Why I don’t want to see Miscellaneous on your P&L

It’s not that I have anything against Miscellaneous. My life so far has been a collection of Miscellany. However, it’s not a tax deductible expense.

Look, I’ve seen a lot of tax returns. And nowhere on a tax return is there a line item for Miscellaneous. Or Uncategorized Expenses, the default QB account. It doesn’t exist because it doesn’t mean anything. As a friend of mine just said, “I’ve never gone into a store and bought miscellaneous.” (Thanks, Lori.)

Is the purchase supplies? Materials, office supplies, franchise fees, burritos for the overnight crew, cleaning supplies, fixtures, or what you have? Everything fits somewhere. If it doesn’t, is it really a business expense? And no, those tickets you bought to see Moby don’t count either, don’t think you can slip them under Miscellaneous and no one will notice.

This isn’t to say you can’t create new accounts for your expenses that don’t seem to fit anywhere. Of course you can – assuming they’re legit business expenses that you can support during an audit. But we want to be clear about what the expense is, and we want them to fit in a category that can help you see on your P&L how you’re doing at any given time, and sticking things in Miscellaneous doesn’t tell you a thing, does it? Except that your business incurred expenses for .  .  . well, who knows what for?  

You can’t run a business effectively with that sort of non-specific thing going on. At year end, I want to look at my P&L and see how much I spent on each category, and if I’m looking at Miscellaneous I’m still wondering, “What did I spend THAT on?” Then I’d have to go back and look. Rather defeats the purpose of doing the bookkeeping in the first place, doesn’t it?

In addition to having clean financials that mean something to you and whoever else has to look at them, there is no place for Miscellaneous on a tax return. This is even more important to you, since we really want to keep the IRS happy.

I recently met with an IRS auditor. You know, the official guys. We had a good time, telling tax jokes and sharing taxpayer stories. Of course, the tax return I handed him didn’t have Miscellaneous on it, or Uncategorized Expense, or anything that wasn’t specific. Since it was pretty clear, we went over franchise fees, just a quick calculation to see if the total could be easily arrived at from sales. And guess what! It was!

But I digress. If there had been a line item for Miscellaneous on there, I’m certain he would have asked for all the receipts. And this is because: Miscellaneous doesn’t mean anything. You might as well say, “yada, yada, yada,” for all the good it’ll do you.

Your bookkeeper’s job is to give you clean books from which clean tax returns can be prepared. If you don’t have a bookkeeper, that doesn’t mean the IRS doesn’t expect clean books just as they would from me.  Keep your books clean, your receipts in order, and your head above water. It takes just a little extra time, and is well worth the effort.

(About those pesky receipts, the kind you can’t see because they fade: Scan them, somehow. You can tape them to a sheet of paper and scan a full sheet. You can get a receipt scanner. You can use something like Concur Breeze, which allows you to scan your receipts when you get them, and it then uploads so you have easy access to categorize them and get them into QB. You can make a copy of them, if you’re into that sort of thing. But don’t count on a pile of faded receipts to keep you out of trouble if someone should come looking.)

Preparing for Year End: Things to Do

Now that it’s mid-December, have you reviewed your books to see what you need to do to be ready for 2012? There’s no better time to prepare, assuming you haven’t done so already. If you have, that would have been a good time to prepare. The sooner you get everything together, the happier you’ll be once January gets here.

                And it will get here, make no mistake.

                Have you reconciled all your accounts? I prefer to reconcile accounts monthly – it’s much easier to do each month as it passes by, but if you haven’t reconciled at all yet this year, it’s time to get started.

What accounts should you reconcile?

1.       Checking accounts

2.       Savings accounts

3.       Line of Credit Accounts

4.       Credit card accounts

These are the obvious ones, but also take a look at other balance sheet accounts. Do you have loans you’re paying on? Does your year end balance reconcile to the lender’s year end balance? If you have liabilities, including the dreaded payroll liabilities, are they accurate? Is your sales tax liability account accurate?

                Why do we reconcile? For one thing, if you don’t reconcile your checking accounts, you run the risk of missing income or expenses. If you’ve been recording all your vehicle payments against the loan account without accounting for interest, you’re missing out on the interest expense. Your payroll liabilities may have been paid but not recorded, missing another expense.

                Downloading your transactions from your bank doesn’t mean you’ve reconciled either. How do you know there aren’t any mistakes? If you don’t reconcile, how will you find duplicated transactions? Better to be assured your books are correct than to assume they are. Should you be selected for a random audit, the time to have cleaned everything up would have been when it happened, not when you’re panicked about what the IRS is going to find when they ask for your QuickBooks file, which they now do.

                Check your major purchases too. Did you buy anything during the year that should be listed as a Fixed Asset? Make sure it’s classified properly. Your tax preparer will need to know about any purchases during the year, including the date purchased and amount you paid.

                I’m not big on New Year’s resolutions, but resolving to reconcile your books monthly is a good resolution, any time you make it. It takes so much less time than trying to do it at year end, and that’s a good thing, right?

                 

Preparing for Year End: The 1099 Situation

I don’t know about you, but the end of the year always gets here before I’m ready for it. And whether we’re ready or not, it will be here anyway, so I try to prepare in December, if not sooner, so I at least have a chance at starting 2012 at an advantage.

1099’s are often overlooked until year end, but the sooner we prepare for them the easier they are to get done once January gets here.  The 2011 Schedule C (Profit or Loss from Business for sole proprietors) now has a line item asking: “Did you make any payments in 2011 that would require you to file Form 1099?” While it has always been a requirement to file 1099’s, now the question is being asked on your tax return, and if you answer Yes, the next question is: “Did you or will you file all required Forms 1099?”

If you answered yes to the first part the only answer that works here is Yes. Of course, that means you have to actually have done it, or will do it, or have me do it, or whatever works for you. Otherwise you’re just asking for trouble. There’s a penalty for each 1099 not filed, and last time I checked it was $50 per occurrence.  

Whether you’re a sole proprietor, a corporation, an LLC, or a partnership, you’re required to file 1099’s.

Amounts to Report

$600 or more, unless it’s for royalties, which is $10 or more.

Who gets a 1099?

The following are the biggest categories to be aware of:

• Nonemployee compensation (subcontractors), unless they’re incorporated
• Rental income (yes, you must send your landlord a 1099)
• Mileage, nonemployee
• Auto reimbursements, nonemployee
• Attorney fees and gross proceeds (any amount)
• Car expenses, nonemployee

There are more but those are the major ones that might apply to you.

When to Report

1099’s are due to the IRS by February 28^th, and to the recipients by January 31^st.

If you’ve paid someone more than $600 this year, you’ll want to make sure they’ve provided a W-9 to you, or have provided their EIN. If you’ve paid more than $600 and don’t have a W-9 yet, get it before the end of the year so you’re ready.

If they refuse to provide a W-9, give them no more payments. And in the future, don’t pay anyone without getting a W-9 first, just in case, even if you don’t anticipate paying them more than $600 in a year.

If you’ve made payments and are unable to get the EIN info from the payee, give me a call. I’ll tell you the best way to handle it.

Here’s a link to the W-9 form:  http://www.irs.gov/pub/irs-pdf/fw9.pdf

Meals and Entertainment

Isn’t it cool that we can take meals and entertainment as a business expense? I mean, it’s like getting paid to eat! Running your own business has so many tax advantages!

Alas, this isn’t really one of them. People often think it is, but that would be wishful thinking. There are times when meals are a deductible business expense. Perhaps you’re having lunch with a customer or a vendor or a partner, and you’re talking about business. Then you have a legitimate business expense. Save your receipts, and write the name of your dining companions on the receipt, and the purpose of the meeting. Enter the info into QuickBooks (assuming you’re like most of us and using QuickBooks). It helps to put the additional info into the memo section. Keep these receipts in a safe place where you can easily access them should someone suggest an audit.

That would be the IRS of course. No one else cares who you eat with.

And of course, the deduction on your taxes is 50% of the total, because the IRS assumes you’d be eating anyway. (And yes, tips are included in the total.)

What is not a legitimate business expense? On your way to a job site, for your convenience, being out of the office, not having access to your kitchen. The IRS doesn’t care if your business keeps you away from home, forcing you to eat elsewhere. The way they see it, you’ll eat anyway, whether you’re on the job or just cruising around looking for trouble. Why should that be a business expense?

They actually have a pretty valid point there. I’m not likely to jump on the IRS bandwagon for no good reason, but you can’t use your business to reduce your food costs. You have to eat anyway, don’t you? How does that make it a business expense? You say you wouldn’t have to dish out for food if you didn’t have to be away from home? The IRS says, “pack a lunch then.” You wouldn’t pay your grocery bills out of your business account would you? (Please say no, or we need to have a talk.) Same diff.

Keep your receipts for true business meals. Annotate them carefully. Keep them safe, just in case. If you want to be reimbursed for eating, look into mystery shopping.

And entertainment? What do you think?

Making JE's Accrual Instead of Cash

Are JE’s Cash or Accrual in QB?

(QuickBooks Tip of the Day)

They’re cash of course. But let’s say you’re creating journal entries to accrue payroll, but the client also likes to see a cash report as well as accrual. Your journal entry is going to show up on the cash report, which isn’t what we want to see, is it? It’s an accrual, after all, and we want it to show only for accrual reports. But there’s a workaround for this pesky little situation.

Let it be known -- I can’t take credit for this one. A friend of mine discovered this, and it’s such an amazing solution I had to steal it and share it. It took her several days of working with QB support for them to figure it out as well. I did warn her I would be doing so, which makes my theft okay. Besides, it’s for the public good.

Here’s the key: “Whether a JE appears on a cash report is driven by the AP/AR accounts.”

So . . . if there is no AP or AR in your JE, do this: enter the first line with AP or AR with a zero amount.

And that’s it. The account doesn’t have to be for anything at all, just listed as the first account on the JE, and that will solve the problem for the reports.

It’s a simple solution to a common problem that I, for one, never would have thought of. Like most QB issues, there is a solution, if only we can find out what it is.

Do You Specialize?

Do you specialize, or do you try to do everything?

I recently stopped at an In and Out, a burger place that’s been going strong for quite a few years. Since they first started, their business model hasn’t changed: hamburgers, fries, shakes and soft drinks. While other burger places are coming out with a new sandwich of the week, places like In and Out, Five Guys Burgers and Fries, and Dick’s in Seattle stay true to the original plan: the basics. They’re all successful, and growing, without making changes to the menu. They’re expanding, and they have legions of devoted fans.

What do you do in your business? Do you try to do anything and everything that comes your way, or do you stick with what you do best, and market that aspect of your business?

Look at burger places again. Does In and Out and Five Guys do print advertising, television, radio? They don’t need to. They have their reviews to speak for them, and since they don’t have a new product of the week to promote, they don’t have to. Instead, they make the best of what they have, and they stick to that formula.

Are you building a name for yourself with what you do, and working on bringing that brand to the market?

The more things you try to do, the less time you have to get known for any one thing, and the more you find yourself working in directions that won’t benefit you in the long term. It’s difficult to specialize in one thing and get really good at it while trying to do everything else at the same time. The things you’re not as good at will siphon your energy, and your marketing message will get cluttered.

Unless you’re an organization big enough to encompass many different areas, you’ll have a harder time convincing people of your mastery in any one area. But if you devote your time and marketing to one aspect only, not only will you improve at that one thing, but you’ll become known for specializing in that one thing.

I see this same mistake with many beginning business owners. I’m guilty of it myself. At the beginning we do whatever it is we need to do to get business, and if it’s in an area we’d rather not do we push those feelings aside and we take on the work anyway. We tell ourselves it’s just short term, just while we get started, and that we can change later. But then what happens? We get more people calling for the thing we don’t specialize in because our name is out there, and much of our work is referred from earlier clients. So we’re expected to keep doing that one thing, and we don’t know how to turn down work.

If you’re anything like me, you don’t turn away work. You keep taking it on because we love the ideas of 1) getting work, 2) people paying us for work, 3) paying the rent.

What do we do then? How do we return to specializing in the one or two areas we’re really good at, and move on from there so we can focus on that? How do we get known for the few things on our menu instead of being expected to have a little bit of everything?

I’m not entirely sure yet, since I’m still finding my own way, but one way is to do your professional education in that area, get any certifications you can, and let your clients know that you specialize in whatever it is, and ask them for referrals. Chase down the possibilities in your area of interest, and don’t chase every stray opportunity that flies by. Talk up your area of expertise. Blog about your area of expertise. Join LinkedIn groups in your narrowed focus of expertise. If there isn’t one, start one.

Most importantly, tell everyone, people you know and people you don’t, what you specialize in, and that you’re looking to add clients to that area of your practice.

Instead of being a jack-of-all-trades and master of none, try being an expert in the areas you choose, and build your brand in that area. Save your energy for what matters to you, and build the work life you want, not the one you fell into. It may take time, but what else have you got to do?

Starting Your Own Business?

Want to know how to eliminate the possibility of making mistakes? Want a foolproof method for ensuring you start off making lots of money with no obstacles in the way?

Good luck with that. One thing you can be sure of, when starting your own business, is that mistakes will be made. Opportunities missed. You’ll find yourself working longer hours than you’d planned, you’ll find that your business model needs to be revamped, you’ll find that what works for someone else doesn’t work for you, and you’ll find that if it were that easy, everyone would do it.

Worried about charging too much/not enough? Don’t worry. You will. You’ll find yourself eating some costs or spending too much time on a fixed rate job, and, if you’re lucky, you’ll find a job you quoted easier than you thought, and you’ll come out ahead. Admittedly, that’s a bit more unlikely, but it could happen.

There are guidelines you can follow, and you can solicit advice from a multitude of people, some of whom may have no idea what you’re doing, or trying to do, and others who do, and some of it will work, and some of it won’t, and you may not know the difference until you try it out and see for yourself.

The only one who can tell you what will definitively work and what will not work for your business is you. For example, some people swear by cold calling. Many don’t. How should this affect you? Should you try it and see? Or do you know you don’t want to go with that method of marketing? There’s no wrong decision because it’s your decision alone.

“But how do I know what will work and what won’t before I’ve even started!” you wail, and I tell you this because it’s the truth: You don’t. You don’t know until you do it, and then you find out, and then you know what to do next time, or what not to do.

There are some things that are a given. Don’t run an expensive yellow pages ad if you’re running a web-based business. Do as much free marketing as possible. Meet as many people as possible. But givens are another topic, aren’t they?

The method I used to start my business was this: Plan out what I can, start by throwing myself into it, and then see what happens. The fun of having your own business is being able to change directions, to back up, slow down, or speed up, and there’s no one to tell you not to. (There will be people who will be happy to tell you, but it isn’t their business, it’s your decision alone.) You get to decide. You get to make your own hours, and who hasn’t heard that making your own hours means you get to work as many weekends as you like? It’s true. You’ll probably work more hours than you’d planned.

Small businesses can react quickly to market forces. We don’t have to submit ideas to someone else and have them forgotten. We get to do it ourselves. Of course, that means there’s a level of responsibility that we wouldn’t have with a job. It’s up to us to get it done, and that may be an inconvenience, and it’s up to us to make the decisions, and they could be bad decisions, and then there’s no one to blame but ourselves.

But that’s how it works. Greater rewards, greater risk. If you don’t want risk, you should get a job, though these days that’s also a risk, isn’t it? But it’s stable. And if you want a raise, you better be prepared to ask someone for one.

It’s up to you. Your decisions. Your profit, or your loss, but it’s more than money. It’s how you want to live your life, and there is no right or wrong way, there’s only what you decide to do with it, and how you react to what you find out as you go.

Which is sort of like life, isn’t it?