In this presentation, we will discuss a method to track tax deductions both business related and non business related in one QuickBooks file in our business QuickBooks file. To think about this method. Let's think about the common situation that happens all the time in that we have our owner, the owner has a business, the business has been generating money, and we need that money now for personal expenses. How should this take place? How are we going to get this money to use for these personal expenses? The way that should typically happen is that the owner takes money out of the business coming out of the business account, going into the bank into the personal account for the owner in the bank, then we take it out of the bank, and we pay for whatever it needs.

We have these been the personal needs. And by doing that we're keeping the books and bank accounts separate from the business and from the personal items, and therefore we can track everything that's been done. is related on the business income statement and track it to the business checking account. And we can track everything that's going to be personally related through the personal checking account and separate those two things fully. This would be the proper way to record this transaction. However, we often see situations where the business pays directly for personal items.

So we'll see out of the checking account money has been drawn, and it's gone not to business related items, but to personal items. When we see that it's not the end of the world, this happens all the time. It's not the best way to do things typically from a separation perspective, because the money is coming out of the business checking account. But as we see that we're going to record that in the bookkeeping system, not as an expense, but as a draw. So all we do when we see that happen is we say okay, this was something that shouldn't be on the income statement as an expense. What should have happened is the owner should have pulled the money out.

Then spent it on personal use, we skipped that middle step, the owner didn't draw the money out, but it went directly to the personal use items. Therefore, we're just going to record it to the draws account. So that's the theory behind this type of method. The reason it's not preferred is because then our checking account isn't as clean when we think about the checking account. Now we have money that's going out of the checking account to personal and some to business. But our books are still proper in that we now have the drawls being recorded and the net income will be recorded correctly.

The effect of this type of transaction on the financial statements is that the income statement will not be affected. What we are not doing is recorded these items that were taken out of the business checking account as business expenses and therefore not recording it to reduce net income. What we will do is record it as equity under the equity section as draws. This would be the same type of reporting As if the owner had taken the money out as a cash draw, and then taken it out of their personal account and spent it on whatever they're going to spend it on. Now, we might be thinking that this draws account is now tracking these things that we spent money on out of the business checking account that we didn't record as expenses. And we could give these to our tax preparer at the end of the year, and let them sort through that information and see if any of that would be deductible.

And we could use the draws in that way. However, this won't be categorized very well because we'll have different things that are going to be recorded as draws whatever is personal, that we spent money on we have to put to this draws account. So it might include if we use it a lot, then a lot of different information in that draws account. And to sort through it would then be difficult. We we could slightly adjust this method by adding draws accounts for specific items. So if we want to track charity, because we think charity might be something that we will have to deduct for tax purposes, but which shouldn't be an expense on our business tax return, then we might set up a draws account to track charitable deductions, we might set up a trial as a draws account to track tuition and payment for things like books, which could be another category which should not be in our business, but might be a type of draw that we can track in the same bookkeeping system.

And to do that we create another drawls account for that medical expenses of some kind we could put in there as well, whether it be insurance, or whether it be prescription drugs, these are types of items that we might say, hey, I want to track these because I'm going to need to give them to my tax preparer at the end of the year, but they shouldn't be decreasing net income. Let's put them in a separate drawls account relabeled specifically to those items. In under this method, then we're just going to break out this equity section we're going to say okay, this is money that came out of the business checking account, and it was for personal use. It shouldn't be a business expense. However, it still does. deductible possibly in other areas of my individual tax return to 1040.

And we can then track these under the equity section without messing up the income statement in this format and give these reports related to these equity accounts to the tax preparer at the end of the year and said, Hey, here's our income statement. Here's the information related to the income statement. Here's the other items that we have tracked that we've made payments for that may be deductible elsewhere. Where might this method be useful for anything related to the Schedule A, we probably have an idea of the types of things we have to provide to the tax preparer, but just if we go through some ideas might be useful medical and dental. If we have any medical and dental expenses that are deductible, it would depend on our adjusted gross income, how much we make, to see if tracking the medical and dental is worthwhile. But if it is, that's one thing that we could have taxes is another especially property taxes on the home now, this is Might be tracked by our mortgage company, and they might actually report that for us.

If it's not tracked, then we may want to track that and make sure that we get that to the tax preparer so that they can include that in the other types of taxes that are state taxes are often things that we might want to group in and say, Hey, can I deduct this and put that in place as well, I've the interest. This is usually mortgage interest. And that's something I will not recommend putting in here typically, because the bank usually has to provide that information in a separate document. So it's usually repetitive. It's not something we really need to put in our system, because we're going to have a document from the bank that should report that accurately. And then we've got gifts is one we might want to track any charitable expenses or any charitable payments that we make.

We might want to set up an equity account and track that casualty and theft doesn't really apply job expenses, anything that's not a job expense related to our business, if we have, for example, another w two business or something like that, that we have we do normal, we're an employee for that we might have some kind of expenses that are able to deduct from there as well as our schedule C business, then there might be some items that we want to track there as well and use this method in that format. These are some above the line deductions on page one of the 1040, which we may want to track as well. So self employed, health insurance depends on the type of business if we want, if that might be an item that we would want to track outside of our business expenses, we might have an IRA that we might set up or some type of retirement plan.

Again, it depends as to what type of business we are using as to whether we will have an IRA or some other type of retirement plan and how to track that. Then we have the tuition and fees that we may want to track as well. So those are just some items that we may use a method like this for to help us track this information in the same fashion. map, how would we do this, what we would do is we'd start making the payments out of our business checking account for those items. Not only that are business related, but are also going to be something that we might have deductions for that are not on the schedule C, but some other area on our tax return. And that's going to muddy up once again, the checking account for our business checking account, if we just look at the checking account.

Now we have some business and personal in there. But it does allow us to then break that information out from business to personal and record it properly as draws anything that's personal to record as draws on our books. If we were to make payments, for example, make checks, and then have a system in which we take our bank account at the end of the year the bank statement and enter that into our QuickBooks. We can do this manually at the end of the year. We might have the QuickBooks system, do it automatically, however that happens. Then we're going to go into our system and anything that's going to be personal, these are going to be some examples of personal items that a pizza place we go to, we might, that just might be a normal personal item, we would put that to draws and say, okay, we spent some money out of the pizza place and put it to took it out of the business account.

And we shouldn't have really done that it shouldn't go into the out of the personal account. Well, we'll just going to put that to draw as normally. And then we've got the American Red Cross and Save the Children those sound like charities. If we see those types of items popping up, then we're going to now assign those to a new account an equity account, not an expense account, called charities a turtle equity account where we can then track that information. The college if we pay the college tuition or a College Bookstore, we might set up another equity account, not an expense account, as we see these items being paid out of our checking account and record those there. We have might have the childcare if we have a child that's in like daycare or preschool or something that might be something that could be deductible to my A credit related to it if something like that is is happening that we have to track every year we know that then we might say okay, here's an equity account for that these are all going to be draws type related accounts.

All equity type accounts, however, will specifically label them so that we can track the detail for them as we pay these items. In order to do that. We simply pay them out of our normal business checking account, and as we record those into the QuickBooks account, we make sure not to put them into an expense account, but to a type of draws account, one that's specific when we can track