WASHINGTON — The Internal Revenue Service today opened the 2011 tax filing season by announcing that taxpayers have until April 18 to file their tax returns. The IRS reminded taxpayers impacted by recent tax law changes that using e-file is the best way to ensure accurate tax returns and get faster refunds.

Taxpayers will have until Monday, April 18 to file their 2010 tax returns and pay any tax due because Emancipation Day, a holiday observed in the District of Columbia, falls this year on Friday, April 15. By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have three extra days to file this year. Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns.

The IRS expects to receive more than 140 million individual tax returns this year, with most of those being filed by the April 18 deadline.

The IRS also cautioned taxpayers with foreign accounts to properly report income from these accounts and file the appropriate forms on time to avoid stiff penalties.
“The IRS has made important strides at stopping tax avoidance using offshore accounts,” said IRS Commissioner Doug Shulman. “We continue to focus on offshore tax compliance and people with offshore accounts need to pay taxes on income from those accounts.”

The IRS also reminded tax professionals preparing returns for a fee that this is the first year that they must have a Preparer Tax Identification Number (PTIN). Tax return preparers should register immediately using the new PTIN sign-up system available through www.IRS.gov/taxpros.

Who Must Wait to File

For most taxpayers, the 2011 tax filing season starts on schedule. However, tax law changes enacted by Congress and signed by President Obama in December mean some people need to wait until mid- to late February to file their tax returns in order to give the IRS time to reprogram its processing systems.

Some taxpayers – including those who itemize deductions on Form 1040 Schedule A – will need to wait to file. This includes taxpayers impacted by any of three tax provisions that expired at the end of 2009 and were renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act Of 2010 enacted Dec. 17. Those who need to wait to file include:

• Taxpayers Claiming Itemized Deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes (add link to Schedule A). In addition, itemized deductions include the state and local general sales tax deduction that was also extended and which primarily benefits people living in areas without state and local income taxes. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
• Taxpayers Claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students – covering up to $4,000 of tuition and fees paid to a post-secondary institution – is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit extended last month and the Lifetime Learning Credit.
• Taxpayers Claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.

In addition to extending those tax deductions for 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act also extended those deductions for 2011 and a number of other tax deductions and credits for 2011 and 2012 such as the American Opportunity Tax Credit and the modified Child Tax Credit, which help families pay for college and other child-related expenses.  The Act also provides various job creation and investment incentives including 100 percent expensing and a two-percent payroll tax reduction for 2011.  Those changes have no effect on the 2011 filing season.

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the recent tax law changes. In the interim, taxpayers affected by thesetax law changes can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes. Additional information will be available at www.IRS.gov.

For taxpayers who must wait before filing, the delay affects both paper filers and electronic filers. The IRS urges taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax law changes and ensure accurate tax returns.

Except for those facing a delay, the IRS will begin accepting e-file and Free File returns on Jan. 14. Additional details about e-file and Free File will be announced later this month.

Many Ways to Get Assistance

The IRS is also continuing to focus on taxpayer service. Taxpayers with questions should check the IRS website at www.IRS.gov, call our toll-free number or visit a taxpayer assistance center.

This is also the first filing season that tax packages will not be mailed to individuals or businesses. There are still many options for taxpayers to get paper forms and instructions if they need them. In recent years, fewer and fewer taxpayers received these mailings. Last year, only 8 percent of individuals who filed tax returns received tax packages in the mail. Taxpayers can still get any forms and instructions they need online at www.IRS.gov, or they can visit local IRS offices or participating libraries and post offices.

In addition, individuals making $49,000 or less can use the Volunteer Income Tax Assistance program for free tax preparation and, in many cases, free electronic filing. Individuals age 60 and older can take advantage of free tax counseling and basic income tax preparation through Tax Counseling for the Elderly.

IRS Free File provides options for free brand-name tax software or online fillable forms plus free electronic filing. Everyone can use Free File to prepare a federal tax return. Taxpayers who make $58,000 or less can choose from approximately 20 commercial software providers. There’s no income limit for Free File Fillable Forms, the electronic version of IRS paper forms, which also includes free e-filing.

Check for a Refund

Once taxpayers file their federal return, they can track the status of their refunds by using the “Where’s My Refund?” tool, located on the front page of www.IRS.gov. Taxpayers can generally get information about their refunds 72 hours after the IRS acknowledges receipt of their e-filed returns, or three to four weeks after mailing a paper return.

Taxpayers need to provide the following information from their tax returns: (1) Social Security Number or Individual Taxpayer Identification Number, (2) filing status, and (3) the exact whole dollar amount of your anticipated refund. If the U.S. Postal Service returns the taxpayer’s refund to the IRS, the individual may be able to use “Where’s My Refund?” to change the address the IRS has on file, online.

Also, taxpayers may complete a Form 8822, Change of Address, and send it to the address shown on the form. They may download Form 8822 from www.IRS.gov or order it by calling 800-TAX-FORM. Generally, taxpayers can file an online claim for a replacement check if more than 28 days have passed since the IRS mailed their refund.

We are living in a period of “accelerated change”. Indeed, the ground does seem to be shifting beneath us almost faster than we can comprehend, so it’s important to stay nimble in these difficult times.

One way you can do so is to closely manage your prices. In some cases you may need to ratchet your prices up to cover a commodity cost-spike. Or, you may want to offer special deals to your best customers to help retain their business.

In this article we’ll discuss four methods you can use to manage prices (and change) within QuickBooks.

Create Discount Calculations

Studies have shown that it’s far easier to get additional sales out of existing customers rather than from new customers. Targeted discounts are just one way to try to encourage your customers to buy more.

However, if you do offer a discount, don’t just type over your standard prices on the QuickBooks invoice, create a discount calculation instead. This accomplishes two things:

Your customers see on their invoice exactly how much of a break you’ve given them.
You can track how successful your campaign was.
It’s easy to set up a discount calculation:

Choose Lists, and then Item List.
Click the Item button, and then choose New from the menu (or press Ctrl+N).
As shown in Figure 1, Choose Discount from the Type list.
Assign an item name, complete the description field, and then enter an amount or a percentage.
Choose an account from the list-you may wish to create a separate account so that you can easily track the amount of discounts that you’ve offered.
Choose Tax or Non-tax to indicate whether the discount is applied before or after sales tax, and then click OK.

Figure 1: A discount item allows you to create and track percentage or amount based discounts.

Keep in mind that discounts only apply to the previous row of the invoice or sales receipt. To apply the discount to multiple items, you must create a Subtotal item:

• Choose Lists, and then Item List.
• Click the Item button, and then choose New from the menu (or press Ctrl+N).
• Choose Subtotal from the Type list, and then assign an Item Name and Description, as shown in Figure 2.

Figure 3 shows a multi-line invoice, along with a subtotal and a discount on all of the items.

Figure 2: A subtotal item allows you to apply a discount to multiple items on an invoice or discount.

Figure 3: Include a subtotal on your invoice when you wish to discount multiple items.

Use Price Levels

Price negotiations are becoming more prevalent and you may find that you have to offer a standard discount to one or more customers in order to keep their business.

In such cases, you might find the price level feature helpful, so that you don’t have to remember to include a discount item on each invoice:

• Choose Lists, and then Price Level List.
• Click the Price Level button, and then choose New (or press Ctrl-N).
• As shown in Figure 4, assign a name to the price level, such as 10% Discount.
• QuickBooks Pro users can only establish Fixed % price levels, which are applied globally to all products. QuickBooks Premier and Enterprise users also have the option to create Per Item discounts, where you can selectively discount only certain items.
• Specify whether to increase or decrease item prices, and optionally choose a rounding method.

Figure 4: Price levels allow you to apply automatic discounts to everything a customer purchases.

Note: You can use price levels to increase or decrease prices.

Change Item Prices

Competitive or other pressures may mean that you need to globally change all of your prices at once. Fortunately, you can use the Change Item Prices feature to do so:

• Choose Customers, and then Change Item Prices.
• As shown in Figure 5, select an Item Type from the list, and then select the items you wish to change, or click the Mark All checkbox.
• Indicate a percentage or dollar amount to increase prices by. This can be based on the current price or current cost of the item. Enter a positive number to increase the price, or negative number to decrease the price.
• Click the Adjust button to see the impact of your changes in the New Price column, and then click OK to make the changes permanent.

Timesaver: You can also manually fill-in the New Price column if you prefer to make targeted adjustments to selected items. This is easier than manually opening each item one at a time.

Figure 5: The Change Item Prices feature allows you to adjust multiple prices at once.

Add a Surcharge

We’re fortunate that gas prices are currently far less than were they were just a few months ago. However, who knows how far they may go this summer during peak driving season.

At some point you may need to consider adding a fuel or other type of surcharge to help recover costs beyond what you’ve factored into your existing prices:

• Choose Lists, and then Item List.
• Click the Item button, and then choose New from the menu.
• As shown in Figure 6, choose Other Charge from the Type list.
• Assign an item name, complete the description field, and then enter an amount or a percentage.
• Choose an account from the list, and then click OK. As shown, you may wish to create a separate account so that you can easily track the amount you earn from the surcharge.

Important: As with discounts, Other Charge items only apply to the preceding row on an invoice or sales receipt. Be sure to add a Subtotal item to your invoice if you want the surcharge to apply to multiple rows of your invoice or sales receipt.

Figure 6: The Other Charge feature allows you to compute fuel and other surcharges.

Although it may seem like drudgery, reconciling your bank account is a critical accounting task that you should carry out each month. Doing so helps ensure the integrity of your financial reports, since most of your accounting transactions ultimately affect cash in some fashion.

Further, QuickBooks is a much more powerful tool for your business if you use it to its fullest extent. Most likely you’ve been reconciling your bank account all along, so in this article we’ll discuss the tricks and techniques you need to know to streamline the process.

If you’re new to QuickBooks, you start the bank reconciliation process by having your bank statement in hand, and then choose Banking, and then Reconcile. The Reconciliation screen shown in Figure 1 appears. In most cases, you enter the ending balance from your bank statement, add any interest or fees, and then click Continue.

You mark transactions as cleared, as shown in Figure 2, and then click Reconcile Now. However, it’s not always that simple, so read on to learn how to sail over any hurdles that may appear.

Figure 1: The QuickBooks Begin Reconciliation window.

Figure 2: The QuickBooks Reconcile window.

1. Locate discrepancies
As shown in Figure 1, click the Locate Discrepancies button to display the Locate Discrepancies window shown in Figure 3.

From there, click the Discrepancy Report button to display the report, as shown in Figure 4. This identifies any edited or deleted transactions that may affect your reconciliation.

Figure 3: QuickBooks can help you identify edited transactions that may disrupt your reconciliation.

Figure 4: Ideally your discrepancy report should never have any transactions listed.

2. Confirm your beginning balance
Your beginning balance should always tie to your bank statement, but if it doesn’t, click the Undo Last Reconciliation button until you reach a point where the beginning balance matches your bank statement. You must then redo the reconciliations to bring your books current and resolve the discrepancy.

3. Don’t forget interest and fees
Be sure to record any interest and fees in the window shown in Figure 1. Alternatively you can record deposit and check transactions to record interest and fees, or the very savvy can use journal entries.

If you go this route, be sure to debit cash and credit interest income for interest earnings or credit cash and debit bank charges for any fees incurred.

4. Double-check your ending balance
Always double-check your ending balance input when you start the reconciliation. A simple transposition or other error here can make it appear that you’ve missed a transaction.

5. Look for transpositions
Sometimes you’ll mark all transactions as cleared, but still have a difference. In such cases, divide the difference by 9. If it divides out evenly, then there’s a good chance that you transposed a number on a transaction.

For instance, a $63 dollar difference divided by 9 returns 7 could mean that a transaction was entered incorrectly. As shown in Figure 5, you can right-click on an amount, and then choose Edit Transaction to fix the error.

Figure 5:Right-click on an amount and choose Edit Transaction to correct a mistake.

6. Pick a side, any side
Don’t mix and match deposits and withdrawals. Reconcile your Deposits and Other Credits first, and then confirm that the total items you marked cleared ties to the amount shown on the Reconcile window.

Then reconcile Checks and Payments – doing one side a time limits your search area for missing or misposted transactions.

7. Clear the decks
If you get tangled up in a reconciliation, click the Unmark All button shown in Figure 2 to start over.

8. Enter missing transactions
You can add missing transactions without closing the reconciliation window. Simply choose a command from the menu across the top or from the Home screen. Saved transactions will instantly appear in the reconciliation window.

9. Check undeposited funds
Choose Banking, and then Make Deposits. If the window shown in Figure 6 appears, you must complete the deposit process for these transactions.

Figure 6: Undeposited funds can pose problems with your reconciliation.

10. Hide unnecessary transactions
Click the Hide Transactions after the Statement’s End Date check box shown in Figure 2 to have fewer transactions to sift through.

11. Void old transactions
Old, uncleared transactions can linger on forever – locate such transactions within your register, choose Edit, and then Void. The banking system generally considers checks to be stale after six months.

Such lingering transactions are often duplicates of a transaction that cleared.

12. Clear voided transactions
Always clear transactions with a zero balance as these won’t affect your reconciliation, but do clutter up the Reconcile window.

13. Bank online
Some institutions allow you to synchronize your records with your online statement. This involves a matching process that automatically clears transactions that match, and makes it easy to quickly post new transactions.

14. Use your keyboard
Rather than using your mouse to click on each transaction that you wish to clear, use the arrow keys on your keyboard to move up and down. Press the spacebar to toggle a transaction as cleared or uncleared.

15. Walk away and come back later
If you just can’t seem to get the unreconciled difference down to zero, the best thing to do is click the Leave button shown in Figure 2, and then resume the reconciliation tomorrow. A fresh eye can do wonders.

16. Reconcile More Frequently
If you can access your bank account online, you can reconcile your bank statement as often as you wish. Consider reconciling accounts with heavy volume weekly or twice a month.

Many businesses can benefit from tracking revenue and expenses by project. Known as job tracking in QuickBooks parlance, it’s ready for your immediate use. For instance, let’s say that your company installs residential elevators. Several different builders contract with you to install your product in their high-end homes. In such cases the builder would be the customer, while each house that you install an elevator in would be a job. You can associate as many jobs with a customer as you wish. As you’ll read in this article, you can not only associate revenues, but also expenses with jobs, as well as create a budget so that you can track your prognostication against reality.

Jobs versus Classes

Users sometimes confuse jobs with classes. Both allow you to track revenue and expenses, but are typically used for different purposes:

• Jobs are helpful when you want to track activity for a specific project for any of your customers. In addition, jobs allow you to create estimates and utilize progress invoicing.
• Classes are effective when you want to track costs by department, for an internal project, or other activities where you’re not necessarily billing a customer. In addition, you must enable classes in QuickBooks by choosing Edit, Preferences, Accounting, and then choose Use Class Tracking on the Company Preferences tab. For instance, a medical office might create a class for each doctor, so that expenses can be allocated fairly among practitioners. Once you enable class tracking, you’ll notice Class fields appear on various transaction screens that you can use as needed.

Note that you can associate customer invoices and expenses with classes, but you’ll find that jobs typically work better for that purpose. However, you can also use jobs and classes in conjunction with each other, for even greater tracking capabilities.

Create a Job

Unlike classes, no special set up is required for jobs, which are always associated with a customer. Since you probably already have numerous customers established in QuickBooks, let’s see how to add a job:

1. Click on the Customer Center button on the toolbar (or press Ctrl+J).
2. Right-click on a customer name in on the Customers & Jobs tab, and then choose Add Job, as shown in Figure 1. Alternatively, you can choose Add Job from the Edit menu after you select a customer name.

Beware: It’s possible to create a job within a job, so be sure that you click on the customer name, and not a job name, when you click Add Job.

The Add Job choice appears amidst many other choices.

3.  At this point the New Job window appears, as shown in Figure 2. Assign a job name, and then complete the Address Info tab. Much of this should carry forward from the associated customer record, but you can override the information as needed for this job.

The New Job dialog box is almost a mirror image of the New Customer dialog box The Additional Info and Payment Info tabs work in the same fashion as with customers, but you’ll note that jobs have an additional Job Info tab. This allows you to maintain these fields:

4.  Job Status:This field lets you assign one of these labels to the job: None, Pending, Awarded, In Progress, Closed, and Not Awarded. You cannot add additional choices to this list, but you should change the status as the job works through the various stages of its lifecycle.

Start Date: Enter the date the job begins.

Projected End: Enter the expected end date for the job. Doing so will later let you compare how your projected job end dates match up to the actual job end dates.

End Date: Leave this field blank until the job is completed.

Job Description: This field allows you to assign an additional description beyond what appears in the Job Name field at the top of the screen.

Job Type: This user-definable field allows you to assign types to jobs as you wish-choose Add New from the list to add a new type. You can edit or delete this list by choosing Lists, Customer & Vendor Profile Lists, and then Job Type List.

Job Info tab: Confusingly, the Job Info tab also appears when you add a new customer. However, you cannot add a customer and a job at the same time. You can use the Job Info tab to store information about that customer, but it’s best to first add the new customer, and then add the job in the fashion described above.

Assign Jobs to Transactions

Estimates, Sales Orders, and Invoices can only be assigned to a single job, but you can split other transaction types among multiple jobs. Therefore you’ll choose a job name from the Customer:Job drop down at the top of the Invoice screen-estimates and sales orders work in the same fashion. Other transaction types have either a Customer:Job column or a Name column where you can assign line items to specific jobs. For instance, Figure 3 shows the Customer:Job field on the Enter Bills screen. In addition, each transaction screen includes a Billable column where you can indicate whether an expense is reimbursable by your customer. You’ll leave the Billable field blank if you’re simply tracking costs for a given job, or click in the field to place a checkmark that will indicate that your customer should be billed for the charge.

The Customer:Job column on the Enter Bills window is one way to assign expenses to a job.

Payroll: The paycheck detail screen allows you to assign payroll to a job, but it’s best to use QuickBooks time tracking feature to do so. The paycheck detail screen doesn’t allow you to specify whether time is billable, but the other screens do. Choose Employees, Enter Time, and either Use Weekly Timesheet or Time/Enter Single Activity. The Enter Time window is shown in Figure 4.

Enable Time Tracking: Choose Edit, Preferences, Time Tracking, and then Yes to enable time tracking.

Use the Enter Time window to assign billable hours to a job.

Apply payments: Remember to apply customer payments against the job and not the customer itself. Otherwise you might encounter situations where the customer has a credit balance and the job has a debit balance that net out to zero.

Budgets

QuickBooks enables you to create a budget for your job, but there’s a catch: you can only budget within a single fiscal year. So, if your job spans more than 12 months, or crosses fiscal years, you may have to use some creativity, such as splitting the job budget between two fiscal years. However, with that caveat in mind here’s how you’ll create a budget for your jobs:

1. Choose Company, Planning & Budgeting, and then Set Up Budgets.
2. Click the Create New Budget button to launch the Create New Budget wizard.
3. Specify a fiscal year, choose Profit and Loss, and then click Next.
4. Choose Customer:Job on the Additional Profit and Loss Criteria screen, and then click Next.
5. Choose Create Budget from Scratch on the Choose How You Want To Create a Budget screen, and then click Finish.
6. You’re now presented with the screen shown in Figure 5, where you can select a customer and/or job, and then enter your budget on an account by account basis.

All customer and job budgets are stored within a single budget screen.

Consolidated Budget: Keep in mind that you only need to run the Create New Budget wizard once for a given fiscal year. Simply change the Customer:Job field on the budget screen to budget additional jobs. Once you’ve run the wizard, you can view or maintain your budget by choosing Company, Planning & Budgeting, and then Set Up Budgets. If necessary, choose your budget from the drop-down list. QuickBooks automatically assigns a name like FY2009�Profit and Loss by Account and Customer :Job.

Reports

Although job tracking is a helpful way to ensure that you bill your customers for reimbursable expenses, most business owners would agree that the primary benefit is the report capability. As you would expect, QuickBooks provides a variety of job-specific reports-choose Reports, and then Jobs, Time & Mileage to access these choices:

• Job Profitability Summary: This report compares actual costs to actual revenues and shows a dollar difference. You can optionally display a percentage difference-this is helpful if you want to determine margins. To do so, display the report onscreen, and then click Modify Report. Click % Difference, and then click OK. By default this report summarizes all jobs, but you can limit the time frame or filter the report to view selected jobs or types of jobs.
• Job Profitability Detail: As shown in Figure 6, this report allows you to view one customer or job at a time, and provides much more detail than the Job Profitability Summary report. However, this job shows data by inventory item. Note that if you select a customer, then all jobs for that customer are summarized together, but you can also select a single job instead.

The Job Profitability Detail report provides the best overview of a single job.

• Profit & Loss by Job: This report provides a column for every job for the specified report period, and details activity by account-as opposed to the Item ID approach used by the Job Profitability Detail report.
• Unbilled Costs by Job: This key report enables you to track any expenses that you’ve marked as billable but haven’t yet passed along to customers. For instance, the Enter Bills and Write Checks screens enable you to assign expenses to a job. An adjacent field enables you to also mark the charge as billable. In turn, QuickBooks notifies of pending unbilled charges when you invoice the customer.

TIP: It’s easy to disable the “unbilled charges available” prompt on QuickBooks invoicing screen, so it’s a good practice to click the Add Time/Costs button on the Invoicing screen and look for unbilled charges on each tab.

• Open Purchase Orders by Job: Most small businesses don’t use purchase order tracking, but those that do can use this report to determine what items are still on order for jobs in progress.
• Mileage by Job Summary and Detail: Most small businesses simply have to absorb the cost of mileage, and therefore don’t choose to track mileage by job. However, if tracking this level of detail is helpful to your business, these reports will be a key tool. In such cases, use Enter Vehicle Mileage on the Company menu to log your travel, as shown in Figure 7.

You can assign vehicle mileage to jobs-and specify whether the miles are billable.

The Job Is Done

In this article we helped you get up and running with QuickBooks job tracking feature. We discusses how job tracking differs from class tracking, and showed how you can use job tracking to allocate revenue and expenses to jobs, as well as track billable charges. We helped you establish budgets for your jobs, and then we wrapped up the article with an overview of QuickBooks job tracking reports.

SOURCE: Internal Revenue Service

Congress recently approved a federal e-file mandate for tax return preparers, based on recommendations from the IRS, the Treasury Inspector General for Tax Administration and the Electronic Tax Administration Advisory Council.

The requirement will be phased in over two years. As a result of the new rules, preparers will be required to start using IRS e-file beginning:

January 1, 2011— for those of you who anticipate preparing 100 or more federal individual or trust tax returns during the year; or

January 1, 2012— for those of you who anticipate preparing 11 or more federal individual or trust tax returns during the year.

Apply to become an e-file provider now

You must be an authorized e-file provider to use IRS e-file. The authorization process can take 45 days or more, so apply now to make sure you will be ready in January.

For small business owners, tax breaks often come in the form of tax deductions – which can offer a nice little instant cash savings – if you know how to navigate tax law and claim the deductions you deserve (not what you believe you are entitled to).

Large tax deductions are a notorious red flag for the IRS, with home-based businesses, in particular, facing an increase in tax audits due to suspicious deduction activity on income tax returns.

To help you navigate the complex world of business tax deductions, here is some foundational guidance that will help you take the deductions that you deserve.

Recordkeeping – Whatever the deductible expense may be, it is essential to maintain adequate records. There are many bookkeeping and accounting computer software programs available that will provide the basics for tracking expenses. But it is also important to keep receipts, invoices, etc., to back up the numbers. Some types of expenses require additional documentation, such as a log book or diary for business use of your personal vehicle or notations as to the business purpose of the expense (see Entertainment Expenses below). Keeping these records up-to-date will be a time-saver in the long run, especially if the IRS selects your return for audit.

Business Expenses vs. Capital Expenses – One of the first concepts a small business owner needs to understand is the difference between what can be expensed and what must be capitalized.

- Business expenses are expenses that can be deducted in the current year, such as business travel, rents, utilities, supplies, insurance, wages, customer entertainment and tangible items with a useful life of no more than one year or cost less than $100. If you are a for-profit, these expenses are usually tax-deductible.

- Capital expenses are those associated with purchasing fixed business assets, such as property and equipment that has a useful life of more than one year, and must be capitalized and depreciated over a period of years rather than be deducted as a current year expenses.  The number of depreciable years depends on the type of property.   Here are some examples: office furnishings – 7 years, autos and light trucks – 5 years, computer equipment – 5 years, residential rental – 27.5 years, commercial rental – 39 years.

Sometimes even capital items can be expensed all in one year by electing to use a special provision of the tax code that allows personal tangible property such as computers, office equipment, tools and machinery to be deducted in full in the year the property is placed into service.  For 2010, up to $250,000 of such items can be expensed under this provision.

Although repairs are generally considered to be currently deductible expenses, there are occasions when that may not be true.  If a repair or replacement increases the value of the property, makes it more useful, or lengthens its life, then it must depreciated. If not, it can be deducted like any other business expense.

Common Business Expenses - Below are some typical types of business expenses that qualify for deductions and special rules associated with them.

– Car Expenses – To take the business deduction for the use of your car, you must determine what percentage of the vehicle was used for business. Deductible costs can include the cost of traveling from one workplace to another, making business trips to visit customers or to attend meetings, or traveling to temporary workplaces. Be sure to maintain complete mileage records. However, commuting to and from your regular place of business is not a business expense. When it comes to claiming car expenses, there are two methods:

a) Actual Expenses – Add your annual car operating expenses (including gas, oil, tires, repairs, license fees, lease payments, interest on vehicle loans, registration fees, insurance, and depreciation). Multiply the car operating expenses by the percentage of business usage to get your deductible expense. Business-related parking and road/bridge tolls are fully deductible and don’t have to be reduced by the percentage of business use. Note: the interest paid on vehicle loans is not deductible by employees who use their personal vehicles on the job.

b) Standard Mileage Rate – The standard rate changes each year, and, for 2010, it is 50 cents per mile for each business mile driven. Business-related parking costs, road/bridge tolls, and the business-use portion of interest paid on vehicle loans (for other than employees) are also deductible when the standard mileage rate method is used.

- Business Use of Your Home – If you use part of your home for your business, you may be able to deduct expenses for items such as mortgage interest, insurance, utilities, repairs, and depreciation. To qualify, you must meet the following criteria:

a) The business part of your home must be used exclusively and regularly for your trade or business. However, there are exceptions for daycare facilities or storage of inventory/product samples.

b) The business part of your home must be:

- The principal place of business, or

- A place where you meet or deal with patients, clients, or customers in the normal course of your business, or

- A separate structure (not attached to your home) used in connection with your business.

- Entertainment Expenses – This includes any activity considered to provide entertainment, amusement or recreation. To be deductible, you must generally show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your business. Recordkeeping is essential – you will need to keep a history of the business purpose, the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained.  Entertainment expenses are usually subject to a 50 percent limit.

- Travel Expenses – These are “ordinary” and “necessary” expenses while away from home when the primary purpose is conducting business. Your home is generally considered to be the entire city or general area where your principal place of business or employment is located. Out-of-town expenses include transportation, meals, lodging, tips, and miscellaneous items like laundry, valet, etc.

Document away-from-home expenses by noting the date, destination, and business purpose of your trip. Record business miles if you drove to the out-of-town location. In addition, keep a detailed record of your expenses – lodging, public transportation, meals, etc. Always list meals and lodging separately in your records. Receipts must be retained for each lodging expense (proves you were out-of-town). However, if any other business expense is less than $75, a receipt is not necessary if you record all the information in a timely diary. You must keep track of the full amount of meal expenses, even though only 50% of the amount will be deductible.

- Conventions - It is not coincidental that most conventions are held in resort areas during the spring through early fall months. Convention planners know quite well that convention timing and location is the key to its success. If planned properly, attendees can deduct a portion of the expenses for establishing business relationships and gaining business knowledge while enjoying a mini-vacation. Even without a convention, business travel can be married with some personal relaxation while still providing a partial or complete deduction. It is important to be aware of when the deductions are legitimate as well as when they are not.

Where a companion, such as a spouse, accompanies the taxpayer, the companion’s meals and travel expenses are generally not deductible. In addition, deductible-lodging expense is based upon the single occupancy rate.

There are special rules related to the deductibility of cruise ship conventions, and the meeting must be directly related to the active conduct of the taxpayer’s trade or business. The cruise ship must be a vessel registered in the United States. All ports of call must be located in the U.S. or any of its possessions.

Note that a higher standard is applied to foreign conventions than to conventions and seminars held within the North American area. Various factors are considered to determine the reasonableness of the location and convention, including, but not limited to, the meeting’s purpose, the sponsor’s purpose and activities, the residence of the organization’s members, the locations of past and future seminars.

- Marketing and Advertising Expenses – Although marketing and advertising is generally thought of in terms of print ads, flyers and radio and television advertising, they also can include marketing that is intended to portray your business positively. Such marketing creates a long-term potential for business and falls within the ordinary and normal requirements of the tax code.

Examples of such marketing include sponsoring local youth sports teams, distributing samples of your business product, and costs associated with prizes offered by your business in a contest. As long as your marketing expenses can be reasonably related to the promotion of your business, they can be deducted.

The foregoing is a brief overview of some of the many deductions available to the small business owner.  However, every business is different and has its own unique expenses.  If you have questions related to deductible expenses for your business, please contact one of our professionals.

The first thing you must do is tell QuickBooks that you will be issuing 1099s. Click on Edit (from the menu bar), then Preferences. Scroll down until you find the picture that says “Tax:1099″ and click on it. On the Company Preferences tab, answer yes to the question about the issuance of 1099 forms, then follow the rest of the instructions on this screen.

Next, you’ll need to identify those vendors who are eligible to receive a 1099. Click on Vendors, then Vendor List. Double-click on the first vendor in the list, then the “Additional Info” tab. In the lower left hand corner, put a check mark in the box that says “vendor eligible for 1099″ and enter their tax ID number they have provided. Repeat this process for any vendors that need to receive a 1099.

Finally, to run the 1099′s and related information, click on Reports, then Vendors, then either of the 1099 reports. Verify the data, correct if necessary, and print your 1099′s all within QuickBooks.

It’s important to review this topic with your accountant to ensure you are collecting the proper information and preparing the 1099 forms correctly for your business.

If you’re like most QuickBooks users, you rely on the Profit & Loss Standard report to monitor how your business is doing. However, you may have overlooked an even more valuable report: the Statement of Cash Flows.

The Profit & Loss Standard (P&L) report is important in its own right, but it only provides partial insight into the health of your business. While the P&L shows what you earned and spent, the Statement of Cash Flows shows you where the cash came from and went to, also known as sources and uses.

As you’ll see in this article, you can use the Statement of Cash Flows to determine the how various activities increased or decreased your cash balance during a given report period.

Cash versus Accrual

Unlike some accounting packages, QuickBooks allows you to run most reports on either the cash or accrual basis.

Cash-basis means that transactions don’t appear on your Profit & Loss statement until either your customer pays their invoice or you pay a vendor (or employee). So, if you enter a bill in QuickBooks to be paid later, the expense won’t immediately appear on a cash-basis P&L.

Similarly, invoices that you send to customers won’t immediately appear on a cash-basis P&L. The expense appears when you write a check to the vendor, and the revenue appears when the customer honors their invoice. Accordingly, cash-basis reports don’t necessarily report a company’s true financial performance.

You could have a stellar looking Profit & Loss Report, but a list full of unpaid bills in QuickBooks. Accordingly, many accountants prefer that business owners use accrual-basis reports.

Accrual-basis reports recognize the effect of every transaction on your P&L immediately. Customer invoices appear on accrual-basis P&L reports as soon as you save the transaction, as do unpaid vendor bills. You can easily see the significance of these differences in Figures 1 and 2.

Figure 1: Cash-basis reports only reflect paid transactions.

Figure 2: Accrual-basis reports include all transactions – both paid and unpaid.

Accrual-basis reports provide a much better picture of where the business stands, but can make it harder to understand your current cash position. However, a cash-basis P&L isn’t a panacea for managing cash flow, as your business has many transactions that don’t affect the P&L.

For instance, loan payments, owner distributions, and owner contributions affect your balance sheet, which tracks assets, liabilities, and equity. Fortunately, the Statement of Cash Flows reflects these types of transactions and more, so it’s a great companion to both cash-basis and accrual-basis P&L reports.

Set Your Preference

You can instruct QuickBooks to always display your reports on either cash or accrual basis:

• Choose Edit, and then Preferences.
• Choose Reports & Graphs, and then Company Preferences.

As shown in Figure 3, specify either Cash or Accrual, and then click OK.

Figure 3: You can set either cash or accrual as your default report format.

Of course, at any time you can change a report to the other format. For instance, if your preference is set to accrual, but you may sometimes want to view a cash basis P&L:

• Choose Reports, Company & Financial, and then Profit & Loss Standard.
• Click the Modify Report button, and then choose Cash in the Report Basis section, as shown in Figure 4.

Figure 4: You can change the accounting method for your P&L on the fly.

NOTE: Most, but not all, reports in QuickBooks allow you to change between cash and accrual. When a report is onscreen, choose Modify Report.

If you don’t see the Report Basis section, shown in Figure 5, then you’ll know that you can’t toggle the report basis. Now that you understand the ins-and-outs of running cash and accrual basis reports, let’s explore the Statement of Cash Flows.

The Statement of Cash Flows

Let’s say that your cash balance at the beginning of your fiscal year was $100,000, and today it is $75,000. The net income figure on your P&L won’t give you the full details on why your cash balance decreased, but the Statement of Cash Flows will. To do so, choose Reports, Company & Financial, and then Statement of Cash Flows.

Report periods: As shown in Figure 5, this report automatically defaults to This Fiscal Year-To-Date, but you can choose another time period if you wish. To do so, make a choice from the Dates drop-down list, or modify the From and To dates, and then click the Refresh button.

Figure 5: The Statement of Cash Flows defaults to the current fiscal year.

Your Statement of Cash Flows report will include up to three major sections:

• Operating Activities
• Investing Activities
• Financing Activities

Don’t worry if your report only includes one or two of these sections – sections only appear when you had relevant transactions during the report period. Let’s explore each of these sections individually.

Operating Activities

The Operating Activities section of the Statement of Cash Flows recaps activities related to running your business. This section will always start with Net Income, followed by an adjustments section.

The adjustments reconcile your net income with the net cash provided by the operating activities. For instance, refer to Figure 5. Net income s $112,999 but the Net Cash Provided by Operating Activities is $42,584. Accordingly, the statement of cash flows identifies the $70,415 difference. Let’s investigate a couple of the items:

Accounts Receivable (-$71,759): During the report period we sent invoices to our customers, of which $31,503.08 remain unpaid. These unpaid invoices are reflected in the Net Income figure, so QuickBooks deducts these because we haven’t received this cash yet.

Inventory Asset (-$17,354): Amounts that we spend on inventory don’t become part of Net Income until we’ve sold the items. At that point QuickBooks posts the expense to cost of good sold, and reduces our inventory account accordingly. Purchasing inventory is a use of cash, so it appears as a negative amount on our Statement of Cash Flows.

Remember: The purpose of the Statement of Cash Flows is to reconcile our net income with the actual change in our cash account. Thus non-cash activities, such as unpaid customer invoices or amortized prepaid expenses get subtracted or added from Net Income, so that you can get a clear picture of where cash went during the report period.

Employee Advances (-$62): We paid $62 to an employee as an advance, which has not yet been repaid. This amount isn’t included in Net Income, but is a use of cash, so the amount is deducted. When our employee repays the advance, our Statement of Cash Flows will reflect a positive amount, since at that point we’ll have a $100 source of cash.

Prepaid Insurance ($893): During the report period we amortized, or used up, $893 of prepaid insurance. This expense is included in our Net Income figure, but we didn’t write a check for it during this report period, so QuickBooks adds this expense back.

Accounts Payable ($13,537): We’ve entered bills into QuickBooks totaling $13,537 that we haven’t paid yet. In effect, we’re temporarily borrowing this money from our vendors, so it’s a source of cash. Later, our Statement of Cash Flows will show a use of cash when we pay the vendor bills. This same treatment applies to credit cards and other liabilities.

As you look through the Statement of Cash Flows, you may also see Investing and Financing activities. Investing activities may include owner contributions as a source of cash, or in the case of the report in Figure 5, the purchase of $11,500 in furniture as a use of cash.

Financing activities will show borrowing on a line of credit or other loan as a source of cash, while loan repayments (net of interest) will appear as uses of cash. In the end, you’ll see exactly what caused your cash balance to increase or decrease during the report period.

Research: You can easily investigate why amounts appear on your Statement of Cash Flows. As shown in Figure 6, the QuickZoom icon appears when you hover over an amount. Double-click to display a detailed report, as shown in Figure 7.

Figure 6: The QuickZoom icon indicates that you can drill-down within a QuickBooks report.

Figure 7: A detailed report appears when you double-click on an amount within a QuickBooks report.

Organizing the Statement of Cash Flows

QuickBooks makes an educated guess at what accounts in your chart of accounts should appear on the Statement of Cash Flows. However, you may encounter instances where activities appear in the wrong section, or don’t appear at all on the report. You can easily remedy such situations:

• Choose Edit, and then Preferences.
• Choose Reports & Graphs, and then Company Preferences.
• Click the Classify Cash button, shown in Figure 3.

As shown in Figure 8, place a checkbox in the appropriate column. You cannot remove balance sheet accounts from the statement, but you can optionally include income and expense accounts. However, keep in mind that this is not a typical need, and you should only proceed under the guidance of your accountant or tax advisor.

Figure 8: QuickBooks allows you to classify accounts as operating, financing, or investing activities.

Did You Know?

QuickBooks has a Product Information window that can provide a dizzying array of information. Press Ctrl-1 to display the window shown in Figure 9. Some key elements on this screen include the product number shown at the top.

Each QuickBooks user in your office should have the same release number. The size and location of your QuickBooks file is shown in the File Information section, while you can use the List Information section to determine how many customers and vendors you have in QuickBooks.

Figure 9: Press Ctrl-1 to view the Product Information window.