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Forum topic by Mark Smith posted 01-04-2013 10:19 PM 2571 views 1 time favorited 27 replies Add to Favorites Watch
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Mark Smith

498 posts in 788 days


01-04-2013 10:19 PM

Tax season is upon us and I’m trying to get my books all straight so I can get my big refund check. I started the business this year and I went to an accountant when I started out and spent about an hour with her getting advice on setting everything up and using Quickbooks. Now that I’m starting to try and get everything together for the end of the year I’m finding Quickbooks is a lot more complicated than I originally thought, and also a lot more complicated than I probably need for a small one man shop like I’m running.

Anybody else using Quickbooks? Is it working for you? Is there better software out there that isn’t as complicated for the very small business? In reading through the IRS instructions on Schedule C, I actually probably could have kept all my records on a spread sheet. It’s really not that complicated. The one thing I do like about Quickbooks is I can make an entry for an expense and then scan the receipt in and attach the image of the receipt directly to that expense. Then the original receipt gets filed away hopefully never to be needed again. As long as I don’t lose my digital image I should never need the original receipt again. I do backup my Quickbooks to Dropbox, but I’m saving the original receipts anyway.

The on thing I don’t like about Quickbooks is the way it figures expenses on the costs of goods sold. I actually messed up my entries this year and all the raw materials I purchased to make things I classified as Cost of Goods Sold. I’m now seeing that I should have classified them as Inventory and then when I made something and sold it from the items in inventory you put down the sales price and then Quickbooks deducts Cost of the Goods from that. The problem being, when you are working with raw materials if you want to track costs in this manner you have to be exact in your entries. For example if I buy 500 BF of wood for $500 I have to make sure than when I list it as inventory I break it down to indicate that the cost was $1 per board foot. And then when I make an item from that wood and sell it you have to list how many BF you used for each item in order for an accurate figure of cost of goods sold. So basically, that’s way too complicated and I’m not going to do it. I’ll just track that another way.

Anyway, I thought I’d make this thread to discuss tax issues related to the wood business. Since I just started the business this year and I spent a lot of money doing so, I have a nice huge loss this year that I get to write-off against other earned income. So it will make for a nice check back from the tax man.

-- Mark Smith, Tracy, CA., http://www.markscustomwoodcrafts.com


27 replies so far

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Mark Smith

498 posts in 788 days


#1 posted 01-05-2013 02:24 AM

147 views but nobody wanted to talk about keeping the books and paying the taxes? Yeah, I didn’t really want to mess with it either, but it’s a necessary evil.

-- Mark Smith, Tracy, CA., http://www.markscustomwoodcrafts.com

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huff

2810 posts in 2034 days


#2 posted 01-05-2013 02:42 AM

Hey Mark, I started to respond to your post earlier, but gave up because it seemed like I was writing a book and figured I would bore you to death. I used Quick Books for my business and personal accounting for a number of years.

I retired this past year, so I’ve quit using it, but loved it when I was in business. I guess it depends on what you want the program to do for you as to how complicated it gets. I kept mine simple and used it more for tax purposes and not for tracking each job.

Let me know if you have any particular questions that I might be able to help you with.

-- John @ http://www.thehuffordfurnituregroup.com

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Mark Smith

498 posts in 788 days


#3 posted 01-05-2013 02:47 AM

That’s kind of the info I was looking for. For 2013, I think I can figure out how to set up Quickbooks to make it much more simple for what I do. For example, I need a way to track tool and equipment purchases for items that are eligible for the 179 deduction. I had listed them as fixed assets in Quickbooks, but that caused some other weird problems. I’m just going to create an account category called 179 for 2013 and just use it to track those expenses. All you need for Schedule C is just a total cost of all 179 items so that should be pretty easy.

-- Mark Smith, Tracy, CA., http://www.markscustomwoodcrafts.com

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JesseTutt

811 posts in 859 days


#4 posted 01-05-2013 03:24 AM

Yes I use QuickBooks. I own 2 businesses (Computer Consulting and Woodworking). Back when I started in business the big three were Peachtree, Quicken and QuickBooks. QuickBooks being the commercial (Industrial strength) version of Quicken. I had a customer that was using Peachtree and their bookkeeper was always fighting with it so no Peachtree. Quicken is ok for personal, but I wanted something more for the business. I tried homemade Excel spreadsheets but they never handled all the needs. Therefore QuickBooks was the lesser evil.

Over 9 years and 4 versions of QuickBooks I managed to get it to do everything I wanted.

For a while Micro$oft was selling an Accounting program. I had great hopes for it, but evidently it did not sell fast enough for Micro$oft to keep it. A shame as it was more intuitive than the others. I even spoke with one of Micro$oft Account developers (sometime being a Micro$oft partner has its perks) and we brainstormed about adding wizards to guide the untrained through various tasks (i.e. a bounced (NSF) check).

I have never tried attaching a scanned copy of a bill to an entry, but it sounds like something to look into.

I also have had problems with how to list the items I purchase for resale. Be it a washer to fix a leaking faucet, a box of screws, or a piece of wood. Early on I was advised not to enable the inventory feature.

Each tax season I will export a copy of QuickBooks into the Accountant’s format and give it to my accountant as part of the bundle of paperwork. That way he can look at the data and fix any problems. One year for some reason QuickBooks had the Cost of Goods Sold as a negative number (which would be a profit).

I hope this helps. The best advice is to take a couple day courses in using QuickBooks.

-- Jesse, Saint Louis, Missouri

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huff

2810 posts in 2034 days


#5 posted 01-05-2013 03:29 AM

Mark,

My wife originally set ours up and she did most of the bookkeeping for years. When she became ill and could no longer do the bookkeeping, I found myself lost for the first year trying to figure things out. I finally took a course through our local community college on Quick Books which helped.

It should be pretty easy to set up a sub-category to be able to track 179 deductions.

I really like being able to do the bill paying using Quick Books and computer checks.

-- John @ http://www.thehuffordfurnituregroup.com

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derosa

1557 posts in 1584 days


#6 posted 01-05-2013 03:55 AM

Only advice is to make sure to print out hardcopies of all receipts, don’t rely on technology to preserve them for you because it won’t at the worst time possible.
I should start looking into quickbooks for myself as last year I discovered that ministers basically file their taxes similar to small businesses. I have to take care of my own social security. But it also means tracking miles driven, business expenses, clothing, my cell phone bill, and even what I buy for the church or house. Last year I owed big time when I discovered all the things I should have been recording, did a lot better this year which combined with the new child will keep me in the black by a little. This year every little thing gets tracked, recorded and categorized.

-- --Rev. Russ in NY-- A posse ad esse

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Mark Smith

498 posts in 788 days


#7 posted 01-05-2013 04:10 AM

The inventory feature is what gave me the most trouble but mostly because I didn’t understand it so I put items in the wrong category. I think the inventory feature is only really required if the use the accural accounting method which is only required of larger businesses. There appears to be an exception for smaller businesses to use a cash basis and not have to worry about end of year inventory. Under the one system you can only write-off the expense of an item in the same year as you sell the item. So all the supplies and wood I bought in 2012 that I still have on hand at the end of the year, I couldn’t write off until I actually used the supply and resold the item. This isn’t that complicated if you are buying items to directly resale, but when you’re buying raw materials to make a finished product it gets way more complicated. And under that system you have to do a year end inventory and report the value of everything on hand. Well I didn’t keep track of how much wood I used up so I couldn’t do an accurate inventory anyway.

-- Mark Smith, Tracy, CA., http://www.markscustomwoodcrafts.com

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Mark Smith

498 posts in 788 days


#8 posted 01-05-2013 04:12 AM

Russ, I don’t have to print hard copies of receipts because I still have the originals. I just scan the receipt and then store the original away. As long as I don’t lose the digital copy I’ll never need the original again.

-- Mark Smith, Tracy, CA., http://www.markscustomwoodcrafts.com

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thedude50

3532 posts in 1226 days


#9 posted 01-05-2013 04:18 AM

quick books is what i use and it is only as complicated as you make it

-- when I am not on Lumberjocks I am on @ http://thisoldworkshop.com where we allow free speech

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Mark Smith

498 posts in 788 days


#10 posted 01-05-2013 04:29 AM

Actually I just went back and read the IRS instructions on inventory, and I think I stated it wrong above. The IRS instructions even for small businesses says you can only deduct the cost of the raw materials in the year that you sell them. So looks like I do have to figure out what I still have on hand at the end of the year, but that should be pretty simple. The IRS even says, ” If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year.” The rules also say you don’t have to account for incidental items so the way I read that I don’t have to figure out how much glue and how many screws I used and how many I still have on hand. Looks like all I have to account for is lumber since that’s the big expense that will be be easy to do.

Anybody else delt with this inventory issue? Is this how you handled it?

-- Mark Smith, Tracy, CA., http://www.markscustomwoodcrafts.com

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Mark Smith

498 posts in 788 days


#11 posted 01-05-2013 05:01 AM

You’re way ahead of me Jonathan. And yes, sales and use tax is a pain. The one thing I did figure out on Quickbooks is how to set up the sales tax and under the current tax rules it’s actually pretty easy. As best I can tell I only have to collect tax for items I sell in or ship within California. If I sell it out of state I don’t have to collect sales tax. I do know that there is talk of States who are trying to get out of state vendors to collect sales tax for their state and if that ever happens we’ll all have a nightmare to deal with. If you sell a lot of stuff online you may be paying sales tax to 20 or 30 different places each quarter.

-- Mark Smith, Tracy, CA., http://www.markscustomwoodcrafts.com

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huff

2810 posts in 2034 days


#12 posted 01-05-2013 02:03 PM

Mark,

How to handle taxes (both State and Federal) is something you will need to rely on your accountant for. I handled taxes on materials pretty much the same way Jonathan stated he does. I built mostly large items so I had a file on each customer that included any and all paperwork that was involved in the job. It’s amazing how many times over the years I would have to refer back to something I built years previously.

Finishes was one thing that was important to keep track of (not for tax purposes, but for future references).
It was not uncommon for a customer to come back a few years later and want another piece built and would like it finished like the other work you did for them. Just starting in business, I could remember pretty well what I did, but the more work I did and the more custom finishes I did, It became impossible to remember what stain I might of custom mixed 5 years ago. I know, nothing to do with Quick Books, but that was one of the main reasons I kept track of everything in a personal folder for each customer.

The big question about inventory is just how far do you break it down and inventory it. At any given time, I would probably have a couple hundred bd.ft. of “scrap” lumber laying around in the shop that I kept and would use on small projects. A whole section in the lumber rack of partial sheets of plywood of different species. A few left over slides, a few odd-ball hinges, a few partial gallons of finish, some opened cans of stain, etc.

As far as inventory goes, I was told since I didn’t really buy in huge volume and didn’t warehouse a bunch of hardware, that I should just list materials as a whole. Heck, at the end of the year I just didn’t go out and buy 500 bd ft. of lumber to put in inventory.

-- John @ http://www.thehuffordfurnituregroup.com

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Mark Smith

498 posts in 788 days


#13 posted 01-05-2013 04:33 PM

Jonathan, those instructions for sales taxes sound right, at least under California law. But it sounds like the way you are doing it you may be paying double tax. I don’t pay sales tax on any of the wood I buy because I don’t build built in items with it. So I collect sales tax on everything I sell in California. If you are paying sales tax on your lumber that you use to build a desk are you then collecting sales tax when you sell that desk? I’m sure the State would rather have the sales tax from the desk because it is going to be more money than the raw materials. That’s why the law is written that way.

-- Mark Smith, Tracy, CA., http://www.markscustomwoodcrafts.com

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Mark Smith

498 posts in 788 days


#14 posted 01-05-2013 04:41 PM

Huff, I’m not too concerned about the inventory thing. I do have about 3,000 BF of wood in the shop right now, but that’s only because I got lucky at an auction and got a good deal on about 12,000 BF. I sold most of it and 3,000 is what I kept for myself. I don’t think the IRS wants a detailed accounting. Since I have about 25% left of what I bought, I’m just going to use 25% of what I paid for it as an end of year inventory amount. It’s pretty simple.

As for the accountant issue, not going to use one. Although I’m no accountant, I spent many years in law enforcement investigating financial crimes and tax laws (especially for the small business) are really not that complicated. I did pay an accountant for an hours time early in the year to ask some questions I needed answered and I got some inncorect answers to one of my most important questions so what’s the use in paying a CPA when they may not even know the law? This CPA told me that I could not use 179 deductions to show a loss in excess of business income for the business in question. I didn’t think that sounded right so I did the research myself and found out she was wrong. I exchanged a few emails with her and she eventually did some research herself and figured out she was wrong. If I had just blindly gone along with her it would have cost me a lot of money this year.

-- Mark Smith, Tracy, CA., http://www.markscustomwoodcrafts.com

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teejk

1215 posts in 1433 days


#15 posted 01-05-2013 05:32 PM

Mark…I think I would take a short course in QuickBooks if one is available. It’s a pretty powerful program that can do a lot for you.

The tax side is important of course but more important is are you producing yourself to the poorhouse? You need to know if you are charging enough for the “incidentals” (e.g. tools don’t last forever and you have a lot of “disposables” like paper towels, razor blades etc. and then there might be the incremental utility costs of flipping the switch on a shop shared with a house). Surprising in that a lot of business people forget about that stuff.

As for your inventory issues, the IRS guides are pretty good and understandable. In a small business, an important rule is to pick a method and use it consistently.

And overall, from the tax side…”pigs get fed, hogs get slaughtered”.

Class dismissed.

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