# Accounting for the Woodworking Business



## msmith1199

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.


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## msmith1199

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.


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## huff

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.


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## msmith1199

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.


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## JesseTutt

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.


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## huff

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.


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## derosa

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.


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## msmith1199

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.


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## msmith1199

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.


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## thedude50

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


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## msmith1199

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?


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## msmith1199

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.


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## huff

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.


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## msmith1199

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.


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## msmith1199

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.


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## teejk

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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## TheDane

It wasn't for a woodworking business, but I used QuickBooks Pro for 14 years. It is a great package, easily configurable, and Intuit's support was, in my experience, top drawer.

-Gerry


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## huff

Mark,

The scary thing about getting advice even from the State tax revenue office or the IRS is a lot of times of how the "law" is inturpeted. When I first started my business 27 years ago, I went to the NC Dept. of Revenue and talked to them about sales tax. When I should pay it if purchasing materials and when I needed to collect it when I sold an item. Guess what, after talking with the first Revenue Officer, I left totally confused about selling and collecting sales tax. I went back and talked to my accountant only to get more confused, so the next day I called the Dept. of Revenue and asked the same questions again, only to get a different answer. When I explained what I was given for answers the day before by another Revenue Officer, I was politely informed that because of my type of business it could be interputated either way?


> ?


??

Basically, since I built small items to be sold retail, that I would have to collect sales tax, but since I also built items that would be installed and became "real property" that I did not have to collect sales tax, but that was if I was a contractor and was building or remodeling. If I built the kitchen cabinets and just sold them to a customer, then it was up to me to collect sales tax, (Like if you buy a cabinet from Lowes) but if I built them and sold them to a contractor and he installed them in a customer's home, then the contractor could file a sales tax exempt certificate with my company and I didn't have to collect sales tax.

In our business, the law is not quite as simple as it seems. It's very easy for us to fall under two or three different type businesses and tax is collected differently on each. I'm sure it's different in every State. Now I'm retired and live in Delaware (No sales tax in this State). Oh well!!

Good luck on your business, may you have a great year in 2013 so you can pay lots of taxes! Just kidding about the taxes.


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## TheDane

My advice … get a good CPA and follow his/her advice. The last place I would go for tax advice is the IRS or state revenue department.

-Gerry


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## teejk

Gerry…wise advice if you are lucky enough to find a "good" CPA on your first or second attempt. I have worked with several and sometimes wondered who took the exam for them (i.e. it obviously wasn't them…like every other profession there is "book smart" vs. "street smart").


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## msmith1199

Huff, I'm very familiar with that, that's why I tend to look up the laws myself and make my own decisions. Like I mentioned earlier, I even went to a CPA who gave me some bad advice and I had to go look it up myself and eventually figured out she was wrong. It even took her a little bit, but eventually she acknowledged she read the law wrong.


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## msmith1199

And Gerry, again what is a good CPA? I was recommended to a lady who does taxes for lots of small businesses. I thought I knew the answer to my question but I wanted to confirm it with a "good CPA" first and she told me I was wrong. I was pretty disappointed after she told me she was wrong because it was going to cost me a huge refund, but I figured she's a CPA, she knows more than me. Well I started researching the issue myself and like I already said I figured out she was wrong, not me.

And for the record, what she was wrong about was the 179 deduction. Basically what that does for a small business is it allows you to buy equipment and write off the full cost of the equipment (up to a limit) in the year you bought the equipment. Normally for equipment you have to depreciate it over the life. So if you paid $1000 for a power tool you may have to depreciate it over five years and only write-off $200 per year. Under 179 you can take the entire $1000 this year. What this does for me, at least for 2012, is gives me a huge loss for the year on the business. The CPA told me that I could only write-off that loss against income from the business and then carry over any loss from year to year. As it turns out that isn't true. You can write-off that loss against any income that you get from any job or any other business you have. And if you file jointly you can write it off against your spouses income. You can't write it off against retirement income or investment income. It has to be income from working. Since my wife works and has a significant income I'll take my loss this year and get my tax refund this year instead of having to do it over the next three to five years.


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## teejk

Mark…you might want to check the sec 179 rules again. I'm not familiar with the rules at all since my company never qualified because they spent millions…but allowing excess losses to offset other income doesn't make sense (pay attention to that "income from a trade or business" part…your salaried income is not the same "trade or business" as your woodworking stuff).


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## TheDane

Mark-I found my CPA through my attorney.

I am familiar with the 179 deduction … our CPA wrote off the cost of equipment we used to produce our product in the year we bought it instead of fooling around with depreciation.

-Gerry


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## msmith1199

teejk, I checked it a bunch of times and even got the original CPA to admit she was wrong. I have since confirmed it with other CPA several of whom had to research it, but confirmed I was right. The entire purpose of the 179 deduction is to encourage businesses to buy equipment and grow, so it makes sense that they allow you to take the loss off of other income.


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## teejk

Mark…since I crave knowlege, I did briefly check and say I am surprised. Normally the tax code would limit deductions to each trade or business but in this case you get to aggregate your trades and businesses and I see that salaries constitute a trade or business even if totally unrelated to your woodworking business. You done good! It does appear that you can't offset investment income though.


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## msmith1199

Yes, investment income is out. Also I don't think I could offset it against my pension checks either, only business income or actual working income. But since my wife has that I'm good to go.


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## msmith1199

Thanks to you guys, I think I just discovered something I didn't realize before. I have Quicken Home for my personal finances and then Quickbooks for my business. As I found out Quickbooks is a very powerful and can be complex program. I didn't realize there was also a Quicken for Home and Business. In looking at that program it appears to contain all of the features that I use in Quickbooks and none of the features I don't use. What I need to do is to be able to create and track invoices and then keep track of all the expenses for the taxes. I don't need payroll and inventory control and all the other stuff Quickbooks has.

Has anybody used Quicken for Business? Does it have all the features a small business with no employees needs? Will it track sales tax like Quickbooks does?


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