Method to track tax related deductions in one place, in one QuickBooks file, to make year end tax filing much easier.
It is generally good advice to keep personal transactions completely separate from business transactions, keeping two separate set up books, and having two separate checking accounts.
There are benefits, however, to tracking some personal items using our business account. Once benefit is that it keeps the items we need to track for taxes in one location and tax preparation and compliance if often one of the main goals for small businesses. The business QuickBooks account is often much more organized then the personal records because special focus has been spent on tracking the accounts and on using the bank account for guidance.
If we can use the same QuickBooks account for tax related items we must track it can simplify our lives. We do run the risk, however, of combining business and personal records in a confusing way so we do need to be very careful.
Items we may want to track in our QuickBooks files that are not business related but which we may need to deduct for taxes include schedule A deductions like charitable deductions, state taxes, medical costs. We may also need to track school costs, IRA contribution, and child care.
There are different methods we can use to track these costs in a business account. We will use a method we are calling the equity draws method.
When an owner draws money out of the business bank account we call this a draw and record it in the equity section. If the owner spends money from the business checking account on personal items we will also record the transaction as a draw rather then a business expense.
By consciously making payments out of the business checking account for personal items we want to track, like tax related items, and categorizing them in Equity draws accounts we can track these spending and still keep our income statement as business only.
To track the tax deductions as draws we will create multiple draws accounts with specific names referring to what we want to track like charitable donation, medical expenses, and son on.
When we make payments for these items we will record the decrease in cash and the other side will go to one of our new specific draws accounts. In essence we are still just recording personal expenses as draws but now we are categorizing the types of draws, and in so doing we are generating documentation we can provide our tax professional with at year end, removing the need to shuffle through a lot of personal records to find the deductions we need.
For more accounting and QuickBooks information see accounting website.