Summer 2011

KEEPING PERSONAL EXPENSES SEPARATE
FROM BUSINESS IN QUICKBOOKS

Many business owners periodically write checks for personal expenses from their business checking account or charge personal expenditures to the company checking account. This is not, necessarily, a problem. Recording the expenditures correctly is important however. Here are a few thoughts to minimize issues with the IRS:

Schedule C filers (Sole Proprietors) or Partnership Taxpayers.
Writing checks from the business account or using business credit cards for personal expenses does not create problems for a business organized as a partnership or sole proprietor. This is not as true when the business is organized as an S Corporation or C Corporation. The IRS is a bit more lenient in its rules about drawing funds from the organization for personal use because Schedule C filers and General Partners' personal assets are at risk against claims arising from business operations. This leniency does not suggest that owners can take a tax deduction for personal expenses, simply that a payment of personal expenses is allowed to the owners of a sole proprietorship or a partnership. To help keep deductible business expenses separate from personal expenses in QuickBooks we suggest setting up a series of Equity accounts per owner to house the personal payments and keep them separate from the business expenses.
    Capital - owner A
        Draw A - Create the following subaccounts of Draw
            Draw A - Medical payments
            Draw A - Estimated Income Tax Payments
            Draw A - Owners Pension
            Draw A - Miscellaneous
Set up a similar grouping for each owner.

On January 1st of each year create a journal entry to bring the balances of the draw accounts to zero:--- Banking menu > Create Journal Entry > Debit Capital > Credit each draw account for the balance in Draw as of 12/31/prior year.

Keeping these non business payments off the income statement provides the business owner with a profit and loss report that will, at a glance, provide information that will help the owners manage the business.

For S Corporations and C Corporations
These business owners have to take much greater care in the tracing of funds that come into and out of the business. S Corporations provide the owners with limited liability and avoids double taxation by passing the income to the personal return. In fact, in some cases the overall tax paid is less than that paid by a Sole proprietor or Partner because the amount taken as a distribution is exempt from social security taxes. The IRS keeps a close watch on the amount paid to owners of S Corporations looking for abuses such as understated wages (wages are subject to social security taxes). Also, payments to owners that are not wages (treated as distributions) must correlate to the percentage of ownership share held.

For help setting up QuickBooks to stay within the boundaries, give us a call.