Shownotes
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.
Transcripts
Welcome to Quickbooks Mastery for small business success.
2
00:00:05,240 --> 00:00:06,190
I'm Erica Northrup.
3
00:00:06,480 --> 00:00:07,530
Lee: And I'm Lee Davis.
4
00:00:07,790 --> 00:00:09,960
Erica: I handle the tech,
and he handles the numbers.
5
00:00:10,120 --> 00:00:14,209
And together, as a father-daughter team,
we bring decades of experience helping
6
00:00:14,299 --> 00:00:16,750
small to medium-sized businesses thrive.
7
00:00:16,870 --> 00:00:20,859
Lee: We know that as a business owner,
your time is best spent mastering
8
00:00:20,869 --> 00:00:24,619
your craft and growing your business,
not getting lost in QuickBooks.
9
00:00:24,879 --> 00:00:28,740
Managing finances can be confusing,
and you don't have hours to waste
10
00:00:29,170 --> 00:00:32,069
sorting through spreadsheets
or fixing bookkeeping mistakes.
11
00:00:32,409 --> 00:00:36,249
That's where we come in, helping
you streamline QuickBooks so you
12
00:00:36,249 --> 00:00:38,159
can focus on building your business.
13
00:00:38,679 --> 00:00:42,069
Erica: Each week, we break it all
down into simple, actionable steps
14
00:00:42,409 --> 00:00:45,619
so you can focus on growing your
business, not fixing your books.
15
00:00:46,060 --> 00:00:48,019
Lee: Let's embark on this journey together
16
00:00:56,312 --> 00:00:59,662
Erica: Welcome back to QuickBooks
Mastery for Small Business Success.
17
00:00:59,742 --> 00:01:04,342
This is episode 43, Can You
Actually Write That Off?
18
00:01:04,452 --> 00:01:06,932
Practical Tax Planning in QuickBooks.
19
00:01:07,002 --> 00:01:12,172
I'm Erica Northrup, and yes, your ears
do not deceive you, I am fighting a cold.
20
00:01:12,182 --> 00:01:15,942
It's been quite the week, so my immune
system has not quite been up to snuff,
21
00:01:15,982 --> 00:01:21,211
but we are gonna keep moving forward,
and I'm here with my papa, Lee Davis.
22
00:01:21,482 --> 00:01:24,662
So last week we talked about
getting your QuickBooks ready
23
00:01:24,670 --> 00:01:26,531
before tax season arrived.
24
00:01:26,622 --> 00:01:30,082
Today, we're taking the next
practical step in answering one of
25
00:01:30,082 --> 00:01:35,121
the questions business owners ask all
the time, you guys, "Can I claim this?
26
00:01:35,181 --> 00:01:36,701
Can I write this off?"
27
00:01:37,101 --> 00:01:40,692
So Papa, you recently recorded a
walkthrough of the chart of accounts
28
00:01:40,692 --> 00:01:45,092
that was excellent, and the expense
categories people use in QuickBooks.
29
00:01:45,591 --> 00:01:50,121
You covered everything from advertising
and insurance to meals, vehicles,
30
00:01:50,170 --> 00:01:51,661
equipment, and loan interest.
31
00:01:51,732 --> 00:01:56,021
I won't use this recording as our
roadmap today, but translate it
32
00:01:56,041 --> 00:02:00,271
into the questions a business owner
should actually ask before putting
33
00:02:00,271 --> 00:02:03,021
something down as a tax deduction.
34
00:02:03,081 --> 00:02:04,162
Lee: Erica, that's right.
35
00:02:04,241 --> 00:02:08,651
I mean, we've explored the chart of
accounts, and we've looked at the
36
00:02:08,711 --> 00:02:11,282
various expense categories, but- Mm
37
00:02:11,291 --> 00:02:17,141
this is a bit of a deeper dive- Yeah
… in saying that if you want to make sure
38
00:02:17,211 --> 00:02:23,971
that your expense is deductible, the IRS
does have some rules- Mm … and that
39
00:02:23,982 --> 00:02:28,266
should be followed when you consider
is something deductible You know,
40
00:02:28,286 --> 00:02:33,286
QuickBooks can help you organize the
information, but the name of the account
41
00:02:33,346 --> 00:02:35,656
does not make an expense deductible.
42
00:02:35,656 --> 00:02:35,966
Erica: Okay.
43
00:02:35,966 --> 00:02:36,526
Lee: Okay?
44
00:02:36,565 --> 00:02:41,335
So you still need to understand
what the purchase was, why the
45
00:02:41,335 --> 00:02:45,876
business paid for it, and how it's
used, and what records support it.
46
00:02:46,046 --> 00:02:51,466
Erica: Yeah, so before we jump in, this
episode is general educational information
47
00:02:51,466 --> 00:02:57,075
for the United States small business
owner, because we have a lot of worldwide
48
00:02:57,095 --> 00:02:59,115
listeners, which I think is incredible.
49
00:02:59,126 --> 00:03:01,875
We're helping people all across
the world, but we are gonna
50
00:03:01,875 --> 00:03:05,346
focus on United States tax rules.
51
00:03:05,386 --> 00:03:09,766
So just be aware, so tax rules
depend on your facts, your
52
00:03:09,766 --> 00:03:11,935
entirety, and the year involved.
53
00:03:11,945 --> 00:03:15,305
So please work with your own
qualified tax professional
54
00:03:15,316 --> 00:03:18,096
before making any tax decisions.
55
00:03:18,125 --> 00:03:23,946
Okay, so Papa, let's start with the phrase
people use all the time, a write-off.
56
00:03:24,175 --> 00:03:29,475
What actually has to be true before a
business expense can become a deduction?
57
00:03:29,495 --> 00:03:33,035
Lee: The federal starting point
is that a business expense must
58
00:03:33,045 --> 00:03:35,704
generally be ordinary and necessary.
59
00:03:35,716 --> 00:03:35,726
Mm.
60
00:03:35,875 --> 00:03:39,045
Those are terms that you
can say, "Well, what are…
61
00:03:39,075 --> 00:03:41,375
What's ordinary and what's necessary?"
62
00:03:41,525 --> 00:03:46,305
Meaning that particular expense
has to fit the business.
63
00:03:46,415 --> 00:03:51,395
You know, if for example, have a
business, a service business, and
64
00:03:51,445 --> 00:03:55,445
you also have a rental income.
65
00:03:55,515 --> 00:03:55,535
Mm-hmm.
66
00:03:55,536 --> 00:03:56,935
A rental property.
67
00:03:57,055 --> 00:03:59,776
Those would not and should not be mingled.
68
00:03:59,786 --> 00:03:59,796
Mm.
69
00:03:59,816 --> 00:04:04,875
Those are separate tax filings
for each type of entity.
70
00:04:04,875 --> 00:04:09,985
So what is ordinary and necessary
depends on what your business is.
71
00:04:10,906 --> 00:04:15,266
You know, ordinary means common and
accepted in that type of business.
72
00:04:15,335 --> 00:04:17,856
Necessary means helpful and appropriate.
73
00:04:17,946 --> 00:04:20,676
It does not have to be indispensable.
74
00:04:20,846 --> 00:04:23,716
You know, I thought about, well,
what does indispensable mean?
75
00:04:23,726 --> 00:04:29,406
Meaning that when you look at
an expense, is it necessary?
76
00:04:29,415 --> 00:04:31,026
Is it indispensable?
77
00:04:31,225 --> 00:04:31,245
Mm-hmm.
78
00:04:31,255 --> 00:04:38,566
So you determine expenses based on what's
necessary to run your business, and so
79
00:04:38,676 --> 00:04:44,735
therefore, it's a little like what's
deductible for interest on a car payment.
80
00:04:44,745 --> 00:04:50,806
So, uh, the IRS does not determine if
you want a Mercedes, that necessarily is
81
00:04:50,806 --> 00:04:54,635
going to be totally all deductible, okay?
82
00:04:54,646 --> 00:04:54,676
Right.
83
00:04:54,705 --> 00:05:00,255
Because you could get along perfectly
fine with maybe a, a lesser car.
84
00:05:00,306 --> 00:05:00,325
Mm-hmm.
85
00:05:00,335 --> 00:05:02,306
And the IRS says, "Yeah, you know what?
86
00:05:02,325 --> 00:05:06,156
It's all right if you wanna buy that, uh,
but not all of it might be deductible."
87
00:05:06,165 --> 00:05:08,595
But anyway, that's really just a example.
88
00:05:08,665 --> 00:05:11,235
And there must be a real business purpose.
89
00:05:11,305 --> 00:05:16,625
Paying with a business credit card or any
type of card, entering the transaction
90
00:05:16,626 --> 00:05:21,985
in QuickBooks or choosing Expense
Account does not create that purpose.
91
00:05:22,056 --> 00:05:27,295
Just because you use a business
account to pay for it doesn't
92
00:05:27,306 --> 00:05:29,665
necessarily mean it's deductible.
93
00:05:29,715 --> 00:05:32,845
A deduction reduces taxable income.
94
00:05:32,965 --> 00:05:33,375
Erica: Yeah.
95
00:05:33,435 --> 00:05:34,676
Lee: And I think that's important.
96
00:05:34,685 --> 00:05:40,630
It does not make the purchase free- It
doesn't automatically produce a dollar
97
00:05:40,630 --> 00:05:43,720
for dollar tax refund, if any refund.
98
00:05:43,730 --> 00:05:47,909
So therefore, it's a deduction that
you take- Mm … against income.
99
00:05:48,000 --> 00:05:50,770
And so you need to ask four questions.
100
00:05:50,779 --> 00:05:51,580
So think about it.
101
00:05:51,670 --> 00:05:52,760
What did we buy?
102
00:05:52,819 --> 00:05:57,330
And in many ways, these questions
are what we have talked about, how
103
00:05:57,330 --> 00:06:01,500
you calculate whether something
is an expense and where it goes.
104
00:06:01,559 --> 00:06:02,620
You know, what do we buy?
105
00:06:02,690 --> 00:06:05,899
What did the business need it,
or why does the business need it?
106
00:06:05,989 --> 00:06:07,609
Was part of it personal?
107
00:06:07,680 --> 00:06:12,150
What document proves both the
amount and the business purpose?
108
00:06:12,159 --> 00:06:18,720
So having that document is extremely
helpful when taking a business deduction.
109
00:06:18,760 --> 00:06:22,489
If the owner would have incurred the
cost personally, even without the
110
00:06:22,499 --> 00:06:27,030
business, slow down and ask the tax
professional how the rules apply.
111
00:06:27,080 --> 00:06:31,350
If you make an investment, such
as an addition to your home, that
112
00:06:31,350 --> 00:06:36,940
would be used for both personal and
business, for the most part, that
113
00:06:36,959 --> 00:06:40,439
addition is not a deductible expense.
114
00:06:40,510 --> 00:06:40,590
Mm.
115
00:06:40,729 --> 00:06:45,510
Uh, you, however, can deduct
the home office expense.
116
00:06:45,519 --> 00:06:49,819
I think that clearly is, um, a tax
deduction, but you need to have that
117
00:06:49,820 --> 00:06:51,669
reviewed with your tax professional.
118
00:06:51,719 --> 00:06:57,129
And you, however, can deduct equipment
and furniture that is directly related
119
00:06:57,129 --> 00:07:01,459
to your business, such as items may
include furniture and equipment.
120
00:07:01,710 --> 00:07:02,529
Mm-hmm.
121
00:07:02,539 --> 00:07:06,309
Computer equipment, software,
normal type expenses that are
122
00:07:06,309 --> 00:07:08,069
deductible for your business.
123
00:07:08,149 --> 00:07:11,449
This is what I was interested in
when somebody says, "Well, you know,
124
00:07:11,449 --> 00:07:12,969
you can take the whole deduction."
125
00:07:12,979 --> 00:07:13,009
Right.
126
00:07:13,170 --> 00:07:15,790
No, you cannot take the whole deduction.
127
00:07:15,829 --> 00:07:20,449
And what you always want to be
concerned about is doing what's right
128
00:07:20,469 --> 00:07:27,556
and what's ethical, and you have a
responsibility To understand what is truly
129
00:07:27,556 --> 00:07:30,366
deductible and follow those guidelines.
130
00:07:30,416 --> 00:07:30,846
Yeah.
131
00:07:30,846 --> 00:07:32,256
And if you're audited, you know what?
132
00:07:32,336 --> 00:07:36,695
You're gonna be perfectly fine because
it's not that you can't make a mistake.
133
00:07:36,786 --> 00:07:37,016
Erica: Yeah.
134
00:07:37,055 --> 00:07:41,932
Lee: But in the spirit of a transaction,
if your accountant or the IRS, you
135
00:07:41,932 --> 00:07:45,546
know, were to work on an audit, then
you would know that, for the most
136
00:07:45,556 --> 00:07:47,765
part, you should be perfectly fine.
137
00:07:47,815 --> 00:07:48,355
Erica: Yeah.
138
00:07:48,425 --> 00:07:49,005
Absolutely.
139
00:07:49,005 --> 00:07:52,675
You know, I feel like those are four
really good questions that every
140
00:07:52,675 --> 00:07:56,435
business owner should ask themselves
about purchases they made to help
141
00:07:56,436 --> 00:07:59,946
them determine if they are good
things to kind of claim and to…
142
00:07:59,956 --> 00:08:01,666
That could be deductions.
143
00:08:02,005 --> 00:08:05,085
So again, those questions are,
number one, what did we buy?
144
00:08:05,145 --> 00:08:08,225
Question number two, why
did the business need it?
145
00:08:08,285 --> 00:08:11,736
Question number three,
was any part personal?
146
00:08:11,785 --> 00:08:17,366
Question number four, what document proves
both the amount and the business purpose?
147
00:08:17,375 --> 00:08:21,205
So I think those are really good
questions to ask yourself when you
148
00:08:21,206 --> 00:08:25,015
are thinking about could this possibly
be a deduction for the business?
149
00:08:25,026 --> 00:08:27,935
So we're gonna be breaking
these down into categories.
150
00:08:27,945 --> 00:08:33,186
So category number one, what makes
a business expense deductible?
151
00:08:33,225 --> 00:08:36,635
You know, QuickBooks reports
the story you give it.
152
00:08:36,664 --> 00:08:41,815
It cannot turn a personal
purchase into a business expense.
153
00:08:41,865 --> 00:08:42,554
Can it, Papa?
154
00:08:42,595 --> 00:08:43,355
Lee: No, it cannot.
155
00:08:43,426 --> 00:08:44,236
Erica: Absolutely not.
156
00:08:44,246 --> 00:08:49,985
Okay, so if I swipe the company card,
the transaction may be in the business
157
00:08:50,015 --> 00:08:55,225
bank feed, but have I still not answered
whether it belongs on the profit and loss?
158
00:08:55,265 --> 00:08:57,625
Is that the distinction, Papa?
159
00:08:57,765 --> 00:08:58,525
Lee: Of course.
160
00:08:58,555 --> 00:08:59,195
Exactly.
161
00:08:59,206 --> 00:09:02,776
I mean, the bank feed
proves that money moved.
162
00:09:02,785 --> 00:09:02,815
Mm-hmm.
163
00:09:03,235 --> 00:09:07,605
It doesn't necessarily prove
a tax deduction- Mm … or
164
00:09:07,605 --> 00:09:09,065
a tax treatment with…
165
00:09:09,115 --> 00:09:11,635
which would make it a deductible
expense for the business.
166
00:09:11,706 --> 00:09:16,605
A personal item paid by the company may
need to go and be charged as an owner's
167
00:09:16,605 --> 00:09:21,596
draw, and appear so on the balance
sheet, uh, rather than as an expense.
168
00:09:21,655 --> 00:09:25,745
The correct treatment depends on
the entity and the facts, okay?
169
00:09:25,746 --> 00:09:27,895
It's a little bit like detective work.
170
00:09:27,925 --> 00:09:33,785
You get the, uh, receipt, which is an
itemization of what the company purchased,
171
00:09:33,835 --> 00:09:40,376
and you attach that and look at it and
say, "Yes, that is a deductible expense."
172
00:09:40,456 --> 00:09:40,946
Erica: Mm.
173
00:09:40,965 --> 00:09:45,835
Lee: And if not, you should separate,
realizing that you need to separate
174
00:09:45,875 --> 00:09:47,566
business and personal accounts.
175
00:09:48,244 --> 00:09:54,004
And it makes it much easier and, you
know, you reduce the risk of taking
176
00:09:54,044 --> 00:09:56,894
personal expenses as a business deduction.
177
00:09:56,944 --> 00:09:57,424
Erica: Okay.
178
00:09:57,454 --> 00:10:03,453
So moving on, category number two, how the
chart of accounts supports tax planning.
179
00:10:03,473 --> 00:10:08,113
So in recording, Papa, you called
the chart of accounts the backbone of
180
00:10:08,113 --> 00:10:12,374
QuickBooks and compared it to a file
cabinet, which I think is brilliant.
181
00:10:12,623 --> 00:10:16,514
So how does the file
cabinet help at tax time?
182
00:10:16,523 --> 00:10:20,794
Lee: Because the file cabinet, back in the
old days, we used to have manila files.
183
00:10:20,863 --> 00:10:21,003
Erica: Yeah.
184
00:10:21,003 --> 00:10:21,603
That
185
00:10:21,603 --> 00:10:27,153
Lee: we labeled with all of the
vendors, and in the vendor file, each
186
00:10:27,163 --> 00:10:30,563
vendor, we put in copies of the bill.
187
00:10:30,563 --> 00:10:35,523
A- and for each bill, we wrote
the fact that if we paid it by a
188
00:10:35,523 --> 00:10:37,833
check and the date and so forth.
189
00:10:37,924 --> 00:10:38,053
Mm-hmm.
190
00:10:38,053 --> 00:10:38,723
And the amount.
191
00:10:38,764 --> 00:10:38,783
Mm-hmm.
192
00:10:38,793 --> 00:10:43,023
So in many ways, the QuickBooks
chart of accounts just kind of
193
00:10:43,053 --> 00:10:46,703
replaces that sort of file cabinet.
194
00:10:46,764 --> 00:10:47,134
Erica: Yeah.
195
00:10:47,213 --> 00:10:51,633
Lee: Because we would go, if somebody
wanted to see, uh, you know, had a
196
00:10:51,633 --> 00:10:55,843
question about a particular bill-
Mm-hmm … we'd go to the file cabinet.
197
00:10:55,843 --> 00:10:56,144
Erica: Yeah.
198
00:10:56,144 --> 00:10:56,164
Lee: Yeah.
199
00:10:56,164 --> 00:11:00,433
Now, we go to the QuickBooks chart
of accounts, and we pull up that
200
00:11:00,434 --> 00:11:05,883
account, and then we can go in and
look at the particular expense.
201
00:11:05,933 --> 00:11:09,053
And if we've scanned the
bill, it's right there.
202
00:11:09,123 --> 00:11:10,394
Erica: Yeah, absolutely.
203
00:11:10,424 --> 00:11:13,543
Lee: You know, it's, it's just
the chart of accounts is the file
204
00:11:13,543 --> 00:11:15,723
cabinet for- Right … for tax time.
205
00:11:15,784 --> 00:11:17,114
Erica: Absolutely.
206
00:11:17,144 --> 00:11:21,913
And I'm sure a good chart of accounts
helps you see the business clearly
207
00:11:21,943 --> 00:11:25,213
before the tax return is ever prepared.
208
00:11:25,223 --> 00:11:28,494
That seems to be the key about the
chart of accounts, doesn't it, Papa?
209
00:11:28,553 --> 00:11:29,123
Lee (2): Of course.
210
00:11:29,133 --> 00:11:29,363
Yeah.
211
00:11:29,363 --> 00:11:34,913
And you have to remember that an
applicable tax return can be a useful
212
00:11:35,013 --> 00:11:37,263
reference for major categories.
213
00:11:37,323 --> 00:11:37,343
Mm-hmm.
214
00:11:37,354 --> 00:11:42,213
But the chart of accounts should also
reflect the business actually, how
215
00:11:42,214 --> 00:11:46,803
the business actually operates and how
management needs to review performance.
216
00:11:46,813 --> 00:11:53,539
So don't assume every business files
a Schedule C, a single member LLC, a
217
00:11:53,919 --> 00:11:59,579
partnership, or an S corp or a C corp
can have different federal filing paths.
218
00:11:59,629 --> 00:12:02,399
Confirm the return with
a tax professional.
219
00:12:02,439 --> 00:12:03,409
So you know what?
220
00:12:03,469 --> 00:12:10,925
I think that in most cases- The LLC
will file a Schedule C, and you file
221
00:12:10,925 --> 00:12:20,655
a Schedule C for each type of entity
that you are going to take a, um,
222
00:12:20,725 --> 00:12:23,355
have income and, and expenses for.
223
00:12:23,405 --> 00:12:27,475
Um, you know, you need to keep
direct job costs separate from
224
00:12:27,475 --> 00:12:32,125
general operating expenses when
that distribution is useful because
225
00:12:32,135 --> 00:12:34,465
that represents cost of goods sold.
226
00:12:34,475 --> 00:12:34,585
Mm-hmm.
227
00:12:34,595 --> 00:12:40,565
Direct materials, direct labor, and
subcontractors may belong in, like I
228
00:12:40,585 --> 00:12:45,265
said, in a cost of goods sold, while
office rent, advertising, and bookkeeping
229
00:12:45,315 --> 00:12:47,625
are usually operating expenses.
230
00:12:47,685 --> 00:12:54,085
I was recently working with a new client,
and they wanted to get a good roadmap
231
00:12:54,305 --> 00:12:58,735
for setting up their chart of accounts,
and we've talked about this before, and I
232
00:12:58,775 --> 00:13:02,075
oftentimes will recommend that Schedule C.
233
00:13:02,115 --> 00:13:02,615
Erica: Yeah.
234
00:13:02,665 --> 00:13:02,935
It's
235
00:13:02,995 --> 00:13:03,505
Lee: a great
236
00:13:03,515 --> 00:13:04,125
Erica: resource.
237
00:13:04,135 --> 00:13:04,165
And
238
00:13:04,175 --> 00:13:08,515
Lee: because it, it makes you look
at the accounts that you're gonna
239
00:13:08,515 --> 00:13:13,005
set up, and it's gonna be consistent,
and so you're not gonna set up more
240
00:13:13,005 --> 00:13:16,745
accounts than you need, and, you
know, the category then has meaning.
241
00:13:16,805 --> 00:13:16,905
Mm-hmm.
242
00:13:16,915 --> 00:13:21,725
It can be tied right back to your tax
filing and make it a lot easier for
243
00:13:21,725 --> 00:13:24,265
your tax professional or your CPA.
244
00:13:24,615 --> 00:13:24,765
Yeah.
245
00:13:24,765 --> 00:13:29,435
And so it changes meaning from
month to month, makes year-to-year
246
00:13:29,435 --> 00:13:32,785
comparison and tax review a lot easier.
247
00:13:32,835 --> 00:13:33,255
Okay?
248
00:13:33,255 --> 00:13:36,465
A good chart- Yeah … of accounts
helps you see your business clearly
249
00:13:36,515 --> 00:13:39,095
before the tax return is even prepared.
250
00:13:39,105 --> 00:13:40,975
So I think that's a good statement-
251
00:13:41,055 --> 00:13:41,435
Erica: Yeah
252
00:13:41,505 --> 00:13:42,985
… Lee: to hold onto.
253
00:13:43,045 --> 00:13:44,195
Erica: Yeah, absolutely.
254
00:13:44,245 --> 00:13:44,505
Okay.
255
00:13:44,505 --> 00:13:49,325
So Papa, what are the common categories
from your walkthrough that a small
256
00:13:49,335 --> 00:13:52,415
business owner should expect to review?
257
00:13:52,435 --> 00:13:53,545
What would you say, Papa?
258
00:13:53,595 --> 00:13:59,715
Lee: I think you can look at the fact
that wages, you know, employees' payments,
259
00:13:59,755 --> 00:14:06,465
wages- Mm … that is the largest expense
usually of service businesses, okay?
260
00:14:06,525 --> 00:14:10,715
We're not necessarily talking
about the, um, the sign man
261
00:14:10,715 --> 00:14:13,555
who works as a entrepreneur.
262
00:14:13,595 --> 00:14:13,805
Erica: Yep.
263
00:14:13,865 --> 00:14:17,935
Lee: You know, he is the only
person that does the work.
264
00:14:17,985 --> 00:14:21,835
We're talking service businesses
that employ people and, you know, so
265
00:14:21,915 --> 00:14:27,515
again, wages and overtime are clearly
an expense that you wanna look at.
266
00:14:27,575 --> 00:14:27,875
Erica: Yep.
267
00:14:27,975 --> 00:14:32,275
Lee: Advertising and promotion, that
includes website and marketing costs.
268
00:14:32,355 --> 00:14:32,655
Erica: Yep.
269
00:14:32,665 --> 00:14:33,835
Lee: The bank charges.
270
00:14:33,895 --> 00:14:37,835
Those are merchant fees, a- and
they can be quite substantial.
271
00:14:37,975 --> 00:14:38,005
Yeah.
272
00:14:38,045 --> 00:14:41,195
Due subscriptions and
software used by the business.
273
00:14:41,285 --> 00:14:42,235
Erica: Insurance,
274
00:14:42,305 --> 00:14:46,135
Lee: um, with useful sub-accounts
when the business needs to distinguish
275
00:14:46,195 --> 00:14:51,475
liability policies, workers' comp,
property, and commercial vehicle coverage.
276
00:14:51,885 --> 00:14:55,625
Now, legal, accounting, bookkeeping,
and other professional fees.
277
00:14:55,685 --> 00:15:00,555
Repairs and maintenance for buildings,
computers, vehicles, and equipment.
278
00:15:00,615 --> 00:15:05,795
A repair is not automatically the
same as an improvement or a new asset.
279
00:15:05,885 --> 00:15:10,055
So think about in, when you're
thinking about repairs and maintenance
280
00:15:10,055 --> 00:15:14,949
or you're thinking about any of
these types of expenses But what
281
00:15:14,949 --> 00:15:20,519
you want to be able to, to use them
for is not just tax purposes, right?
282
00:15:20,519 --> 00:15:25,019
You want, you want them to be
usable for comparative reasons.
283
00:15:25,029 --> 00:15:25,049
Yeah.
284
00:15:25,109 --> 00:15:29,949
Looking at year to year and
making some financial decisions.
285
00:15:30,009 --> 00:15:34,279
You also have office expenses,
supplies, stationery, printing,
286
00:15:34,359 --> 00:15:39,689
rent or lease costs, licenses, tax,
utilities, and business telephone costs.
287
00:15:39,759 --> 00:15:41,829
You have travel, business meals.
288
00:15:41,889 --> 00:15:45,059
Now, automobile costs,
interest, and depreciation.
289
00:15:45,109 --> 00:15:49,649
These deserve extra attention
because limitations, allocations,
290
00:15:49,669 --> 00:15:51,499
or elections may apply.
291
00:15:51,549 --> 00:15:54,789
Erica: And I suppose something that
we need to remember is the category
292
00:15:54,789 --> 00:15:57,099
list is a review guide, right?
293
00:15:57,099 --> 00:16:01,509
So not a promise that every transaction
in the account is deductible.
294
00:16:01,579 --> 00:16:03,439
Anyways, just a good call-out.
295
00:16:03,469 --> 00:16:09,959
Okay, so moving on to category number
three is meals, travel, and entertainment.
296
00:16:09,959 --> 00:16:14,919
So meals and entertainment is one of those
categories people hear about constantly.
297
00:16:14,919 --> 00:16:18,909
If a business owner takes a client
or employee to dinner, what should
298
00:16:18,909 --> 00:16:22,299
they know before they call the
whole thing deductible, Papa?
299
00:16:22,339 --> 00:16:25,829
Lee: Certainly, that's an area
that the IRS made a lot of changes
300
00:16:25,829 --> 00:16:28,039
on over the last several years.
301
00:16:28,139 --> 00:16:28,169
Mm-hmm.
302
00:16:28,179 --> 00:16:33,969
Um, and now a business
entertainment expense is not
303
00:16:34,029 --> 00:16:35,839
deductible for the most part.
304
00:16:35,909 --> 00:16:40,369
A meal, however, is
considered 50% deductible.
305
00:16:40,479 --> 00:16:44,139
So but there are some rules
that you want to follow.
306
00:16:44,199 --> 00:16:51,579
It's not that you can't deduct for travel,
so there should be a distinction between
307
00:16:51,639 --> 00:16:57,709
the fact that you're gonna take somebody
out for a meal or you travel on business.
308
00:16:57,759 --> 00:17:02,849
The business travel and the
meals, they are 50% deductible.
309
00:17:02,969 --> 00:17:03,469
, okay?
310
00:17:03,479 --> 00:17:03,499
Yeah.
311
00:17:03,519 --> 00:17:10,319
But you have to make sure that you
have a clear audit trail on them.
312
00:17:10,339 --> 00:17:16,759
So what the business trip was for, who you
met with, and what the purpose of it was.
313
00:17:16,819 --> 00:17:21,289
A business meal must first have
a valid business connection.
314
00:17:21,289 --> 00:17:26,579
So whether that's business travel or
whether that's a meal, the employee
315
00:17:26,608 --> 00:17:30,419
should generally be present, and
the cost the IRS kind of looks
316
00:17:30,419 --> 00:17:32,239
at, it shouldn't be lavish or- Mm
317
00:17:32,239 --> 00:17:34,669
extravagant under the circumstances.
318
00:17:34,729 --> 00:17:39,199
And as I've said, business meals are
generally subject to a 50% limitation
319
00:17:39,249 --> 00:17:42,019
unless a specific exception applies.
320
00:17:42,069 --> 00:17:48,269
And travel meals, again, if you're away
from home, uh, they are 50% deductible.
321
00:17:48,379 --> 00:17:53,649
. But again, you want to make sure
that you have a separate file on each
322
00:17:53,649 --> 00:17:55,599
trip- And the purpose and so forth.
323
00:17:55,669 --> 00:17:58,529
Entertainment expenses are
generally not deductible.
324
00:17:58,579 --> 00:18:01,829
If food or beverages are purchased
separately from an entertainment
325
00:18:01,839 --> 00:18:05,169
event or separately stated on the
bill, then the meal portion may
326
00:18:05,169 --> 00:18:07,149
be analyzed under the meal rules.
327
00:18:07,159 --> 00:18:09,379
So if you take somebody
to a baseball game-
328
00:18:09,449 --> 00:18:09,669
Erica: Right
329
00:18:09,739 --> 00:18:11,939
… Lee: that, those tickets
are not deductible.
330
00:18:11,999 --> 00:18:16,649
But if you take them to lunch
before the game, you may deduct it.
331
00:18:16,679 --> 00:18:21,309
So keep separate QuickBooks accounts for
travel, deductible business meals, and
332
00:18:21,309 --> 00:18:25,879
non-deductible entertainment, and that'll
help the tax professional review the file.
333
00:18:25,939 --> 00:18:26,969
Erica: Yeah, absolutely.
334
00:18:26,969 --> 00:18:30,909
Okay, so what should the owner
record besides the restaurant
335
00:18:30,949 --> 00:18:33,119
name and the total on the receipt?
336
00:18:33,149 --> 00:18:36,699
What kind of records should they be
keeping about these kinds of things?
337
00:18:36,749 --> 00:18:37,089
Lee: Yeah.
338
00:18:37,109 --> 00:18:41,759
They should document any business travel
or any business lunch, who attended- Mm
339
00:18:41,869 --> 00:18:46,559
… the specific purpose or topic discussed,
the date and amount and location,
340
00:18:46,609 --> 00:18:50,459
and whether the entertainment charge
was separate from food and beverage.
341
00:18:50,499 --> 00:18:53,869
And the lunch is not much help, okay?
342
00:18:53,939 --> 00:18:56,439
If you just write lunch,
that's not much help.
343
00:18:56,449 --> 00:18:56,479
Right.
344
00:18:56,949 --> 00:19:00,429
Um, so again, be a little bit specific.
345
00:19:00,559 --> 00:19:03,359
Who attended, what business was discussed.
346
00:19:03,919 --> 00:19:06,469
And give the transaction a real story.
347
00:19:06,519 --> 00:19:06,769
Erica: Right.
348
00:19:06,769 --> 00:19:09,969
If you do a lot of this, it seems
like a good log that you're keeping,
349
00:19:09,969 --> 00:19:12,049
even on your phone, it's just- Yes
350
00:19:12,059 --> 00:19:16,279
okay, here was the date, here's where
we went for lunch, here's who attended,
351
00:19:16,299 --> 00:19:20,139
and, you know, here's, here were the
brief notes on what we discussed.
352
00:19:20,149 --> 00:19:20,169
Yeah.
353
00:19:20,179 --> 00:19:22,049
Here's, here's a good little outline.
354
00:19:22,049 --> 00:19:26,969
And so that you have a record, you have
a, a record of everything that happened
355
00:19:26,969 --> 00:19:30,989
so that if you ever do get audited, you
can present that information and give
356
00:19:30,989 --> 00:19:33,989
it to the IRS and say, "Right, look,
this is, these were actual business
357
00:19:33,989 --> 00:19:35,999
expenses, and this is what they were for."
358
00:19:36,009 --> 00:19:37,089
So yeah, absolutely.
359
00:19:37,139 --> 00:19:41,419
Okay, so moving on to topic number
four is vehicles and mileage.
360
00:19:41,419 --> 00:19:47,349
So you also listed automobile costs,
fuel, vehicle insurance, and fixed assets.
361
00:19:47,369 --> 00:19:51,449
If a vehicle is used for both
work and personal life, and most
362
00:19:51,459 --> 00:19:52,619
are, if we're honest, right?
363
00:19:52,739 --> 00:19:55,179
What should the owner track, Papa?
364
00:19:55,229 --> 00:20:00,459
Lee: Only the business use
portion is potentially deductible.
365
00:20:00,529 --> 00:20:05,459
Mixed use requires an allocation
supported by records, and usually your
366
00:20:05,529 --> 00:20:10,279
tax professional or your CPA, if you
take mileage, for example, I'm gonna
367
00:20:10,279 --> 00:20:15,309
talk about the difference between
taking expenses from your business or
368
00:20:15,369 --> 00:20:21,759
taking mileage, and then there will be
a form that you'll complete, and you
369
00:20:21,759 --> 00:20:23,779
have a, a business log that says- Mm
370
00:20:23,799 --> 00:20:25,729
"I did X business miles."
371
00:20:25,789 --> 00:20:34,999
And if your mileage, for example, was
8,000 miles, and you did 6,000 for
372
00:20:34,999 --> 00:20:37,679
business, then you had 2,000 for personal.
373
00:20:37,689 --> 00:20:43,649
So you are gonna take the mileage
rate, whatever the federal mileage rate
374
00:20:43,669 --> 00:20:46,549
deduction is, for those 6,000 miles.
375
00:20:46,759 --> 00:20:50,699
So a mileage log should record
the date, the destination,
376
00:20:50,769 --> 00:20:52,579
business purpose, and miles.
377
00:20:53,179 --> 00:20:59,349
Um, QuickBooks does have a tool o-
on your phone if you use the app.
378
00:20:59,449 --> 00:21:03,879
You can go in, and they have a
mileage tool a- and sometimes
379
00:21:03,879 --> 00:21:09,339
that is very helpful in tracking
your mileage and is very useful.
380
00:21:09,379 --> 00:21:14,899
But however you handle it, you need to
have a mileage log- Mm … um, to track
381
00:21:14,899 --> 00:21:18,909
your, your business-related expenses,
and you can pull that log out, total
382
00:21:18,909 --> 00:21:24,379
up the miles, and have, see exactly
what the mileage all totals to be.
383
00:21:24,429 --> 00:21:31,779
With actual expense method, so if you're
actually taking expenses, then the
384
00:21:31,839 --> 00:21:37,579
vehicle has to be apportioned to what is-
Mm … personal versus what is business.
385
00:21:37,579 --> 00:21:37,659
Right.
386
00:21:37,659 --> 00:21:42,349
And, and you may deduct,
certainly, fuel expenses, repairs,
387
00:21:42,379 --> 00:21:46,149
insurance, registration, lease
payments, and depreciation-
388
00:21:46,229 --> 00:21:46,459
Erica: Mm
389
00:21:46,469 --> 00:21:50,099
… Lee: must be divided between the
business and the personal use.
390
00:21:50,099 --> 00:21:54,939
So you don't have to track it all
individually of those items- Mm … but
391
00:21:54,949 --> 00:21:57,549
it can be done at the end of the year.
392
00:21:57,859 --> 00:22:01,829
When you look at your business-related
expenses and say, "Yes, for that truck,
393
00:22:01,879 --> 00:22:07,809
I use it 70% of the time for business,"
fine, you deduct 70% of those expenses.
394
00:22:08,239 --> 00:22:11,849
Uh, business parking and tolls
may be deductible separately
395
00:22:11,909 --> 00:22:13,259
under applicable rules.
396
00:22:13,309 --> 00:22:16,689
Keep them distinct from parking
tickets or other penalties.
397
00:22:16,699 --> 00:22:20,899
So if you get a, a parking
ticket, that's not deductible.
398
00:22:21,069 --> 00:22:21,529
Erica: Right.
399
00:22:22,309 --> 00:22:23,389
Lee: And/or a penalty.
400
00:22:23,399 --> 00:22:23,429
Right.
401
00:22:23,479 --> 00:22:24,709
So that's not deductible.
402
00:22:24,779 --> 00:22:25,479
Erica: Absolutely.
403
00:22:25,509 --> 00:22:30,739
So sort of as a follow-up, so even if a
truck has a business logo on the side,
404
00:22:30,789 --> 00:22:35,899
the owner still needs to track how it
was actually used, don't they, Papa?
405
00:22:35,939 --> 00:22:36,439
Lee: Yes.
406
00:22:36,519 --> 00:22:40,469
A logo does not replace
the mileage or use records.
407
00:22:40,509 --> 00:22:40,889
Erica: Yeah.
408
00:22:40,939 --> 00:22:44,629
Lee: That treatment can differ
based on who owns the vehicle, how
409
00:22:44,629 --> 00:22:49,099
reimbursement is handled, and which
method was chosen in the first year.
410
00:22:49,149 --> 00:22:54,029
Those are planning questions, not
decisions to be made from the bank feed.
411
00:22:54,199 --> 00:22:55,719
Erica: Yeah, absolutely.
412
00:22:55,739 --> 00:22:57,299
Okay, moving on.
413
00:22:57,379 --> 00:23:02,159
Category number five, we're gonna cover
equipment and fixed assets, you guys.
414
00:23:02,169 --> 00:23:03,949
So let's talk about equipment.
415
00:23:04,009 --> 00:23:05,539
I think this is a good place for that.
416
00:23:05,569 --> 00:23:10,499
In your recording, you show that a
truck, computer, or piece of equipment
417
00:23:10,509 --> 00:23:14,959
may belong on the balance sheet instead
of going straight to office supplies.
418
00:23:14,969 --> 00:23:17,749
So how should an owner
think about that one, Papa?
419
00:23:17,759 --> 00:23:21,789
Lee: An item expected to
provide value beyond the current
420
00:23:21,819 --> 00:23:23,829
year may be a fixed asset.
421
00:23:23,829 --> 00:23:29,079
So it has to be considered to
have value after year one, um,
422
00:23:29,109 --> 00:23:31,279
or considered a capital item.
423
00:23:31,319 --> 00:23:35,029
The business exchanged cash
for property it still owns.
424
00:23:35,089 --> 00:23:39,739
The money didn't simply disappear
as an ordinary monthly expense.
425
00:23:39,749 --> 00:23:44,249
So in other words, you have
traded one asset for another.
426
00:23:44,289 --> 00:23:48,279
If you paid out cash, you now
have less cash, but you have
427
00:23:48,289 --> 00:23:50,739
some type of fixed asset.
428
00:23:50,809 --> 00:23:54,779
Um, the tax return may recover
the cost through depreciation,
429
00:23:54,799 --> 00:24:00,129
Section 179, bonus depreciation,
a safe harbor, or another rule.
430
00:24:00,619 --> 00:24:05,249
QuickBooks should preserve the purchase
details so the tax professional
431
00:24:05,299 --> 00:24:07,029
can make the correct decision.
432
00:24:07,079 --> 00:24:10,109
In other words, scan the bill-
433
00:24:10,239 --> 00:24:10,469
Erica: Right
434
00:24:10,479 --> 00:24:12,029
… Lee: into QuickBooks, okay?
435
00:24:12,109 --> 00:24:12,659
Erica: Mm.
436
00:24:12,719 --> 00:24:12,749
Yes.
437
00:24:12,759 --> 00:24:17,649
Lee: Um, the $2,500 figure is often
discussed for small purchases.
438
00:24:18,597 --> 00:24:23,927
You know, it's a election, it's a de
minimis safe harbor for qualifying
439
00:24:23,957 --> 00:24:27,827
taxpayers- Mm-hmm … without an
applicable financial statement.
440
00:24:27,867 --> 00:24:32,617
It is not a universal rule that
everything below 2,500 is automatically
441
00:24:32,627 --> 00:24:36,727
deductible as an expense or
everything above it is capitalized.
442
00:24:36,777 --> 00:24:41,077
But the safe harbor has conditions,
including consistent book treatment
443
00:24:41,137 --> 00:24:43,737
on an annual election with the return.
444
00:24:43,797 --> 00:24:48,377
Amounts above the threshold may still
be deductible under other rules, and
445
00:24:48,387 --> 00:24:52,997
amounts below it may require different
treatment when the conditions are not met.
446
00:24:53,017 --> 00:24:56,727
Keep the bill, the purchase date,
the description, the serial, or
447
00:24:56,737 --> 00:24:59,157
identifying information when useful.
448
00:24:59,237 --> 00:25:04,047
Total cost, business use information,
financial documents, and date the
449
00:25:04,057 --> 00:25:05,777
property was placed in service.
450
00:25:05,777 --> 00:25:07,717
So that's important to know.
451
00:25:07,767 --> 00:25:11,147
Just because you expense something
doesn't make it deductible.
452
00:25:11,257 --> 00:25:11,267
Mm-hmm.
453
00:25:11,267 --> 00:25:13,637
In other words, you have to put it in use.
454
00:25:13,687 --> 00:25:18,967
It has to be before the end of
the tax period, whether you're a,
455
00:25:18,967 --> 00:25:21,657
um, a calendar or a fiscal year.
456
00:25:21,667 --> 00:25:21,697
Right.
457
00:25:21,857 --> 00:25:24,677
Whatever that period is.
458
00:25:24,937 --> 00:25:25,357
Erica: Mm.
459
00:25:25,387 --> 00:25:28,327
It really comes down to
having great systems, right?
460
00:25:28,367 --> 00:25:29,087
You need systems.
461
00:25:29,137 --> 00:25:31,607
It doesn't have to be something
complicated, but a method for
462
00:25:31,607 --> 00:25:35,437
helping you track this information
so that, again, if you ever do
463
00:25:35,437 --> 00:25:37,257
get audited, you have it there.
464
00:25:37,307 --> 00:25:40,287
You can supply that information
and back up, like, what you're
465
00:25:40,287 --> 00:25:42,257
saying is what it comes down to.
466
00:25:42,307 --> 00:25:42,687
So love that.
467
00:25:42,687 --> 00:25:42,907
Mm-hmm.
468
00:25:42,907 --> 00:25:47,597
So what should someone do if they are
unsure whether a large purchase is
469
00:25:47,597 --> 00:25:50,447
equipment or an ordinary expense, Papa?
470
00:25:50,497 --> 00:25:54,387
Lee: First of all, they should not
bury it in supplies or miscellaneous
471
00:25:54,417 --> 00:25:57,047
expenses merely to clear their bank fee.
472
00:25:57,117 --> 00:26:02,687
They need to make sure it has a specific
treatment, and that they need to record
473
00:26:02,687 --> 00:26:07,947
it in a clear holding or a fixed asset
category with a supporting document.
474
00:26:08,007 --> 00:26:08,097
Mm.
475
00:26:08,107 --> 00:26:11,697
In other words, they may need
to make a journal entry and, you
476
00:26:11,697 --> 00:26:16,167
know, then they can contact their
bookkeeper or their tax professional
477
00:26:16,277 --> 00:26:21,647
to determine the correct handling
of, you know, that, that purchase.
478
00:26:21,717 --> 00:26:28,027
And because each particular fixed asset
is gonna be looked at according to
479
00:26:28,027 --> 00:26:30,677
the tax rule regarding that purchase.
480
00:26:30,737 --> 00:26:34,297
You know, a, a large purchase
deserves its own question.
481
00:26:34,337 --> 00:26:38,147
Don't let the bank feed make
that tax decision for you.
482
00:26:38,587 --> 00:26:38,597
Mm.
483
00:26:38,687 --> 00:26:39,807
Erica: Ab- absolutely.
484
00:26:39,857 --> 00:26:41,467
Lee: In other words, it,
it's a big number, it should
485
00:26:41,607 --> 00:26:43,727
determine how it gets handled.
486
00:26:43,767 --> 00:26:44,017
Erica: Right.
487
00:26:44,017 --> 00:26:45,787
You should give some time to that number.
488
00:26:45,837 --> 00:26:46,727
Absolutely.
489
00:26:46,737 --> 00:26:46,767
Right.
490
00:26:46,777 --> 00:26:48,187
Okay, so moving on.
491
00:26:48,267 --> 00:26:51,647
Category number six, loan
and principal interest.
492
00:26:51,657 --> 00:26:57,927
So one of the clearest examples in your
recording was the loan payment, Papa.
493
00:26:58,187 --> 00:27:04,827
Why is the full amount leaving the bank
not the same as a full business expense?
494
00:27:04,947 --> 00:27:06,697
Lee: Because the principal portion…
495
00:27:06,697 --> 00:27:09,827
So when you take out a
loan, you incur a liability.
496
00:27:09,917 --> 00:27:11,697
A loan is not an expense.
497
00:27:11,767 --> 00:27:15,217
The interest is an expense
for borrowing money.
498
00:27:15,557 --> 00:27:20,007
But the principal portion reduces the
loan liability on the balance sheet.
499
00:27:20,037 --> 00:27:24,907
Paying back borrowed money is not
the same as incurring a new operating
500
00:27:24,987 --> 00:27:30,293
expense, like I said The interest
portion may be deductible when the debt
501
00:27:30,303 --> 00:27:36,503
and use of proceeds qualify, although
limits and tracing rules can apply.
502
00:27:36,523 --> 00:27:44,073
So a $1,000 bank withdrawal might include
890 of principal and 110 of interest.
503
00:27:44,123 --> 00:27:50,173
Posting the entire $1,000 to an
expense overstate the expense and
504
00:27:50,183 --> 00:27:52,203
leaves the loan balance wrong.
505
00:27:52,263 --> 00:27:58,253
So posting the entire payment to principal
can hide also a legitimate tax deduction.
506
00:27:58,303 --> 00:28:02,953
And I think that that deserves at
least some discussion that you have to
507
00:28:02,953 --> 00:28:08,953
understand when you are entering a check
in QuickBooks and you're paying the
508
00:28:08,953 --> 00:28:14,523
loan, if you don't have the principal
and interest breakdown, then I recommend
509
00:28:14,523 --> 00:28:20,353
clients that they, if they can't get
that information, to post the total
510
00:28:20,353 --> 00:28:24,793
check to the principal, and then they'll
receive a document at the end of the year
511
00:28:24,803 --> 00:28:28,693
for the interest, and they can make a
journal entry for the interest expense.
512
00:28:28,703 --> 00:28:34,213
So that's a very practical tool on, you
know, how rather than, uh, wait and see
513
00:28:34,213 --> 00:28:36,483
if you can get the information, this…
514
00:28:36,613 --> 00:28:38,883
Because some companies
do not provide that.
515
00:28:38,883 --> 00:28:39,243
Mm-hmm.
516
00:28:39,253 --> 00:28:41,823
And it will be done at
the end of the year.
517
00:28:41,823 --> 00:28:46,503
So use that lender statement
or amortization schedule if the
518
00:28:46,503 --> 00:28:48,383
split is unavailable each month.
519
00:28:48,463 --> 00:28:53,343
Keep the payment in a clear loan account
and make a supporting adjustment with
520
00:28:53,343 --> 00:28:55,253
your bookkeeper or your tax professional.
521
00:28:55,293 --> 00:28:59,143
Attach the annual statement or
other supporting information to the
522
00:28:59,143 --> 00:29:02,533
adjustment that you're gonna make,
the journal entry, if you will.
523
00:29:02,953 --> 00:29:03,113
Erica: Mm-hmm.
524
00:29:03,123 --> 00:29:06,503
Lee: And because one payment,
you know, can affect both the
525
00:29:06,503 --> 00:29:08,723
balance sheet and the profit loss.
526
00:29:08,733 --> 00:29:09,223
Mm-hmm.
527
00:29:09,223 --> 00:29:12,283
QuickBooks needs split,
not just the bank total.
528
00:29:12,343 --> 00:29:13,633
Erica: Yeah, absolutely.
529
00:29:13,633 --> 00:29:17,523
As we've stated over and over again,
what happens in real life does
530
00:29:17,523 --> 00:29:20,523
need to be reflected in QuickBooks.
531
00:29:20,583 --> 00:29:20,723
That is important.
532
00:29:20,723 --> 00:29:20,813
Right.
533
00:29:21,003 --> 00:29:21,813
Most excellent.
534
00:29:21,833 --> 00:29:22,963
Okay, moving on.
535
00:29:23,103 --> 00:29:27,273
Section seven, what does not
become deductible automatically?
536
00:29:27,273 --> 00:29:30,973
So Papa, I would love if we
could do a quick myth round.
537
00:29:31,033 --> 00:29:37,183
I want to give listeners a few places
where the answer is not automatically yes.
538
00:29:37,193 --> 00:29:37,913
So here we go.
539
00:29:37,943 --> 00:29:42,123
Here is this quick kind of section
that we're gonna give some myths
540
00:29:42,163 --> 00:29:44,223
that people believe about deductions.
541
00:29:44,223 --> 00:29:48,753
So if I paid for it from the business
account, is it deductible, Papa?
542
00:29:48,823 --> 00:29:49,513
Lee: No.
543
00:29:49,603 --> 00:29:53,663
Payment source does not establish
business purpose or tax treatment.
544
00:29:53,723 --> 00:29:54,533
Erica: Absolutely.
545
00:29:54,563 --> 00:29:54,933
Okay.
546
00:29:55,193 --> 00:29:59,313
So if QuickBooks calls it an
expense, is it deductible, Papa?
547
00:29:59,363 --> 00:29:59,803
Lee: No.
548
00:30:00,483 --> 00:30:06,083
QuickBooks, you know, can name an account
and organize records, but the federal and
549
00:30:06,093 --> 00:30:08,553
state tax rules determine deductibility.
550
00:30:08,643 --> 00:30:09,503
Erica: Absolutely.
551
00:30:09,503 --> 00:30:15,303
So if I bought equipment before December
31st, I automatically get the entire
552
00:30:15,303 --> 00:30:17,573
deduction this year, don't I, Papa?
553
00:30:17,643 --> 00:30:18,553
Lee: Uh, no.
554
00:30:18,563 --> 00:30:24,297
Property business use It has to be placed
in service before the end of the year.
555
00:30:24,307 --> 00:30:28,897
So just by writing the check,
if you don't put that asset or
556
00:30:28,897 --> 00:30:33,787
that fixed asset into service, it
won't qualify for that deduction.
557
00:30:33,847 --> 00:30:34,727
Erica: Absolutely.
558
00:30:34,777 --> 00:30:39,857
If I took a client to a show and
dinner, the entire evening is a
559
00:30:39,857 --> 00:30:41,327
business expense, isn't it, Papa?
560
00:30:41,457 --> 00:30:41,967
Lee: Generally, no.
561
00:30:41,967 --> 00:30:42,507
No.
562
00:30:42,647 --> 00:30:46,797
Entertainment is usually non-deductible,
and the meal needs to have a
563
00:30:46,797 --> 00:30:49,067
separate analysis and documentation.
564
00:30:49,107 --> 00:30:51,617
Erica: So the bank
statement shows the charge.
565
00:30:51,657 --> 00:30:53,997
I have all the proof I need.
566
00:30:54,037 --> 00:30:56,427
I mean, I must have all
the proof, don't I, Papa?
567
00:30:56,467 --> 00:31:01,677
Lee: The statement may prove payment,
but it doesn't prove what was purchased
568
00:31:01,737 --> 00:31:03,967
or why it was a business expense.
569
00:31:03,977 --> 00:31:09,427
So you need to have that bill
to support the business expense.
570
00:31:09,487 --> 00:31:10,447
Erica: Absolutely.
571
00:31:10,497 --> 00:31:14,437
Okay, a write-off means the
business gets the money back, Papa.
572
00:31:14,437 --> 00:31:16,837
I mean, it definitely should, doesn't it?
573
00:31:16,867 --> 00:31:17,767
Lee: N- no.
574
00:31:17,847 --> 00:31:22,317
A write-off is a deduction,
generally reduces taxable income.
575
00:31:22,387 --> 00:31:22,827
Absolutely.
576
00:31:22,827 --> 00:31:25,477
The savings depends on
the taxpayer's situation.
577
00:31:25,507 --> 00:31:26,847
Erica: Absolutely.
578
00:31:26,917 --> 00:31:32,137
Okay, category number eight, moving
into records that support deduction.
579
00:31:32,157 --> 00:31:36,487
Okay, so you showed people how to
attach a receipt inside of QuickBooks.
580
00:31:37,165 --> 00:31:40,275
What should a good supporting
record tell us, Papa?
581
00:31:40,325 --> 00:31:45,565
Lee: The payee, the date, amount,
and what was actually purchased-
582
00:31:45,575 --> 00:31:49,205
Mm … that supports the proof of
payment, a description of the item
583
00:31:49,255 --> 00:31:51,595
or service, and the business purpose.
584
00:31:51,635 --> 00:31:55,145
For meals, who attended and
what business was discussed.
585
00:31:55,175 --> 00:32:00,335
For vehicles, the mileage or use record
and the business destination or purpose.
586
00:32:00,345 --> 00:32:06,225
For assets, the acquisition information,
cost, improvements, business use,
587
00:32:06,295 --> 00:32:12,505
depreciation, or Section 179 information,
and disposal information when the
588
00:32:12,515 --> 00:32:14,855
asset is later sold or retired.
589
00:32:14,865 --> 00:32:14,875
Mm.
590
00:32:14,935 --> 00:32:18,815
And that's really important because,
uh, there, there are a lot of
591
00:32:18,825 --> 00:32:24,025
supporting documents on the tax
return that are important to be
592
00:32:24,035 --> 00:32:28,355
fully provide the information so the
accountant can, or the tax professional
593
00:32:28,405 --> 00:32:31,025
can maximize that deduction.
594
00:32:31,035 --> 00:32:31,045
Mm.
595
00:32:31,085 --> 00:32:35,475
Also, a bank or a credit statement
can support payments, but proof of
596
00:32:35,515 --> 00:32:39,645
payment alone does not establish
the entitlement to a deduction.
597
00:32:39,675 --> 00:32:44,565
Again, you need the receipt or the
document of what was purchased.
598
00:32:44,625 --> 00:32:49,225
Electronic payments can be useful when
they're complete, legible, secure, and
599
00:32:49,225 --> 00:32:53,265
retained for the required period of
time following the business document's
600
00:32:54,105 --> 00:33:00,735
retention policy, and the tax professional
can advise about discarding documents.
601
00:33:00,745 --> 00:33:01,595
So it's important- Mm
602
00:33:01,595 --> 00:33:03,725
to get the advice from a, a professional.
603
00:33:03,795 --> 00:33:04,665
Erica: Most excellent.
604
00:33:04,685 --> 00:33:09,065
Okay, so Papa, what is the practical
habit you want someone to begin this
605
00:33:09,085 --> 00:33:11,145
week if they could only do one thing?
606
00:33:11,185 --> 00:33:16,205
Lee: Well, I would say attach the
bill when the transaction is fresh,
607
00:33:16,275 --> 00:33:18,575
not months later, or the receipt.
608
00:33:18,585 --> 00:33:18,595
Mm.
609
00:33:18,725 --> 00:33:22,305
Add the business purpose memo
at the same time, particularly
610
00:33:22,305 --> 00:33:25,885
when you think about credit card
receipts or debit card receipts.
611
00:33:25,915 --> 00:33:28,585
You know, make sure
you get those receipts.
612
00:33:28,645 --> 00:33:28,995
Um-
613
00:33:28,995 --> 00:33:29,365
Erica: Yeah
614
00:33:29,415 --> 00:33:31,835
… Lee: use the correct vendor and category.
615
00:33:31,855 --> 00:33:36,325
That's extremely important when you're
going back and looking at an expense.
616
00:33:36,385 --> 00:33:41,395
And split mixed transactions rather than
forcing the full amount into one account.
617
00:33:41,405 --> 00:33:45,155
So if there's- Mm … multiple accounts,
um, you know, split it correctly.
618
00:33:45,195 --> 00:33:50,945
And reconcile the accounts so missing and
duplicate transactions are easier to find.
619
00:33:50,995 --> 00:33:52,525
Erica: Yes, absolutely.
620
00:33:52,565 --> 00:33:54,805
Okay, that was so good, Papa.
621
00:33:54,805 --> 00:34:00,515
So now let's give people a
15-minute expense review.
622
00:34:00,545 --> 00:34:04,125
I think let's give everyone
one practical action.
623
00:34:04,175 --> 00:34:05,695
Open QuickBooks, you guys.
624
00:34:05,755 --> 00:34:10,255
Set a timer for 15 minutes, and do this
review, 'cause I don't want this podcast
625
00:34:10,264 --> 00:34:13,795
to turn into something that you're simply
listening to, you know, taking in the
626
00:34:13,795 --> 00:34:15,525
information, but then doing nothing.
627
00:34:15,585 --> 00:34:18,574
We want this to actually
move the needle for you.
628
00:34:18,585 --> 00:34:19,635
So do it.
629
00:34:19,635 --> 00:34:20,335
Get it out.
630
00:34:20,355 --> 00:34:25,387
If you're in your car, when you get
home- Open QuickBooks and set a timer
631
00:34:25,437 --> 00:34:27,837
for 15 minutes and do this review.
632
00:34:27,847 --> 00:34:30,717
You are not preparing the tax return yet.
633
00:34:30,746 --> 00:34:34,016
You are finding the questions
while there is still time to
634
00:34:34,087 --> 00:34:35,786
answer them, and that's important.
635
00:34:35,786 --> 00:34:39,206
This is why this is so valuable,
because you're ahead of the curve.
636
00:34:39,217 --> 00:34:41,127
Most people don't do this now.
637
00:34:41,137 --> 00:34:45,797
Most people wait until it really
is truly too late So get it out.
638
00:34:45,806 --> 00:34:47,027
Let's go through this together.
639
00:34:47,027 --> 00:34:52,527
Okay, so number one, run a profit and
loss for January 1 through today, and
640
00:34:52,527 --> 00:34:58,327
compare it with the same period last
year if prior year date is reliable.
641
00:34:58,377 --> 00:35:02,237
Number two, scan the major
expense groups from, from Papa's
642
00:35:03,077 --> 00:35:08,267
walkthrough: advertising, automobile,
fees, subscriptions, insurance,
643
00:35:08,337 --> 00:35:14,837
professional fees, repairs, meals,
travel, rent, supplies, licenses,
644
00:35:14,887 --> 00:35:18,037
utilities, interest, and depreciation.
645
00:35:18,067 --> 00:35:22,067
And you guys, I am gonna put this
all in a PDF so you can just see
646
00:35:22,067 --> 00:35:25,997
it and walk through it and kind
of fill it out as you're going.
647
00:35:26,007 --> 00:35:31,007
Number three, open the detail
behind the five largest or
648
00:35:31,007 --> 00:35:33,247
most unusual expense balances.
649
00:35:33,287 --> 00:35:37,457
Ask what changed and whether
every transaction belongs there.
650
00:35:37,497 --> 00:35:43,477
Number four, review uncategorized expense,
ask my accountant, miscellaneous expense,
651
00:35:43,517 --> 00:35:46,167
and any personal or owner categories.
652
00:35:46,177 --> 00:35:46,817
Make a list.
653
00:35:46,867 --> 00:35:51,527
Do not reclassify items you
do not understand, you guys.
654
00:35:51,537 --> 00:35:52,537
So important.
655
00:35:52,577 --> 00:35:56,007
Number five, find equipment
and vehicle purchases.
656
00:35:56,087 --> 00:36:00,717
Confirm that invoices and purchase
details are attached, and flag
657
00:36:00,747 --> 00:36:03,357
anything that may be a fixed asset.
658
00:36:03,397 --> 00:36:09,317
Number six, find loan payments and confirm
that principal and interest are separated
659
00:36:09,317 --> 00:36:12,017
or supported for year-end adjustment.
660
00:36:12,067 --> 00:36:17,807
Number seven, choose three meal,
travel, or vehicle transactions and
661
00:36:17,807 --> 00:36:22,377
check whether the business purpose
and supporting records are complete.
662
00:36:22,607 --> 00:36:26,677
Number eight, send the question
list to the bookkeeper or tax
663
00:36:26,677 --> 00:36:31,577
professional, and schedule the
planning conversation before year-end.
664
00:36:31,587 --> 00:36:33,507
So important, you guys.
665
00:36:33,537 --> 00:36:33,847
Lee: Yeah.
666
00:36:33,917 --> 00:36:37,587
Do not begin by asking,
"How much can I write off?"
667
00:36:37,597 --> 00:36:37,857
Erica: Yeah.
668
00:36:37,917 --> 00:36:38,347
Lee: Okay?
669
00:36:38,437 --> 00:36:43,197
Begin by asking what happened, how
it was used, and how can I prove it.
670
00:36:43,227 --> 00:36:46,437
Erica: So true, and this does not
have to be, again, something that's
671
00:36:46,437 --> 00:36:49,407
complicated and takes so much time.
672
00:36:49,447 --> 00:36:52,477
It's something that you can just
set up a simple system for and
673
00:36:52,477 --> 00:36:54,067
you're doing as you're going.
674
00:36:54,067 --> 00:36:58,327
And if you don't have that system yet,
this is a great time to put it in place.
675
00:36:58,677 --> 00:36:59,307
So good.
676
00:36:59,327 --> 00:37:04,997
Okay, so Papa, I think the big takeaway
today is that legitimate deductions begin
677
00:37:05,007 --> 00:37:07,587
long before a tax return is prepared.
678
00:37:07,597 --> 00:37:11,907
They begin when the business separates
personal and business activity,
679
00:37:11,927 --> 00:37:16,707
chooses useful QuickBooks categories,
records the purpose, and keeps the
680
00:37:16,707 --> 00:37:19,407
documents that support the transactions.
681
00:37:19,517 --> 00:37:20,367
Would you agree?
682
00:37:20,417 --> 00:37:21,057
Lee: That's right.
683
00:37:21,297 --> 00:37:25,247
The goal is not to create the
most expense accounts or chase
684
00:37:25,297 --> 00:37:26,617
every possible write-off.
685
00:37:26,667 --> 00:37:31,781
The goal is to give your tax professional
Complete, accurate information so
686
00:37:32,071 --> 00:37:37,691
you can claim what the law allows
and avoid claiming, um, expenses
687
00:37:37,791 --> 00:37:39,611
that are not business related.
688
00:37:39,731 --> 00:37:40,761
Erica: Absolutely.
689
00:37:40,761 --> 00:37:44,841
So if you're listening and thinking,
"I'm not sure my QuickBooks would give
690
00:37:44,841 --> 00:37:49,271
me that information," start with our
free QuickBooks Clarity Scorecard.
691
00:37:49,291 --> 00:37:51,641
This is why I created this.
692
00:37:51,641 --> 00:37:54,791
It is such a useful resource, you guys.
693
00:37:54,821 --> 00:37:58,381
We will link it in the show notes,
and you can also find it on our
694
00:37:58,381 --> 00:38:00,781
website at leedavisoncompany.com.
695
00:38:00,841 --> 00:38:05,241
And we are also building our QuickBooks
course for business owners who want help
696
00:38:05,251 --> 00:38:07,081
putting these systems into practice.
697
00:38:07,231 --> 00:38:08,531
So join the wait list.
698
00:38:08,531 --> 00:38:12,661
I have an official wait list on our
website at leedavisoncompany.com,
699
00:38:12,711 --> 00:38:16,231
and I'll also drop it in our show
notes so you can get on that wait list.
700
00:38:16,291 --> 00:38:21,641
And when we finally do launch our revamped
QuickBooks course, which is going to be
701
00:38:21,711 --> 00:38:24,571
amazing, you can be the first to know.
702
00:38:24,591 --> 00:38:26,661
You can be the know in your circle.
703
00:38:26,751 --> 00:38:28,021
Just love that.
704
00:38:28,091 --> 00:38:32,471
And you guys, if you, again, if you have
any QuickBooks questions or a topic you
705
00:38:32,471 --> 00:38:37,581
would like for us to cover, just email
us at [email protected].
706
00:38:37,591 --> 00:38:42,181
We read and respond to every single
email, and we would love to hear from you.
707
00:38:42,271 --> 00:38:45,911
Absolutely, give us that feedback,
'cause we wanna know, for sure.
708
00:38:45,921 --> 00:38:48,681
Lee: Thanks for listening, and
we will talk to you next time.
709
00:38:48,841 --> 00:38:50,181
Erica: Yes, absolutely.
710
00:38:50,181 --> 00:38:51,111
We'll see you next week.
711
00:38:51,161 --> 00:38:51,891
Bye for now.
712
00:38:55,821 --> 00:38:59,161
Thanks for tuning in to QuickBooks
Mastery for small business success.
713
00:38:59,321 --> 00:39:03,141
Lee: If you enjoyed this episode,
hit subscribe and stay connected
714
00:39:03,141 --> 00:39:05,411
with us at leedavisoncompany.com.
715
00:39:05,461 --> 00:39:07,971
Erica: We know QuickBooks can
be overwhelming, so we've put
716
00:39:07,971 --> 00:39:10,841
together a free resource to
help you get started right away.
717
00:39:10,891 --> 00:39:13,741
Grab your copy at leedavisoncompany.com,
718
00:39:13,991 --> 00:39:18,071
and when you do, you'll also get
access to our VIP email list, where
719
00:39:18,071 --> 00:39:22,331
we share exclusive QuickBooks tips,
business strategies, and support.
720
00:39:22,481 --> 00:39:23,881
Lee: And we'd love to hear from you.
721
00:39:23,931 --> 00:39:28,031
If you have a QuickBooks question
or a business challenge, send it our
722
00:39:28,031 --> 00:39:31,091
way at [email protected].
723
00:39:31,151 --> 00:39:33,621
We might feature it in a future episode.
724
00:39:33,761 --> 00:39:36,481
Erica: We're here to help you
simplify QuickBooks and grow your
725
00:39:36,481 --> 00:39:38,121
business, one step at a time.
726
00:39:38,381 --> 00:39:38,621
See you next time.
