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Posts Tagged ‘Home Based Businesses’

QuickBooks is a great accounting program for home-based businesses to track their income and expenses. It is easy to learn and simple to use. It has a great Help file. You do not need an accounting background to be able to generate reports such as a Profit and Loss and Balance Sheet needed for tax preparation and managing your business. I have listed a few key points to consider when using QuickBooks.
Cash or Accrual Basis of Accounting? The first step in setting up your company in QuickBooks is to determine if you will track income and expenses on the “Cash Basis” or “Accrual” basis. Most small businesses operate on the cash basis of accounting. What this means is you record your expenses when you write the check or charge your credit card, and you record your sales or income when you take the money to the bank and deposit it into your account. This is the easiest way to account for your transactions. Some businesses are required by the IRS to report on the accrual basis. This normally pertains to large publicly traded companies and/or some manufacturing entities. On the accrual basis, you record income at the time of sale, not at the time you receive payment. You also enter expenses when you receive the bill, not when you pay it. The choice is yours on which basis to use. QuickBooks supports both accounting methods.
Simplify the Chart of Accounts!! The most important list in your accounting system is your Chart of Accounts. You track your flow of money through this list of accounts which includes where your income comes from, where you put it, what your expenses are for, and what you use to pay them. QuickBooks’ EasyStep Interview walks you through setting up your accounts. The system also offers sample business templates that already have accounts set up for you. You can later delete or add any accounts that were initially setup in this interview to make it match your income and expenses better. Keep your chart of accounts SIMPLE! Too many accounts result in messy reports that are hard to read and analyze. Also, use descriptions for your account id’s, not numbers. If you assign account numbers for each account, you will have to memorize the numbers for fast data entry. It is much easier to type in the name of the account when entering transactions. This is a key timesaver!
Utilize Reports QuickBooks has many reports you can run for daily management of your business. The most widely used reports are the Profit

Taxes are your single biggest expense against your income. Knowing what deductions you’re entitled to can save you hundreds, if not thousands of dollars. This article will cover vehicle related deductions that often get overlooked by home-based businesses. Our focus will be for individuals with no employees, however many of the deductions will apply to small business and large corporations as well.
There are two ways to calculate Vehicle deductions:
1. Standard mileage for 2006 is $0.445/mile
2. Actual cost method + depreciation
Lets start with the “standard mileage rate”. You can write off each mile you drive that is related to your business at $0.445/mile. This is called the “standard mileage rate”. So if you drive 10 miles to visit a client, then 10 miles to return to your home office, you can deduct 20 miles. 20x.445=$8.90. However, you cannot deduct all your miles, such as going to the grocery store. You can see how this can add up to a substantial amount. Some professions such as real estate require a lot of driving.
In addition to your standard mileage rate, you can also deduct parking fees and tolls in connection with your business travel. If you have a loan on the car, then you can deduct the interest paid on the loan to the extent that you use the car as a business expense. So if you use your car 50% for business and 50% for personal use, then half the interest paid on the loan is deductible! Remember, this is for self-employed only. You cannot deduct interest on a loan if you are an employee using the car for your job.
The standard mileage rate is by far the simplest, but may not offer you the largest deduction. Instead, you can choose the “Actual Cost Method”. In this method, you deduct all the expenses related to owning and maintaining your car. This would include and is not limited to oil changes, repairs, tires, brakes, tune-ups, washing and waxing, auto-club memberships, license plates, and car insurance. Again, all of these expenses are deductible for the portion that you use the car for business. For example, if you drive 20,000 miles during the year, and 15,000 miles are for business, and the remaining miles are for personal use, then you can deduct 15,000/20,000 or 75% of all those expenses.
In addition to the actual cost method, you can deduct a depreciation value. This is a value that reflects the loss of value to the car over time due to wear and tear. The simplest example of this would be if you bought a new car in 2006 for $20,000, you can deduct 20% of the value the first year times the percentage of business use. So if you use the car 75% for business, you calculate your deduction as follows: $20,000×75%x20%=$3000.
For the following years, you use the following schedule:
First year: 20%. (Half a year)
Second year: 32%
Third Year: 19.2%
Fourth Year: 11.52%
Fifth Year: 11.52%
Sixth Year: 5.76% (half a year)
What if you trade an old car you were using for business for a new car? You would have to recalculate a “basis” cost for depreciation. You also have a different depreciation schedule if you use the car less than 50% for business or if you buy a hybrid electric car.
We have by no means covered all the twists and turns that would affect how you calculate your deductions. Fortunately a popular tax software like TurboTax or Taxcut will walk you through each step in calculating your deduction then give you which method yields you the biggest deduction. If you’re going to use a tax accounting service, make sure you go over these kinds of deductions with the tax professional. Bring this article with you and ask them if the have experience with how to prepare returns small businesses and all the deductions that are available to you. If they hesitate or stutter, go somewhere else. If could cost you thousands.