In this presentation, we will discuss an overview of tracking tax deductions for personal items within our business account using a classes method. In other words, our objective is to take those items which are not business deductions, but which we want to track because we want to be able to provide them to the tax preparer at the end of the year, which may be deductible on our personal income tax return, but not as part of the business and see if there is a system that we can use our QuickBooks file that we are running our business accounts in, to help us to track these items while not messing up the income statement and the financial statements of the business. Remember, our goal here is to have our business income, that's generally where we're going to think that our sole proprietor is making money. And usually we're going to have to take that money out of the business, put it into the bank for the personal owner, and then use that money.

At some point for personal use this way, we're keeping the business separate from the personal. And that will help us to do the accounting track the accounts, it's going to be that way in our bookkeeping system, as well as in the bank statement, which is nice for this format. What we would like to do is think of a way that we can track some of these items, the ones that we want to specifically track for specific reasons such as taxes in the bookkeeping system, possibly, because that's where we do a good job of tracking items. In order to think about this method. Let's first think about a time when we may pay from the business directly to personal items. And this happens often.

So we want to keep these two things separate in some way so that we can keep the bookkeeping separate, but it's quite possible that oftentimes we pay something out of the business checking account, if that were to happen if we paid out of the business checking account for personal items. How would we record that in our system? Well, when we Put it into QuickBooks, then we're just not going to put it on as a business expense, we should put it on the books as a draws to the owner. That's going to be a typical type of transaction. It's not as clean from the bank statement standpoint, because now we have business and personal items going out of the bank statement. But when we put it into our books, we can still make that separation, say, hey, these are not affecting the income statement.

These are personal items, and therefore they're going to be recorded as draws, rather than business expenses. So these types of things happen. Now we want to think about, well, how can we do this maybe intentionally, in some cases, so that we can then track certain information such as possibly child care, or education or health insurance or medical costs, maybe some of these items that we might want to track in a more efficient way. So one way to do this is to use the classes feature within QuickBooks. So we're going to show just kind of like the end result. What was the Financial Statements look like if we were to use classes in this format to to pull out those individual items that we could still track within the system, but in a different way in a different format and using different classes.

To do that, let's take a look at the profit and loss report. So we're going to go to the reports up top, we're going to go to company and financial. And let's go down to the profit and loss we're first going to look at the profit loss by class. So this is what we're going to set up these classes profit and loss by class. If we take a look at that item, changing the dates to the range, we will be working in Oh 10119 to 1230 119 that's January 1 to December 31. You'll note that we have a profit and loss and then these two columns here, these are going to be our classes.

So we have the first class and these being our business related items. That's what's typically we're going to put in our system and you know all the time whether we had classes or not, it would be the our business related QuickBooks file items, income and expenses and then we have the the tax today deductions for the personal items that we want to specifically track. And so what we've done is we've intentionally said, we're going to pay these specific items, such as possibly charitable items, such as possibly the medical expenses, such as possible childcare, these items, that might be something we need to track for taxes intentionally out of the business accounts, but apply them to a different class, so that we can break them out and still have that separation between the business and personal. So here we have that so we have the business on this side, we've put all of the personal items then in this example, under other expenses, and group them under a sub category of personal deductions.

So we have personal deductions that we wanted to intentionally track in this format. We've got personal deduction for charity, childcare, college, an IRA, I'm going to make this a little bit larger medical costs, medical insurance, state taxes, these are things we want to track, but we don't want to be Including a net income for the business. So you can see net income here and net income here for the business not affected. And then we could still track these items in this format. Now of course, this is a kind of a bulkier looking report. So there's pros and cons to this method, we'll take a look at some other reports and how to make this nicer in a second.

But one way you can make it look a little bit nicer is we can we can nicely format this and minimize these options. So we just see the one line item and maximize these options. As we give this to our employer. This method is nice too, because we can just give these items which are as of just this year's worth of data in one lump sum number. And or we can double click on any of them and give the year to date number so January through December, which we probably want to do just to give the detail of it and say here here if there's any questions on what we actually spent on we spent to the Red Cross and to the Save the Children, so you can fill That out the tax return if you need to for the charitable deductions and that information so we have a detailed report, and we have the summary report, and it's in an income statement format, so we don't have to worry about whether it's including last year's numbers or anything like that unless we ran the dates incorrectly.

So that's the nice thing about us being able to just run this report say hey, there's this is what you put in the schedule, see if it's a sole proprietor, this is what you what you have that I think are added the deductions, and I'll give you the detailed report, double clicking, giving you the detail of each one, in case you need the detail of it. And so that's a nice format to have for the tax preparation. Let's compare this to the income statement to the balance sheet now by going to the reports up top company and financial and take a look at the balance sheet standard. And we'll take a look at this at the date of 1230 119 the end of the year. We're working on December 31st. Note that if we go down to the bottom, QuickBooks will include this 19,004 28.

That's net income. And we want to think about, well, how is this working? How is this equity section working? Does it really all line up? Does it work in this? I mean, how is this relating?

How's the balance sheet related to the income statement? Well, if we look at the profit and loss by class, note that we're taking the entire amount, the 19 for 28, not the business amount. And you might think well, that is that messing things up on the on the balance sheet side, and if it's a sole proprietor note that it's all rolling into equity in one format or another. So if we go back to the balance sheet, you'll you'll note that these amounts here, the income statement accounts that were personal are really kind of draws you so in a perfect world do you think they would roll into the draws account, but in financial accounting, the draws account, it's only temporary anyways, in other words, all of this stuff is for a sole proprietor we're going to roll into owner's equity at the end of the day.

So this 19 for 28 is kind of deceiving. Because it is representing net income, including these accounts that we would kind of call draws. But normally, this net income wouldn't even be reported on a on a balance sheet. It's only QuickBooks that does that kind of funny reporting it because it's trying to show us how to tie the thing out. In other words, if we change the date to the following year, if we change it to 2020, and once I refresh this report, this 19 is going to go away and it's going to be included now in the owner's equity. So I'm just gonna click here.

So now it's included in the owner's equity went away. And that's it. So just note that these all these equity accounts for a sole proprietor are kind of like the same thing in financial accounting, the same thing what happened, withdraws, it's a temporary account that should get closed out to the owner's equity. QuickBooks just doesn't do that because it wants to track draw separately. So just note that relationship. That's one thing that can be a little bit confusing of this method.

Is that when you think about the equity account, if it's a sole proprietor and out shouldn't be a big deal or a problem, but you could get a little, you're thinking on what the equity accounts are doing could get a little bit confusing. As you look at that net income number, just note that the net income is total net income, even though those personal accounts are really kind of draws. But for sole proprietor, they're all pretty much the same thing. So be aware of that. And so and don't let that don't let that confuse you. Going back to 2019, as you see this net income number.

So that's the first thing now we could make this report a little bit nicer, I'm going back to the profit loss. And you might want to run this report and just see one class or the other. And to do that, you can go to Customize reports up top and we can go to the filters and go filter by class. We'll discuss this in more detail later. I'll just give you an example now, and then we can do this and say I just want to look at the business items here. And say okay, so there's the business items just showing us the business information.

Now it doesn't now it only shows us the 5910, which isn't going to tie into the, to the balance sheet. So just be aware that of course, again, this numbers total net income on the balance sheet that they're showing there. I'm going back to the profit loss. If I wanted to do it just for the business expenses, customize or to the to the personal, that is the business, go to filters, and then we want to choose the filter of classes. And then we want to see just the tax deductions. And this is another way we could just give this report then to our tax preparer.

It looks a little cleaner and we say hey, here are just the tax deduction items. Alright, so then I'm gonna remove that filter. And we're going to go down classes. I'm going to remove that filter and say okay, and so here we have our total again, going down to the 19 for 28 it's also nice to note that if you have an item that could be in both of these classes, meaning let's say one of these charitable deductions was actually a deductible for the business. And for whatever reason we could, okay, we're going to there, we say this, let's say the second one was actually a business deduction. So we can go into that item.

And we can easily change the class to business and say, save and close and say close that out. And so now we've got part of it in the business and part of it in the personal so that the ability for us to do that it's pretty easy. And note that also if we have one miscategorized and we have the classes laid out as personal, personal personal, we know that we can easily recategorize we can run this report and say, we ran the wrong class. I can clearly see that and just double click on it and go into that item and reclassify it as we need to. So that's another if this if this method. If we mess up on this method and we don't classify it correctly, it should be fairly easy for us to review the reports, see the change, make the change within QuickBooks, which is pretty good about, you know, almost too good about us being able to go back in there and adjust things.

Now let's take a look at one another report that might look better just in terms of the financial statements, the normal profit loss. If we go to the reports up top company and financial and profit and loss, we're going to go to a 10119 to 1230 119 the year we'll be working on and you'll see you have the same information but no classes now. And this looks fine. We we brought everything to the bottom these things shouldn't be there then these are really draws. So we have them in the income statement now. So we might want to run a report How can I just do it normal profit loss And get rid of these items.

And if the way we have it now, it's pretty nice because you could see just net income up top, here's above the line net income. And here's all these items that are really personal, not business related, but which we want to track. And then here's net income after those items. So that's not too bad that way we have it here. And this is kinda like the end result of our problem. So as we get to the end, we'll we'll format it in this format.

So then, so this will be where we get to once we're done with what will the practice problem we work on. We could format this one though, and go to Customize reports and go to filters again, and go to classes. And then once again, we want to filter out the just we want to just have the business items, and then say, Okay, and then now we have just the business related items and anything that has a class that's other than business isn't included in here. And that means all the stuff that we have On the bottom drops away. And now we're just have our business related items. And this can be just our normal profit and loss.

So that's really nice, it looks very nice format here, just remember that, you want to make sure we first if you use this method, first go to the classes, reports here, and run the report for all classes to make sure that the classes are properly allocated. Otherwise, if you filter out some of the data, you might filter out some data that you that should be in there. So as long as the classes are filtered out, there's kind of that added little complexity step, then you can kind of format your profit and loss back to the profit loss. So it looks like just a standard profit loss, and you'll be able to track both those items. Also note though, however, that this item down here, once again, isn't what's going to be reported on the balance sheet for that time period, because the balance sheet is going to show the total but again, a normal balance sheet shouldn't even break out the net income there.

And and really what the actuality of this is that 19 for 28. If we look at a profit loss, and we take away the filter, well, let's go to the profit loss by class. What that really means is that 3000 of it should be going to draws. And the 15 910 should be going to the, the equity account, but then the draws is all going to, it's all going to flow out to equity in the end of the, at the end of the day anyways, where it should. So if you go to the profit loss, just be aware of that number there that 19 428 really includes draws as well. Some of those should be draws should be classified as draws, but it's all going to roll out to the to the equity section.

So that's just some of the pros and cons of this type of method. We're going to go through now and work through this method and this will be kind of like the end result that we will see with this data set we're working with