to review performance.

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So don't assume every business files

a Schedule C, a single member LLC, a

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partnership, or an S corp or a C corp

can have different federal filing paths.

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Confirm the return with

a tax professional.

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So you know what?

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I think that in most cases- The LLC

will file a Schedule C, and you file

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a Schedule C for each type of entity

that you are going to take a, um,

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have income and, and expenses for.

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Um, you know, you need to keep

direct job costs separate from

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general operating expenses when

that distribution is useful because

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that represents cost of goods sold.

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Mm-hmm.

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Direct materials, direct labor, and

subcontractors may belong in, like I

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said, in a cost of goods sold, while

office rent, advertising, and bookkeeping

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are usually operating expenses.

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I was recently working with a new client,

and they wanted to get a good roadmap

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for setting up their chart of accounts,

and we've talked about this before, and I

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oftentimes will recommend that Schedule C.

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Erica: Yeah.

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It's

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Lee: a great

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Erica: resource.

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And

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Lee: because it, it makes you look

at the accounts that you're gonna

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set up, and it's gonna be consistent,

and so you're not gonna set up more

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accounts than you need, and, you

know, the category then has meaning.

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Mm-hmm.

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It can be tied right back to your tax

filing and make it a lot easier for

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your tax professional or your CPA.

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Yeah.

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And so it changes meaning from

month to month, makes year-to-year

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comparison and tax review a lot easier.

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Okay?

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A good chart- Yeah … of accounts

helps you see your business clearly

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before the tax return is even prepared.

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So I think that's a good statement-

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Erica: Yeah

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… Lee: to hold onto.

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Erica: Yeah, absolutely.

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Okay.

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So Papa, what are the common categories

from your walkthrough that a small

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business owner should expect to review?

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What would you say, Papa?

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Lee: I think you can look at the fact

that wages, you know, employees' payments,

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wages- Mm … that is the largest expense

usually of service businesses, okay?

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We're not necessarily talking

about the, um, the sign man

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who works as a entrepreneur.

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Erica: Yep.

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Lee: You know, he is the only

person that does the work.

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We're talking service businesses

that employ people and, you know, so

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again, wages and overtime are clearly

an expense that you wanna look at.

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Erica: Yep.

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Lee: Advertising and promotion, that

includes website and marketing costs.

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Erica: Yep.

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Lee: The bank charges.

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Those are merchant fees, a- and

they can be quite substantial.

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Yeah.

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Due subscriptions and

software used by the business.

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Erica: Insurance,

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Lee: um, with useful sub-accounts

when the business needs to distinguish

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liability policies, workers' comp,

property, and commercial vehicle coverage.

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Now, legal, accounting, bookkeeping,

and other professional fees.

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Repairs and maintenance for buildings,

computers, vehicles, and equipment.

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A repair is not automatically the

same as an improvement or a new asset.

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So think about in, when you're

thinking about repairs and maintenance

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or you're thinking about any of

these types of expenses But what

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you want to be able to, to use them

for is not just tax purposes, right?

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You want, you want them to be

usable for comparative reasons.

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Yeah.

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Looking at year to year and

making some financial decisions.

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You also have office expenses,

supplies, stationery, printing,

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rent or lease costs, licenses, tax,

utilities, and business telephone costs.

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You have travel, business meals.

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Now, automobile costs,

interest, and depreciation.

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These deserve extra attention

because limitations, allocations,

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or elections may apply.

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Erica: And I suppose something that

we need to remember is the category

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list is a review guide, right?

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So not a promise that every transaction

in the account is deductible.

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Anyways, just a good call-out.

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Okay, so moving on to category number

three is meals, travel, and entertainment.

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So meals and entertainment is one of those

categories people hear about constantly.

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If a business owner takes a client

or employee to dinner, what should

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they know before they call the

whole thing deductible, Papa?

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Lee: Certainly, that's an area

that the IRS made a lot of changes

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on over the last several years.

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Mm-hmm.

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Um, and now a business

entertainment expense is not

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deductible for the most part.

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A meal, however, is

considered 50% deductible.

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So but there are some rules

that you want to follow.

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It's not that you can't deduct for travel,

so there should be a distinction between

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the fact that you're gonna take somebody

out for a meal or you travel on business.

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The business travel and the

meals, they are 50% deductible.

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, okay?

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Yeah.

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But you have to make sure that you

have a clear audit trail on them.

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So what the business trip was for, who you

met with, and what the purpose of it was.

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A business meal must first have

a valid business connection.

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So whether that's business travel or

whether that's a meal, the employee

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should generally be present, and

the cost the IRS kind of looks

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at, it shouldn't be lavish or- Mm

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extravagant under the circumstances.

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And as I've said, business meals are

generally subject to a 50% limitation

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unless a specific exception applies.

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And travel meals, again, if you're away

from home, uh, they are 50% deductible.

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. But again, you want to make sure

that you have a separate file on each

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trip- And the purpose and so forth.

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Entertainment expenses are

generally not deductible.

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If food or beverages are purchased

separately from an entertainment

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event or separately stated on the

bill, then the meal portion may

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be analyzed under the meal rules.

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So if you take somebody

to a baseball game-

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Erica: Right

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… Lee: that, those tickets

are not deductible.

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But if you take them to lunch

before the game, you may deduct it.

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So keep separate QuickBooks accounts for

travel, deductible business meals, and

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non-deductible entertainment, and that'll

help the tax professional review the file.

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Erica: Yeah, absolutely.

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Okay, so what should the owner

record besides the restaurant

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name and the total on the receipt?

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What kind of records should they be

keeping about these kinds of things?

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Lee: Yeah.

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They should document any business travel

or any business lunch, who attended- Mm

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… the specific purpose or topic discussed,

the date and amount and location,

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and whether the entertainment charge

was separate from food and beverage.

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And the lunch is not much help, okay?

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If you just write lunch,

that's not much help.

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Right.

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Um, so again, be a little bit specific.

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Who attended, what business was discussed.

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And give the transaction a real story.

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Erica: Right.

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If you do a lot of this, it seems

like a good log that you're keeping,

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even on your phone, it's just- Yes

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okay, here was the date, here's where

we went for lunch, here's who attended,

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and, you know, here's, here were the

brief notes on what we discussed.

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Yeah.

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Here's, here's a good little outline.

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And so that you have a record, you have

a, a record of everything that happened

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so that if you ever do get audited, you

can present that information and give

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it to the IRS and say, "Right, look,

this is, these were actual business

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expenses, and this is what they were for."

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So yeah, absolutely.

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Okay, so moving on to topic number

four is vehicles and mileage.

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So you also listed automobile costs,

fuel, vehicle insurance, and fixed assets.

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If a vehicle is used for both

work and personal life, and most

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are, if we're honest, right?

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What should the owner track, Papa?

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Lee: Only the business use

portion is potentially deductible.

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Mixed use requires an allocation

supported by records, and usually your

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tax professional or your CPA, if you

take mileage, for example, I'm gonna

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talk about the difference between

taking expenses from your business or

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taking mileage, and then there will be

a form that you'll complete, and you

369

have a, a business log that says- Mm

370

"I did X business miles."

371

And if your mileage, for example, was

8,000 miles, and you did 6,000 for

372

business, then you had 2,000 for personal.

373

So you are gonna take the mileage

rate, whatever the federal mileage rate

374

deduction is, for those 6,000 miles.

375

So a mileage log should record

the date, the destination,

376

business purpose, and miles.

377

Um, QuickBooks does have a tool o-

on your phone if you use the app.

378

You can go in, and they have a

mileage tool a- and sometimes

379

that is very helpful in tracking

your mileage and is very useful.

380

But however you handle it, you need to

have a mileage log- Mm … um, to track

381

your, your business-related expenses,

and you can pull that log out, total

382

up the miles, and have, see exactly

what the mileage all totals to be.

383

With actual expense method, so if you're

actually taking expenses, then the

384

vehicle has to be apportioned to what is-

Mm … personal versus what is business.

385

Right.

386

And, and you may deduct,

certainly, fuel expenses, repairs,

387

insurance, registration, lease

payments, and depreciation-

388

Erica: Mm

389

… Lee: must be divided between the

business and the personal use.

390

So you don't have to track it all

individually of those items- Mm … but

391

it can be done at the end of the year.

392

When you look at your business-related

expenses and say, "Yes, for that truck,

393

I use it 70% of the time for business,"

fine, you deduct 70% of those expenses.

394

Uh, business parking and tolls

may be deductible separately

395

under applicable rules.

396

Keep them distinct from parking

tickets or other penalties.

397

So if you get a, a parking

ticket, that's not deductible.

398

Erica: Right.

399

Lee: And/or a penalty.

400

Right.

401

So that's not deductible.

402

Erica: Absolutely.

403

So sort of as a follow-up, so even if a

truck has a business logo on the side,

404

the owner still needs to track how it

was actually used, don't they, Papa?

405

Lee: Yes.

406

A logo does not replace

the mileage or use records.

407

Erica: Yeah.

408

Lee: That treatment can differ

based on who owns the vehicle, how

409

reimbursement is handled, and which

method was chosen in the first year.

410

Those are planning questions, not

decisions to be made from the bank feed.

411

Erica: Yeah, absolutely.

412

Okay, moving on.

413

Category number five, we're gonna cover

equipment and fixed assets, you guys.

414

So let's talk about equipment.

415

I think this is a good place for that.

416

In your recording, you show that a

truck, computer, or piece of equipment

417

may belong on the balance sheet instead

of going straight to office supplies.

418

So how should an owner

think about that one, Papa?

419

Lee: An item expected to

provide value beyond the current

420

year may be a fixed asset.

421

So it has to be considered to

have value after year one, um,

422

or considered a capital item.

423

The business exchanged cash

for property it still owns.

424

The money didn't simply disappear

as an ordinary monthly expense.

425

So in other words, you have

traded one asset for another.

426

If you paid out cash, you now

have less cash, but you have

427

some type of fixed asset.

428

Um, the tax return may recover

the cost through depreciation,

429

Section 179, bonus depreciation,

a safe harbor, or another rule.

430

QuickBooks should preserve the purchase

details so the tax professional

431

can make the correct decision.

432

In other words, scan the bill-

433

Erica: Right

434

… Lee: into QuickBooks, okay?

435

Erica: Mm.

436

Yes.

437

Lee: Um, the $2,500 figure is often

discussed for small purchases.

438

You know, it's a election, it's a de

minimis safe harbor for qualifying

439

taxpayers- Mm-hmm … without an

applicable financial statement.

440

It is not a universal rule that

everything below 2,500 is automatically

441

deductible as an expense or

everything above it is capitalized.

442

But the safe harbor has conditions,

including consistent book treatment

443

on an annual election with the return.

444

Amounts above the threshold may still

be deductible under other rules, and

445

amounts below it may require different

treatment when the conditions are not met.

446

Keep the bill, the purchase date,

the description, the serial, or

447

identifying information when useful.

448

Total cost, business use information,

financial documents, and date the

449

property was placed in service.

450

So that's important to know.

451

Just because you expense something

doesn't make it deductible.

452

Mm-hmm.

453

In other words, you have to put it in use.

454

It has to be before the end of

the tax period, whether you're a,

455

um, a calendar or a fiscal year.

456

Right.

457

Whatever that period is.

458

Erica: Mm.

459

It really comes down to

having great systems, right?

460

You need systems.

461

It doesn't have to be something

complicated, but a method for

462

helping you track this information

so that, again, if you ever do

463

get audited, you have it there.

464

You can supply that information

and back up, like, what you're

465

saying is what it comes down to.

466

So love that.

467

Mm-hmm.

468

So what should someone do if they are

unsure whether a large purchase is

469

equipment or an ordinary expense, Papa?

470

Lee: First of all, they should not

bury it in supplies or miscellaneous

471

expenses merely to clear their bank fee.

472

They need to make sure it has a specific

treatment, and that they need to record

473

it in a clear holding or a fixed asset

category with a supporting document.

474

Mm.

475

In other words, they may need

to make a journal entry and, you

476

know, then they can contact their

bookkeeper or their tax professional

477

to determine the correct handling

of, you know, that, that purchase.

478

And because each particular fixed asset

is gonna be looked at according to

479

the tax rule regarding that purchase.

480

You know, a, a large purchase

deserves its own question.

481

Don't let the bank feed make

that tax decision for you.

482

Mm.

483

Erica: Ab- absolutely.

484

Lee: In other words, it,

it's a big number, it should

485

determine how it gets handled.

486

Erica: Right.

487

You should give some time to that number.

488

Absolutely.

489

Right.

490

Okay, so moving on.

491

Category number six, loan

and principal interest.

492

So one of the clearest examples in your

recording was the loan payment, Papa.

493

Why is the full amount leaving the bank

not the same as a full business expense?

494

Lee: Because the principal portion…

495

So when you take out a

loan, you incur a liability.

496

A loan is not an expense.

497

The interest is an expense

for borrowing money.

498

But the principal portion reduces the

loan liability on the balance sheet.

499

Paying back borrowed money is not

the same as incurring a new operating

500

expense, like I said The interest

portion may be deductible when the debt

501

and use of proceeds qualify, although

limits and tracing rules can apply.

502

So a $1,000 bank withdrawal might include

890 of principal and 110 of interest.

503

Posting the entire $1,000 to an

expense overstate the expense and

504

leaves the loan balance wrong.

505

So posting the entire payment to principal

can hide also a legitimate tax deduction.

506

And I think that that deserves at

least some discussion that you have to

507

understand when you are entering a check

in QuickBooks and you're paying the

508

loan, if you don't have the principal

and interest breakdown, then I recommend

509

clients that they, if they can't get

that information, to post the total

510

check to the principal, and then they'll

receive a document at the end of the year

511

for the interest, and they can make a

journal entry for the interest expense.

512

So that's a very practical tool on, you

know, how rather than, uh, wait and see

513

if you can get the information, this…

514

Because some companies

do not provide that.

515

Mm-hmm.

516

And it will be done at

the end of the year.

517

So use that lender statement

or amortization schedule if the

518

split is unavailable each month.

519

Keep the payment in a clear loan account

and make a supporting adjustment with

520

your bookkeeper or your tax professional.

521

Attach the annual statement or

other supporting information to the

522

adjustment that you're gonna make,

the journal entry, if you will.

523

Erica: Mm-hmm.

524

Lee: And because one payment,

you know, can affect both the

525

balance sheet and the profit loss.

526

Mm-hmm.

527

QuickBooks needs split,

not just the bank total.

528

Erica: Yeah, absolutely.

529

As we've stated over and over again,

what happens in real life does

530

need to be reflected in QuickBooks.

531

That is important.

532

Right.

533

Most excellent.

534

Okay, moving on.

535

Section seven, what does not

become deductible automatically?

536

So Papa, I would love if we

could do a quick myth round.

537

I want to give listeners a few places

where the answer is not automatically yes.

538

So here we go.

539

Here is this quick kind of section

that we're gonna give some myths

540

that people believe about deductions.

541

So if I paid for it from the business

account, is it deductible, Papa?

542

Lee: No.

543

Payment source does not establish

business purpose or tax treatment.

544

Erica: Absolutely.

545

Okay.

546

So if QuickBooks calls it an

expense, is it deductible, Papa?

547

Lee: No.

548

QuickBooks, you know, can name an account

and organize records, but the federal and

549

state tax rules determine deductibility.

550

Erica: Absolutely.

551

So if I bought equipment before December

31st, I automatically get the entire

552

deduction this year, don't I, Papa?

553

Lee: Uh, no.

554

Property business use It has to be placed

in service before the end of the year.

555

So just by writing the check,

if you don't put that asset or

556

that fixed asset into service, it

won't qualify for that deduction.

557

Erica: Absolutely.

558

If I took a client to a show and

dinner, the entire evening is a

559

business expense, isn't it, Papa?

560

Lee: Generally, no.

561

No.

562

Entertainment is usually non-deductible,

and the meal needs to have a

563

separate analysis and documentation.

564

Erica: So the bank

statement shows the charge.

565

I have all the proof I need.

566

I mean, I must have all

the proof, don't I, Papa?

567

Lee: The statement may prove payment,

but it doesn't prove what was purchased

568

or why it was a business expense.

569

So you need to have that bill

to support the business expense.

570

Erica: Absolutely.

571

Okay, a write-off means the

business gets the money back, Papa.

572

I mean, it definitely should, doesn't it?

573

Lee: N- no.

574

A write-off is a deduction,

generally reduces taxable income.

575

Absolutely.

576

The savings depends on

the taxpayer's situation.

577

Erica: Absolutely.

578

Okay, category number eight, moving

into records that support deduction.

579

Okay, so you showed people how to

attach a receipt inside of QuickBooks.

580

What should a good supporting

record tell us, Papa?

581

Lee: The payee, the date, amount,

and what was actually purchased-

582

Mm … that supports the proof of

payment, a description of the item

583

or service, and the business purpose.

584

For meals, who attended and

what business was discussed.

585

For vehicles, the mileage or use record

and the business destination or purpose.

586

For assets, the acquisition information,

cost, improvements, business use,

587

depreciation, or Section 179 information,

and disposal information when the

588

asset is later sold or retired.

589

Mm.

590

And that's really important because,

uh, there, there are a lot of

591

supporting documents on the tax

return that are important to be

592

fully provide the information so the

accountant can, or the tax professional

593

can maximize that deduction.

594

Mm.

595

Also, a bank or a credit statement

can support payments, but proof of

596

payment alone does not establish

the entitlement to a deduction.

597

Again, you need the receipt or the

document of what was purchased.

598

Electronic payments can be useful when

they're complete, legible, secure, and

599

retained for the required period of

time following the business document's

600

retention policy, and the tax professional

can advise about discarding documents.

601

So it's important- Mm

602

to get the advice from a, a professional.

603

Erica: Most excellent.

604

Okay, so Papa, what is the practical

habit you want someone to begin this

605

week if they could only do one thing?

606

Lee: Well, I would say attach the

bill when the transaction is fresh,

607

not months later, or the receipt.

608

Mm.

609

Add the business purpose memo

at the same time, particularly

610

when you think about credit card

receipts or debit card receipts.

611

You know, make sure

you get those receipts.

612

Um-

613

Erica: Yeah

614

… Lee: use the correct vendor and category.

615

That's extremely important when you're

going back and looking at an expense.

616

And split mixed transactions rather than

forcing the full amount into one account.

617

So if there's- Mm … multiple accounts,

um, you know, split it correctly.

618

And reconcile the accounts so missing and

duplicate transactions are easier to find.

619

Erica: Yes, absolutely.

620

Okay, that was so good, Papa.

621

So now let's give people a

15-minute expense review.

622

I think let's give everyone

one practical action.

623

Open QuickBooks, you guys.

624

Set a timer for 15 minutes, and do this

review, 'cause I don't want this podcast

625

to turn into something that you're simply

listening to, you know, taking in the

626

information, but then doing nothing.

627

We want this to actually

move the needle for you.

628

So do it.

629

Get it out.

630

If you're in your car, when you get

home- Open QuickBooks and set a timer

631

for 15 minutes and do this review.

632

You are not preparing the tax return yet.

633

You are finding the questions

while there is still time to

634

answer them, and that's important.

635

This is why this is so valuable,

because you're ahead of the curve.

636

Most people don't do this now.

637

Most people wait until it really

is truly too late So get it out.

638

Let's go through this together.

639

Okay, so number one, run a profit and

loss for January 1 through today, and

640

compare it with the same period last

year if prior year date is reliable.

641

Number two, scan the major

expense groups from, from Papa's

642

walkthrough: advertising, automobile,

fees, subscriptions, insurance,

643

professional fees, repairs, meals,

travel, rent, supplies, licenses,

644

utilities, interest, and depreciation.

645

And you guys, I am gonna put this

all in a PDF so you can just see

646

it and walk through it and kind

of fill it out as you're going.

647

Number three, open the detail

behind the five largest or

648

most unusual expense balances.

649

Ask what changed and whether

every transaction belongs there.

650

Number four, review uncategorized expense,

ask my accountant, miscellaneous expense,

651

and any personal or owner categories.

652

Make a list.

653

Do not reclassify items you

do not understand, you guys.

654

So important.

655

Number five, find equipment

and vehicle purchases.

656

Confirm that invoices and purchase

details are attached, and flag

657

anything that may be a fixed asset.

658

Number six, find loan payments and confirm

that principal and interest are separated

659

or supported for year-end adjustment.

660

Number seven, choose three meal,

travel, or vehicle transactions and

661

check whether the business purpose

and supporting records are complete.

662

Number eight, send the question

list to the bookkeeper or tax

663

professional, and schedule the

planning conversation before year-end.

664

So important, you guys.

665

Lee: Yeah.

666

Do not begin by asking,

"How much can I write off?"

667

Erica: Yeah.

668

Lee: Okay?

669

Begin by asking what happened, how

it was used, and how can I prove it.

670

Erica: So true, and this does not

have to be, again, something that's

671

complicated and takes so much time.

672

It's something that you can just

set up a simple system for and

673

you're doing as you're going.

674

And if you don't have that system yet,

this is a great time to put it in place.

675

So good.

676

Okay, so Papa, I think the big takeaway

today is that legitimate deductions begin

677

long before a tax return is prepared.

678

They begin when the business separates

personal and business activity,

679

chooses useful QuickBooks categories,

records the purpose, and keeps the

680

documents that support the transactions.

681

Would you agree?

682

Lee: That's right.

683

The goal is not to create the

most expense accounts or chase

684

every possible write-off.

685

The goal is to give your tax professional

Complete, accurate information so

686

you can claim what the law allows

and avoid claiming, um, expenses

687

that are not business related.

688

Erica: Absolutely.

689

So if you're listening and thinking,

"I'm not sure my QuickBooks would give

690

me that information," start with our

free QuickBooks Clarity Scorecard.

691

This is why I created this.

692

It is such a useful resource, you guys.

693

We will link it in the show notes,

and you can also find it on our

694

website at leedavisoncompany.com.

695

And we are also building our QuickBooks

course for business owners who want help

696

putting these systems into practice.

697

So join the wait list.

698

I have an official wait list on our

website at leedavisoncompany.com,

699

and I'll also drop it in our show

notes so you can get on that wait list.

700

And when we finally do launch our revamped

QuickBooks course, which is going to be

701

amazing, you can be the first to know.

702

You can be the know in your circle.

703

Just love that.

704

And you guys, if you, again, if you have

any QuickBooks questions or a topic you

705

would like for us to cover, just email

us at [email protected].

706

We read and respond to every single

email, and we would love to hear from you.

707

Absolutely, give us that feedback,

'cause we wanna know, for sure.

708

Lee: Thanks for listening, and

we will talk to you next time.

709

Erica: Yes, absolutely.

710

We'll see you next week.

711

Bye for now.

712

Thanks for tuning in to QuickBooks

Mastery for small business success.

713

Lee: If you enjoyed this episode,

hit subscribe and stay connected

714

with us at leedavisoncompany.com.

715

Erica: We know QuickBooks can

be overwhelming, so we've put

716

together a free resource to

help you get started right away.

717

Grab your copy at leedavisoncompany.com,

718

and when you do, you'll also get

access to our VIP email list, where

719

we share exclusive QuickBooks tips,

business strategies, and support.

720

Lee: And we'd love to hear from you.

721

If you have a QuickBooks question

or a business challenge, send it our

722

way at [email protected].

723

We might feature it in a future episode.

724

Erica: We're here to help you

simplify QuickBooks and grow your

725

business, one step at a time.

726

See you next time.