Entertainment

Most people understand what a business meal is, but what is business entertainment? Entertainment can be a variety of things, from an opera to a concert or basketball game. Are these deductible? Yes under the same conditions as for meals. The entertainment has to be with other people, you have to discuss or conduct business and you are allowed to deduct 50% of the expense on your tax return. On your books it would be at 100%. However you going to the movies every weekend with your girlfriend or boyfriend does not count; so don’t try to pull that one. You also need to document in a calendar or other record who the event was with and for what purpose.

Provided by Alamo Bookkeeping Associates LLC

Meals

Meals are considered a business expense under certain conditions. 1st, the meal you are having should be business related where your business is discussed and 2nd it should be with another person. This does not mean a meal with yourself; it has to be with another person. However, if you are traveling away on business then the meal is deductible even if you are only paying for yourself. If you are buying breakfast every morning at McDonalds for yourself that does not count as a business expense. That would be a personal expense. If you buy food for someone else, such as an employee or a client, then that is a business expense. The IRS only allows 50% of the expense to be deducted on your tax return in most cases, so consider that before spending on that lavish meal, it is not 100% deductible. For bookkeeping purposes it is. That is where there is a difference between company books and the tax return for yourself or the company.

There are some other classifications for meals that are expensed under other conditions for people who regularly travel as part of their job which I will not discuss here. However, if you fall under that category as a regular traveler, you will want to look into what is called per diem expenses.

Travel

Travel usually entails for most business owners, things such as going to a seminar or trade show in another city, like Las Vegas, the capital of trade shows. Travel expenses include car rentals, plane tickets, hotel charges, etc. You cannot deduct travel that you are taking for a personal vacation, even if you make phone calls to your business while you are away. The travel has to be for a business purpose. If you travel regularly for business such as sales calls to clients/customers out of town this may be a major expense category for you. Meals are expensed in its own category, not under travel.

Uniforms

Some businesses, especially in the service industries, have employees wear a uniform. Uniforms are great for a business to appear more professional. Uniforms can be expensed as long as it is not just regular clothes that you can use elsewhere. For example, if everyone in your place of business is required to wear jeans and a blue top, this is probably not considered a uniform because you can use jeans and the top anywhere as a normal piece of clothing. However if the top you have is embroidered with a company name and or logo, the cost of the shirt can be considered a uniform expense. Regular clothes that you buy to use at your place of business are not considered a business expense, even if you bought it for a special occasion such as a public speaking engagement. Neither is the cost of dry-cleaning for those clothes deductible.

However, let’s say you are a professional dancer and have to buy costumes for shows. These would be considered a business expense because your work is as an artist and you probably wouldn’t wear that sequined dress or skirt as normal clothing.

Telephone expense

Usually this includes a phone you have in your office. However many people have either only a cell phone, or may have more than one cell phone, one of which is used only for business. If you have a phone in your house it cannot be deducted as a phone expense unless you have a 2nd line that you can claim as a home office or fax line. As for cell phone bills, you need to make a separation between business use and personal use and expense only the business portion on your books. For instance, if your cell phone is used 50% for your business, then deduct that portion of your bill on your books. You may be able to accomplish this by paying one month out of your business account and the following month out of your personal account.

Bank Fees

Because banks can hit you with so many different types of fees, especially with all the recent bank consolidations, it has its own category. This includes monthly bank fees, NSF or returned check fees, copy fees and just about any other type of bank fee. This category does not include the credit card discount fee a bank deducts from deposits to your account, which is a separate category. But it can include the other miscellaneous fees banks charge these days for having credit card deposits which are normally listed in your merchant credit card statement. Also as a reminder you can always try to ask the bank for credit on some of the fees they charge. Many banks will give you a one time or once a year credit. It never hurts to ask.

Dues and Subsciprtions

Most people think about magazine subscriptions when they see this category. But this is not what this necessarily means. It includes any dues you pay to belong to an organization such as the Better Business Bureau, Chamber of Commerce or other type of business association. For apartment rentals, it would include apartment association dues or other real estate associations. Some dues may be a one time charge such as dues to Costco or may be a recurring annual or monthly charge.

Insurance Expense

Insurance for your business would include liability insurance generally, but other types of insurance can be included, such was worker’s compensation and disability insurance. Car insurance would be included if a vehicle is for business use, however if you car is for personal use only, you would not expense that insurance on your books.

Other Taxes

Other taxes can include property taxes paid for personal property such as your office furniture etc. You may also have inventory taxes such as car dealers who pay a monthly inventory tax. This category can include any other taxes that you may not pay regularly, including penalty taxes.

Payroll Taxes

Payroll Taxes should include social security, medicare, state unemployment and federal unemployment taxes. There are taxes that are paid by both the employee and employer, and there are some that are paid by only the employer. You can also break down between these two types on your bookkeeping so you know how much is the employer portion, and how much is the employee portion which comes out of their wages.

Salary and Wages

Wages paid generally means hourly or salary employees that you pay on a regular basis. Wages should be the gross amount paid before the deduction of any income or social security taxes. It does not include the amount of tax you pay as an employer, that is accounted for separately as payroll taxes. Wages should not include contract labor paid. It should include anyone who has worked for you during the year on a regular basis, even if they did not work all year or only for a short period.

Contract Labor Expenses

Contract Labor is a tricky category. Basically, anyone you pay over $600 during a year and is not a corporation is considered an outside contractor. This does not mean people who regularly work for you, more on this later. If you do real estate and pay someone to paint, fix the walls do landscaping, etc. they are contract labor. If you have a business that employs day labor, or other people who work for you on an occasional basis are contractors. This also means that you need to send them a 1099 tax form for the year, so you need to get all their information, including current address and social security to be able to send them the 1099 tax form.

Utilities

This category would include the basics electricity, gas and water. If you pay for garbage collection it is also under this category. Internet services can be considered part of your utilities, or you can categorize it as internet services. If you provide cable TV in your office for customers to watch while they are waiting, that would be considered part of your utilities expense. However, you cannot charge your personal cable bill as part of your utilities. Your utilities for your home should also not be expensed here, that is also a part of the home office calculation that is done on your personal tax return.

Rents

Rents would include office space you use for your business, or rent paid for a storage facility. Rent also includes equipment you may rent for a project, such as a tractor to clear land. Rental equipment should have a separate category from rent you are paying for office or storage space. You should not be expensing rent for your personal residence or apartment in this category, even if you work from home. That is a separate calculation done on your tax return under the home office category, but this should not appear on the books for your business.

Professional Fees

This expense category generally applies to fees paid to accountants, bookkeepers and attorneys. This would include legal fees your attorney charges you to file legal documents. There may be other types of professionals that could fall under this category, such as architects. This would not include fees paid to medical doctors.

What are Commissions and Fees

The expense category of commissions and fees should cover fees you pay to other professionals such as a real estate agent, or if you pay a referral fee to a person who finds a customer or client for your business.

This category should not include sales commissions paid to a sales person who regularly works for you.

Fees would include recording fees such a notary fee, title recording fees or a registration fee. Also fees you pay to take out permits with City or County offices can fall here.

What are the Expense Categories to Use?

As far as categorizing expenses, since most bookkeeping, especially for small businesses is to be able to prepare your tax returns at the end of the year, I recommend using the categories as they are set up on a tax return. For a business schedule C, that would be as follows; advertising, commissions & fees, insurance, interest, professional fees, office expense, rent, repairs & maintenance, supplies, meals & entertainment, utilities and wages paid. I will give come some further clarification as to what falls in some of these categories
.

Getting Those Receipts Together

OK, so now we come to receipts. The important thing is, that you make sure your receipts are readable, and if not, or if they tend to fade because of cheap fax paper being used (try the finger rub test, rub the receipt and see if it fades) or any other reason, make sure you write down the date and amount of purchase on the receipt, especially for any big purchases like furniture or computers as this information is needed on the tax return. The other annoying feature on some receipts is the length. Some stores like to give warranty or return information and/or advertising on receipts. I recommend you cut off that portion, unless you need the warranty info to reduce the amount of paper you are sorting.

I recommend that you separate receipts by month, and if there are certain categories that you regularly spend such as office supplies or cleaning supplies, bunch those together in categories. This also makes things easier as bookkeeping is done by categories. The categories depend on the business.

I generally ask my clients to simply stick the receipts in a large envelope by month to give me each month.

If you purchase any items by cash, separate those items from the other receipts. Again I don't recommend you buy too many things with cash because if those are lost or damaged, you have no record of your purchase.

If there are any items you purchased that you did not receive a receipt for, I recommend you make a receipt and put the sellers name and address on it. Sometimes sellers don't want to give a receipt, and that may help him but it doesn't help you, you need a receipt as proof of purchase, so either get one from them or make one and have them sign it at the time of purchase. If they refuse to sign at least make a receipt for your records.

Next, what are the expense categories?

Bank and Credit Card Statement Tips

The other very important set of papers you need for doing your books is a set of bank and credit card statements used for your business. Some small businesses, especially when starting out may use a personal credit card and even their personal bank account for purchases. As in my previous post, I advise to not do this or at least keep it to a minimum.

It is also a good idea to request the canceled checks from the bank. Some banks send only a copy of the checks in the statement but the important thing is that the print on the check is readable. Some banks make small copies of the check that is almost impossible to read. This is where it is helpful to keep a check register where you note the checks you have been writing. If you don't have a copy of the check or have an incomplete register then you need to write down by each check who the check was made to and the amount. Otherwise if you can't read it you can't record it properly.

Although banks offer "Online Banking", I have generally found that you may not able to view a check immediately and either you have to request the bank copy and wait a day or two to view it, or the bank may charge you to request a copy that is over 60 days old, sometimes as much as $3.00 a copy, which is bullshit. That is just another fee banks can hit you with so don't depend on online banking.

Also make sure that you have every month needed and are not missing a month or two because that will delay and/or throw off the bookkeeping records. I inevitably get people who bring me their statements and have one or two months missing. That causes delays and interruptions in the work flow.

If you are using a personal credit card, I recommend you highlight the items that pertain to the business to make it easier to go through the statements.

Usually the first month or two you may need to attach an explanation as to what some of the expenses are for. I recommend you do this for items that are not obvious as to what the expense is for.
Next: Receipts

DBA or Incorporation papers

Many times for tax offices and banks, you will be asked to present the documents showing your DBA, or Does Business As and your articles of incorporation if you incorporated. A Does Business As is usually applied for at your local County Clerk’s office, however you may need to check with your local government office to find out where to apply for one. This document basically tells others that you are doing business under a certain name, let’s say Sunshine Floor Cleaning, but gives the information as to who is behind that business name. This document generally has a low cost of about 20.00.

Articles of incorporation are generally applied for with your Secretary of State office and are done on a state level. These generally cost around $350.00 (filing fee). This makes the business is own entity and it then has to file its own tax reports on a local, state and federal level. Various tax offices may sometimes ask for a copy of your “articles’ which is why it is a good idea for your accountant/bookkeeper to have a copy of these. This saves you the time of having to look for these every time a particular tax office requests them. These are also often asked for when opening up new bank accounts and/or applying for loans, so keep plenty of copies or have it scanned to your computer so you know where they are.

Next : Bank and Credit Card Statements

What information should I gather to start my books?

This is the list I give to new clients to bring to me to get started on their books.

DBA or Incorporation papers

Bank statements

Credit Card Statements used for business

Receipts for Expenses

Sales figures

Loan documents for any business loans

Contracts on cars purchased

Information on vehicles used in the business

List of Assets Purchased for the Business

Contracts entered into, such as bids for jobs won

Information on employees

Tax return for prior year

I will discuss what these are in more detail.

Next: DBA or Incorporation papers

How the Home Office calculation works

From: Business School 101

and Alamo Bookkeeping Associates

Here is how it works. You take the total square footage of your house. Then you calculate the square footage of the office space you are using, whether this is a separate room or an area of a room. Lets say you are using a 10 foot by 10 foot room and your house is 1000 square feet total. The area you are using is 100 square feet (10 times 10).

Take 100 divided by 1000 and you get .10 or 10 percent.

Then you total all your expenses listed. For example.

Electricity 2000, Water 500, Insurance 1000, total 3500.

Now take the 3500 and multiply by .10 (10 percent).

You get to deduct $350.00 for your home office on your tax return as an expense. This may not sound like much but as they say, every little bit helps.

Most people don't actually enter this number on their accounting books, they put it on the personal tax return. However, the moral of the story is, keep your utility and insurance bills. Don't throw them away if you have a home office.

Next: So how do I set up a set of books?

What is a home office expense?

From: Business School 101

and Alamo Bookkeeping Associates

So what exactly are considered “Home Office” expenses?

1st let's begin with whether you should claim a home office. The plus is that it becomes a deduction on your tax return. However depending on the size of your house this may end up being just a few hundred dollars for the year, if that. The drawback is that if you sell your house, you have to recalculate the amounts you expensed for depreciation of the home and add that to your gain, if you have one. In other words, you may have to take back the depreciation expense you deducted each year on the house when you sell it. This is called recapture. You can however, deduct other expenses and leave out depreciation on the home.

If you decide that you are going to expense your home office. Then the information you need is the following:

The purchase price of your house if you choose to depreciate. You can also choose not to depreciate, in which case you don't need the purchase price. At least not now, you will need that if and when you sell your house in the future.

The total square footage of your home.

The square footage of the room or space you use for your office.

Interest on the house payment.

Insurance on the house.

Repairs and maintenance on the house and/or on the actual office space in the house.

Utilities.

If you are renting the house then you would use the rent payment instead of interest and depreciation.

Next: How the actual home office calculation works.

A Tricky Thing called Office Expense

There is a tricky type of expense called "Office Expense". This item is mostly interpreted as the place/location you work out of. This can be an office location you are renting, or it can be a room in your house if you don't rent an office space outside your home. However for tax purposes, "Office Expense" actually encompasses a bunch of other type of costs pertaining to running your office. For example, your internet service can be considered an office expense. Also supplies you buy, such as paper plates, cups, toilet paper, etc are part of your office expense. Office supplies such as ink, paper and other types of office supplies can be part of your office expense. For IRS purposes you can group this bunch together as Office Expense. However most business people want to keep track of these items separately for bookkeeping.

Now, if you are renting office space, obviously you are going to track the rent payment as your office expense, or maybe you will call it office rent. The choice of description for this item is yours when you set up your books. For IRS purposes, it is considered rent expense.

The problem comes in when the office you use is in your home. The IRS rules state that the room you use should be a separate area in your house. It does not necessarily have to be a separate room, just an area within your house.

Now, just how would you track this for bookkeeping? The answer is that most small business owners who are working from their home office do not enter this as a separate expense on their books. They simply calculate that when tax time comes.

Next, what exactly goes into the calculation of a home office?

How do I keep track of my miles?

From Business School 101

and Alamo Bookkeeping Associates

Alright, so now that you know you should be keeping track of your miles or your actual auto expenses, just how do you go about doing that?

Obviously, if you are going to use actual expenses (the hard way), then save your receipts and keep track of them in your bookkeeping. If you are going this route you will probably accumulate a lot of receipts, especially for gas.

If you are going to do it the easy way, that is, track your miles, then all you need is some type of journal to write this in, such as a calendar, notebook, etc. There are actual mileage log books available at office supply stores, but you don't really need one as a small calendar will do.

What are the things you should be noting in your journal or calendar?

1. The miles to/from the location you are doing business at. For instance, you are an interior decorator, so you have to travel to a house. The house is 15 miles away from your office. So you would track the 30 miles round trip. If you are traveling from your home to the office first, then going to the client's house, the miles to your office don't count. Those are considered commuting miles to your office. If you are going from your home to the client's office, those miles do count. Commuting to or from your home to your office is not a tax deductible expense.

2. The dates you traveled. This should be plain and simple. However as my personal experience has taught me, most business owners forget this part. They usually remember the trip, however they often can't remember when they took it. Sometimes they even confuse which year they took the trip. This is why you should keep a log, and write things down as they happen. Most of us can’t remember where/when we went this past week, much less months ago.

3. The purpose of your trip. For example, you went to a tradeshow about interior decorating in another city. You would note on your calendar, "trip for trade show". You went to a client's house to take measurements for curtains. You would note, "trip to client X’s house. "

Keeping this log will kill two birds with one stone, you have a record for yourself and for the IRS, should you need to provide proof.

Next- A tricky thing called office expense.

What other things should I be keeping track of?

From: Business School 101

and Alamo Bookkeeping Associates

Well there are lots of them, however I will discuss some of the big ones. The main item I see fall through the cracks is mileage for use of your car/truck, etc. and office expenses.

There are two ways to record car expenses; the easy way and the hard way. The hard way is to keep track of all your actual expenses. These are: gas, repairs and maintenance, insurance, and a tricky item called depreciation of your vehicle. If your vehicle is considered a vehicle for hire, such as a taxicab, van, limo, bus etc, then you must track actual expenses; you do not have another option.

However if your vehicle is not a vehicle for hire then you have the choice of tracking your miles. This would be the easier way to record car expenses. This little item is often overlooked by business owners, especially new ones, who haven't got a clue how important this is. This item will usually turn out to be a large amount when tax time comes so it is very important that you keep track of it.

Next: how should I keep track of my miles?