Quickbooks setup, part 3: what to do with (the rest of) the tax lines
Real EstateI must apologize as there are a few lines here that would make for an entirely separate article, and yet 90% of businesses that use Quickbooks as their accounting software don’t. I’m sorry these definitions are so short, but if you need any clarification, feel free to email me.
IK-1 tax lines
The K-1 tax form is a bit like a mutt form on the tax return. It primarily deals with the division of profits and expenses in a partnership, trust, or corporation, so if your business is not a partnership or corporation, these particular tax lines will not apply to you. Some people receive a K-1 because they are part of a group of people who own a trust or portfolio that generates income during the year. That income is divided by designated percentages among those in that group. An example of this would be a trust left to a group of siblings that generates income during the year, with the oldest receiving 60% and one or more siblings receiving an equal share of the remaining portion. Each sibling would receive a 1065B which would then be used to complete the K-1 form.
Schedule K
1. Rental Income – Used when a partnership or corporation earns income from rental property.
2. Rental Expenses – Self-explanatory, but make sure you can break down what your actual expenses are compared to what you think you’re spending. Advertisements, management fees, mileage to collect rent or inspect home issues all play a part in reducing your income and tax liability.
3. Portfolio – Interest – CD’s – when a CD is part of an investment, it earns a special place on the K1 form in addition to US Treasury interest, which is the next category.
4. Portfolio – Interest – US Treasury (bonds), etc. Many of these bonds are nontaxable income and many of these nontaxable bonds pay decent interest rates.
5. Portfolio – Dividends – What would normally be on a 1099 DIV in the case of a partnership, corporation, or trust that owns stock will go in K1.
6. Portfolio – Royalties – Income received from copyright, patents, oil, gas or mineral properties. Check your portfolio to see if your mutual funds are being invested in these types of companies.
7. Other Income – The IRS junk category for all purposes. Other. If you can’t fit it into any of the other categories, put it here.
Deductions –
1. Charitable – Yes, partnerships, corporations and trusts can donate to worthy causes and receive the same benefits of canceling these donations to offset income and foster goodwill in their communities.
2. Other – If you can’t adjust a deduction anywhere else, put it here.
investment interest
1. Foreign taxes: Some mutual funds invest globally and therefore you end up paying some foreign taxes. Sometimes these foreign taxes are deductible, that’s a whole other article that I haven’t written yet.
2. Available Tax Reduction – Another category listed on your 1099DIV at the end of the year. Most businesses won’t use this category, I’ve been doing this for 9 years and I have yet to serve a customer that uses this category.
II. Balance Sheet Tax Lines
While many of the lines that have been covered can easily fall into this income or expense category, the balance sheet covers accounts that would be considered assets, liabilities, or equity.
1. Cash – These would be your bank accounts, your cash on hand, or petty cash accounts. It would include any accounts that are immediately available as liquid assets.
2. Accounts Receivable – If you accept payment on credit terms, all amounts you are expecting to pay will be classified as A/R. There are companies now that will pay cash for their accounts receivable, which in cases of extreme cash flow constraints would be an option. However, the percentage you get will drop significantly and is not an option for many smaller business owners.
3. Bad Debt Allowance – This is the method I discussed earlier of calculating in advance that .5 – 2% of your A/R will never be paid and being able to claim that as such against your A/R.
4. US Government Obligations – Rarely used, but if you have back taxes or debt to the government on a payment plan or regular payments, use this box.
5. Tax Exemption Section. – If the company owns tax-exempt bonds or securities, these are assets that are paid based on the ‘loan’ made to the payer.
6. Other Current Assets – These are assets that can be easily and quickly converted to cash within a year, CDs, bonds, etc.
7. Loans to shareholders: Just as it is possible for a shareholder of a corporation to lend money to the company, it is also possible for the shareholder(s) to borrow money from the company. Keep in mind that this type of loan is strictly regulated and is one of the reasons Enron executives were more closely scrutinized and prosecuted, because the loans were below market value for excessive amounts that they could never have been reimbursed.
8. Real Estate Mortgage Loans – If your business involves the collection of loan amounts for real estate purchases, this would be the account to deposit those payments.
9. Other Investments: Are there any other investment activities your company is involved in that generate income, either directly or through depreciation or amortization of assets?
10. Buildings – Your building will be listed on the balance sheet as a positive addition to your assets and their value; however, the loan for the purchase of the buildings will be on the liability side. There should be a separate fixed asset account showing the original cost of the building.
11. Accumulated Depreciation – The annual amount deducted from the VALUE (not COST) of the building, vehicle, etc. Accumulated means all deductions accumulated from the previous year for this asset. This amount, if added correctly, will appear in the chart of accounts as a negative number.
12. Land – Land is not depreciated, however, the cost of the land is an asset and must be included in the accounting.
13. Accumulated amortization –
14. Other Assets – Assets that cannot be put into any of these categories. Intangible assets, such as goodwill, etc.
balance sheet liabilities
1. Accounts Payable – These are accounts you owe that are on credit. This is for products, services or merchandise that you bought on credit.
2. Short-Term Mortgages Payable: In a time of dire need for cash flow, sometimes a business owner will take out a short-term secured mortgage. Short term means that it must be paid within 12 months.
3. Other Current Liabilities – All liabilities that will be canceled within 12 months.
4. Shareholder Loans – When the business is short on cash and the owners/shareholders are not, the money is placed here so that when it is withdrawn it is made as repayment of the shareholder loan, with interest, and is not subject to taxes, apart from the interest earned personally by the shareholder.
5. Mortgages/Long-Term Notes: Mortgages on property, notes payable to businesses or individuals that are not expected to be paid within a year.
6. Other Liabilities – All liabilities that don’t fit into other categories go here.
7. Capital Stock: The number of shares authorized for issue by a company’s bylaws, including common and preferred shares. In general, the value assigned to each share is $1, but that depends on the individual owner of the company.
8. Paid-in capital – capital received from investors for shares, also called contributed capital.
9. Treasury Stock: Stock repurchased by a corporation for retirement or resale to the public. It should not be considered when calculating an earnings per share ratio, dividends or for voting purposes.
Numbers 7, 8 and 9 are generally intended for companies intending to sell their shares or go public. For these categories, I would suggest getting guidance from a CPA before attempting to go through that process yourself.
M-1
The M-1 is a form used for corporations with income or assets of more than $250,000. It is a comparison of the balance at the beginning of the year with the balance at the end of the year. Using Quickbooks makes this preparation easy as the information flows easily from the Quickbooks file to many different types of tax preparation software. (Lacerte, ProSeries, etc.) The cost of this tax preparation software is often prohibitive for a business that doesn’t specialize in tax preparation, so look for a preparer that uses one of these two systems.
1. Net book income: Revenue minus book expenses goes this far.
2. Book depreciation – ditto.
3. Non-Refundable Book Expenses: Consult a tax professional before putting any of your accounts in this category!
4. Income on Books Not Returned – again, consult a tax professional before using any of these categories.
8825A-E
If your corporation or partnership owns one or more rental real estate, income and expenses are allocated to one of these accounts. The A, B, C, etc. they are for separate rental properties, so you can track up to 5 different properties.
1. Gross Rents – How much rental income you received for this property.
2. Advertising: How much did it cost you to advertise this property as for rent?
3. Car and trips: how many times did you travel to the property for maintenance, rent collection, etc.
4. Cleaning and maintenance: tenants can sometimes make a mess, how much did it cost you to clean the carpet, paint, etc.?
5. Commissions: Did you hire someone to help you rent the place? Pay them and find out here.
6. Insurance – This would be for property and casualty insurance on the property in case you get sued or someone gets hurt while living on or exploring your property.
7. Legal and professional fees: Did you have an attorney draft the rental paperwork?
8. Interest expense – usually reported on the property’s 1098.
9. Repairs: In addition to regular cleaning, was anything broken that needed repairs?
10. Taxes: property taxes, county taxes, etc.
11. Utilities: Are you paying utilities to keep up appearances while trying to rent the property? Are you paying the tenant’s utilities?
12. Salaries – Do you have someone on staff who is your “property manager”? Split your wages across properties for accurate accounting! (but pay them with a check).
13. Miscellaneous Expenses: pest control, security, etc. they would all go here.
We hope this article has helped you improve your Quickbooks education on tax lines. Remember the old adage, “Garbage in, garbage out!” If you file them correctly, your reports will be more accurate and decidedly more useful to you and your accountant.