Borrowing Money for Your Business

If you are a small business owner looking for capital to start a business or expand an existing one, you will quickly learn that most lenders will require you to be personally liable on a secured loan.

A favorite source of funds for a small business owner looking for capital to start a business or expand an existing one is a loan on their home. Home loans usually provide a lower interest rate and are far easier to obtain than a business loan, which almost always will require a business owner to sign a personal guarantee and provide adequate security.

If planned carefully, using a home loan for business can provide a quick source of capital. However, if not thought out correctly, it can lead to unexpected tax results due to the complexity of the home mortgage interest rules. There are four tax rules that cause the complication and must be taken into consideration when considering your financing options:

1. Interest from loans secured by a taxpayer’s home (or second home) must be deducted as home mortgage interest to the extent the loans do not exceed specific debt limits for home mortgages, which are $1 million for acquisition debt and up to $100,000 of equity debt. Thus, a taxpayer cannot arbitrarily allocate a portion of the home mortgage interest to another use such as the taxpayer’s business.

2. The interest on loans secured by the home in excess of the sum of the acquisition debt and the equity debt can be traced to the use of the funds using the general tracing rules. Thus, the interest in “excess” of that allowed to be deducted as home mortgage interest can be traced to the actual use of the money (for example, the taxpayer’s business).

3. A taxpayer can make a tax election to treat any debt on the taxpayer’s home “as not secured by the home”. This election cannot be reversed without the IRS’s consent but can be eliminated by terminating the loan. This election is dangerous in that once it is made none of the interest can be deducted as home mortgage interest. Although you will now be able to trace (allocate) the portion related to your business, any part of the loan that is attributable to the home is no longer deductible. Thus, this election generally works best when used for second loans or lines of credit that are used 100% for business use.

4. Equity debt interest secured by the home or second home is not deductible for alternative minimum tax purposes. Thus, a taxpayer receives no tax benefit for interest paid on an equity debt to the extent the taxpayer is subject to the AMT. Business interest, on the other hand, is deductible for AMT purposes.

So why do you care where the interest is deducted? First and foremost, when interest is deducted as a business expense, it offsets your business income for both regular tax and self-employment tax. Another reason is that you may not have enough deductions to itemize so there is no tax benefit gained from the home mortgage interest deduction. And there is the issue of equity interest not being deductible for AMT purposes where business interest is.

Examples – To better understand how these rules play out, let’s apply them to some examples. Let’s assume that you currently have a $200,000 mortgage on your home, all of which is acquisition debt or refinanced acquisition debt. For this purpose, the $200,000 acquisition debt is debt incurred to acquire the home and any debt incurred to subsequently make substantial improvements on the home. The current market value of your home is $500,000.

• Scenario A – You need $150,000 to start your business so you refinance your existing $200,000 mortgage for $350,000 and you do not exercise the unsecured election. During the year, you pay $10,000 of interest on the loans. According to rule #1, you first must allocate the interest to home mortgage interest to the extent allowable as home mortgage interest and then the excess can be traced to your business. Thus, $200,000 of the debt is attributable to refinanced acquisition debt and the next $100,000 of the refinanced debt must be treated as home equity debt. The remaining $50,000 of debt is excess debt and per rule #2 can be traced to your business. Thus, only $1,429 of the $10,000 of interest can be traced to your business. The remaining interest must be treated as home mortgage interest and deducted as an itemized deduction, if you can itemize.

• Scenario B – Same as scenario “A” except you elect to treat the loan as unsecured (Rule #3). Since rule #1 only allows a taxpayer to deduct interest as home mortgage interest on debts that are secured by the home, the interest on the $200,000 of the acquisition portion of the refinanced debt is no longer deductible for any purpose since it is traceable to, but not secured by, the home. However, since the loan is unsecured none of the amount in excess of the $200,000 needs to be treated as equity debt and instead $4,286 ($10,000 x 150/350) of interest from the remaining $150,000 of that debt can be traced to your business. So, although you increased the amount that is deductible as business interest, you lost the amount that could have been deducted as acquisition debt interest.

• Scenario C – Instead of refinancing the first trust deed, you leave it alone and obtain a 2nd TD (or a line of credit) for $150,000. You make the unsecured election for just the 2nd TD. Since the original loan is still secured by the home, the interest on that loan is still allowed and deducted as an itemized deduction as usual. And, since the 2nd TD is treated as unsecured, the interest on that debt can be traced to and deducted on your business. So even though you pay a slightly higher interest rate on a 2nd TD, you will still be able to deduct all of the interest.

These rules can be confusing and require some in-depth planning to ensure you maximize the benefits of the interest deductions based on your overall business needs, existing loan mix and personal tax structure. Please call this office for assistance prior to any refinance, whether it is personal- or business-related, to make sure you get the most from your interest deductions while avoiding pitfalls.

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Important Tip When Buying or Selling a Business

If you are contemplating on buying or selling a business, one of the most important and frequently overlooked issues is the allocation of the purchase/sales price to the various elements of the business.

Most businesses are made up of different types of assets, and those assets get different treatment for tax purposes. How those items are identified at the time of the sale/purchase can have a significant tax impact on both the buyer and the seller. A seller will, of course, want to designate items into classes that will yield a long-term capital gain on sale and thus provide the best tax result from the sale. The buyer, on the other hand, will generally want to designate the purchased items into classes that provide the biggest up front write-offs.

The IRS generally does not care how the class allocations are made so long as both the buyer and the seller use consistent treatment. That is where IRS Form 8594 comes in. The form allocates the entire purchase/sales price of the business into the various classes of assets; both the buyer and the seller are required to file the form with their tax returns. It is also very important that the allocations are spelled out in the sales/purchase agreement and that the treatment be consistent between the buyer and seller.

A seller would prefer to designate the major portion of the sales price to goodwill and minimize any allocation to furnishings and equipment. Why, you ask? Because goodwill is a capital asset, which for federal purposes will be taxed at a maximum rate of 15%, while the furnishings and equipment can be taxed as high as 35%. Conversely, the buyer would prefer to have as much as possible designated as furnishings and equipment, since they can be written off over a short period of time (usually 5 or 7 years) or even expensed under the Sec. 179 rules, as opposed to a 15-year amortized write-off for the goodwill.

Whether you are the buyer or the seller, don’t leave the asset allocations to chance. Negotiate the allocation as part of the sales agreement. If you don’t, you could easily end up with inconsistent treatment and potential adjustments by the IRS.

If you are anticipating a sale, please call this office so that we may assist you in structuring the transaction to your best benefit.

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Too Many Estimated Tax Vouchers?

When your 2008 tax return was prepared, this office may have provided you with estimated tax vouchers for you to use in filing and paying your 2009 estimated tax liability. If you owed a significant amount of tax on your 2008 return or have filed estimates in the past, the IRS may send you yet another set of payment vouchers without any payment amounts shown. This leaves some taxpayers confused on which set of vouchers to use and how much they should pay, if any. Here is some guidance:

• If this office provided you with vouchers, continue to use those vouchers and pay the amount indicated unless you feel that there will be a significant change in tax liability either up or down. In some cases, your estimates may have been established to provide a “safe harbor” payment amount to avoid any potential underestimated penalty. Arbitrarily tinkering with the payment amount could jeopardize the “safe harbor” exception to the penalty.

• If during your tax appointment estimates were discussed, and this office advised you that you did not need to pay estimates, you can probably disregard the vouchers the IRS sent unless there has been a significant change in income, withholding, marital status or some other tax situation has changed. If any of these have occurred, you might wish to consult with this office to make sure that your withholding amount and estimates are adequate.

Even if estimates were not discussed or vouchers were not provided at your appointment, it may be appropriate for you to come in for a consultation appointment if your tax situation has significantly changed since your appointment.

If you have taken advantage of any of the tax incentive deductions and credits, you may be able to reduce your estimated tax payments.

Word of Caution: If you decide to discard an extra set of vouchers, remember that the forms include your name, address and Social Security number. Make sure that you properly dispose of them so that no one has access to your personal information.

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Fuel-Efficient Vehicles Provide Big Tax Break

If you pick a fuel-efficient new car, you can benefit from a sizable tax credit that reduces your income tax dollar for dollar. This is in addition to the sales tax deduction. So for those of you who are going car shopping, read this article carefully.

Toyota & Honda No Longer Qualify – This credit is allowed for a limited number of fuel-efficient vehicles produced by each manufacturer. Toyota and Honda have already exceeded that limit, and a credit is no longer available for cars produced by those two manufacturers.

Ford on Your Mind? If you are considering a Ford or Mercury, you need to act quickly since Ford has almost reached its limit as well. The credit for the purchase of a new Ford or Mercury has already begun to phase-out, effective for purchases made after March of this year. The reduced credit percentages are:

Hybrid Credits – For other new hybrid cars, 100% of the applicable credit is allowed. The tables below (updated through April of 2009) list the qualified vehicles and the amount of credit available for each.

Lean-Burn Technology Vehicle Credit – In addition to hybrid vehicles, the government recently certified passenger cars and light trucks equipped with advanced lean-burn technology, which generally run on diesel fuel, for credit. The vehicles qualifying for this credit include the following:

• 2009 Volkswagen Jetta 2.0L TDI Sedan manual or automatic – $1,300
• 2009 Volkswagen Jetta 2.0L TDI SportWagen manual or automatic – $1,300
• Mercedes GL 320 Blue TEC – $1,800
• Mercedes R 320 Blue TEC – $1,550
• Mercedes ML 320 Blue TEC – $900

Before You Count Your Credits – Be aware, that unless you use the vehicle in business, these credits are nonrefundable personal credits that can reduce your tax to zero and any excess is lost (not refundable). For example, if you have a total regular tax liability of only $1,000 and your credit is $3,400, you will only get the benefit of $1,000 of the credit and there is no carryover to a subsequent year. For 2009, the hybrid and lean-burn technology vehicle credits are allowed to be claimed against the Alternative Minimum Tax (AMT).

On the other hand, if you use the vehicle in business, the portion of the credit attributable to the business use is a general business credit and any unused amount will carryforward to the next year. The general business credit also reduces the AMT in addition to the regular tax. For prior years, only the business portion of the credit could be used against AMT. If the vehicle is used partially for business and personal, the credit is allocated according to the use between the nonrefundable and general business credits.

It may be appropriate for you to contact this office prior to making the purchase to see how the credit will benefit your particular circumstances.

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What To Do If You Receive an IRS Notice

If it is not your refund check in the mail box, that letter from the IRS will probably increase your heart rate a little. Don’t panic; many of these letters can be dealt with simply and painlessly.

Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of a change to their account, or to request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what needs to be done to satisfy the inquiry.

However, the letters also have to advise you of your rights and other information required by law. Thus, these letters can become overly lengthy and sometimes difficult to understand. That is why it is important to either call this office immediately or forward a copy of the letter or notice so it can be reviewed and handled accordingly.

Do not procrastinate or throw the letter in a drawer hoping the issue will go away. Most of these letters are computer generated and, after a certain period of time, another letter will automatically be generated. And as you might expect, each succeeding letter will become more aggressive and less easily dealt with.

That is why it so important for the correspondence to be dealt with promptly and correctly. This office can handle these matters for you, so please call us immediately for assistance.

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Special Vehicle Sales Tax Deduction Not Limited to Cars

Taxpayers typically associate the special 2009 vehicle sales tax deduction with the purchase of a new car. However, this deduction also applies to the purchase of new light trucks, motor homes, motorcycles and motor scooters that meet the “motorcycle definition.” So if you are in the market for any of the above, you could qualify for this deduction.

Here are some things that you should know about this new deduction:

• State and local sales taxes paid on up to $49,500 of the purchase price of qualifying vehicles can be deducted.

• Qualified motor vehicles generally include new (not used) cars, light trucks, motor homes and motorcycles.

• Purchases must occur after February 16, 2009 and before January 1, 2010.

• This deduction can be taken regardless of whether or not other deductions on your tax return are itemized. If you claim the standard deduction, it is an addition to the standard deduction amount.

• This deduction is for 2009 only and you will get the tax benefit when your 2009 tax return is filed in 2010.

• The amount of the deduction is phased out for higher-income taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers (between $250,000 and $260,000 for joint filers).

The actual tax benefit generated by this deduction will depend upon your individual tax bracket, which is based on your income. Let’s say that you are in the 25% tax bracket and you purchased a $35,000 vehicle. If the sales tax was 8%, you would save $700 in taxes, determined as follows:

The sales tax deduction is $2,800 (8% of $35,000).
The tax benefit is $700 (25% of $2,800).

Keep in mind that this deduction can only reduce your tax liability to zero, so you may not receive the full benefit if you already pay a minimal amount of tax.

If you have questions related to your specific tax benefit or whether you qualify for this deduction, please give this office a call.

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Don't Be a 2009 Tax Ostrich!

Hopefully, you have your 2008 tax return behind you. But even if your 2008 return is on extension, don’t think you can put off worrying about 2009 until next year! Congress has created a number of tax incentives to help stimulate the economy and, in some cases, you need to take action to benefit from those incentives. These incentives include the hybrid and lean-burn vehicle credits, the vehicle sales tax deduction, and the home energy efficiency and energy generation credits. In addition, there are other incentives, strategies and issues that can seriously impact your 2009 tax return.

• Consider Purchasing a Home – If you don’t own your home, you might consider buying one. Interest rates are low and so are home prices. Where rent payments are not deductible, home mortgage interest and property taxes are allowed, providing most taxpayers with additional tax deductions. This may permit you to reduce your withholding and provide more cash flow during the year.

If you are a first-time homebuyer and purchase the home before December 1, 2009, you may also be able to take advantage of the $8,000 first-time homebuyer credit. This is unlike the credit in 2008, since it is not a loan that needs to be paid back. The IRS’ very liberal definition of a “first-time homebuyer” is someone who hasn’t owned a home in at least three years.

Need help with the down payment? Consider utilizing one or both of these tax rules:

(1) You (and your spouse, if married) can each tap your respective IRA accounts penalty-free for up to $10,000 each. The IRA distributions, however, are taxable.

(2) If you qualify for the first-time homebuyer credit, after the purchase of your home is completed, you can amend your 2008 federal return to claim the credit (yes, even though the purchase was made in 2009); you don’t have to wait until your 2009 return is filed in 2010.

If you are thinking about helping a child or relative with their first home, this may be an opportune time for that as well.

There are other details to be concerned with, and some states are offering their own versions of home buying credits, so you may wish to schedule an appointment to see how a 2009 home purchase will play out for your particular circumstances and income level.

• Take Advantage of Loss Carryovers – You may have seen your stock portfolio take a dive in 2008 and you sold off many of these investments. Since investment losses cannot result in a deductible loss greater than $3,000 a year on your tax return, you probably have substantial loss carryovers, which can provide you with a $3,000 loss for a number of years. These loss carryovers can also be used to offset current year gains from sales of other investments, such as land, rental property, a vacation home, and other capital assets. So, if you are sitting on a gain because you don’t want to pay the taxes, this may be an opportunity to utilize the carryover losses.

• Keep An Eye On Your Withholding – The new “Making Work Pay Tax Credit” is being paid to taxpayers in advance through reduced payroll withholding. The reduction was accomplished by tweaking the withholding tables, which does not consider your specific tax circumstances. You may not have even noticed the difference, especially when spread over weekly, bi-weekly, or semi-monthly payroll checks. However, the amounts add up over time and could cause you to owe more federal income tax when your 2009 tax return is filed. This could be especially troubling for married individuals who both work and have their withholding adjusted.

• More Investment Flexibility for 529 Plans – Section 529 Qualified Education plans are tax-advantaged savings plans that can be used to pay qualified education expenses. For calendar year 2009 only, 529 plans may permit accounts to change their investment strategy twice (as opposed to once under prior rules) during the year, as well as upon a change in the designated beneficiary of an account. This new flexibility was prompted by concerns from 529 plan sponsors that in today's market environment the lack of flexibility in switching investments could imperil many 529 accounts.

• Clarifying Waivers of RMDs for 2009 – Retirement plan account participants, IRA owners, and their beneficiaries do not have to take required minimum distributions (RMDs) for 2009. However, this special one-year relief from taking RMDs does not apply to 2008 RMDs that were deferred until 2009, and those distributions must be taken in 2009.

The 2009 RMD waiver applies to individuals who may be eligible to postpone taking their 2009 RMD until April 1, 2010 (generally, retired employees and IRA owners who attain age 70-1/2 in 2009). However, the law does not waive any RMDs for 2010.

For beneficiaries taking distributions over a five-year period, he or she can waive the distribution for 2009, effectively permitting the beneficiary to take distributions over a six-year period.

• Unemployment Withholding – If you are drawing unemployment compensation, you are probably aware that a recent law change makes the first $2,400 of unemployment benefits tax free for each individual. If married with both spouses drawing unemployment, each can exclude the first $2,400 of their individual unemployment benefits. But don’t become complacent and overlook the fact that the balance of the unemployment you receive will be taxable, and over time that can add up to a significant amount of taxable income. If you don’t have any tax withholding, you can dig yourself a significant tax hole. You don’t need to end up with a big tax liability on your 2009 return when you are already struggling to make ends meet. Taxes can be withheld from your unemployment payments by completing and submitting a W-4V. If you need assistance, please call this office.

• Consider a Mid-Year Tax Consultation – June through August is a great time to sit down and review your year-to-date tax status, discuss strategies, review the scenarios included in this newsletter, and extrapolate the 2009 outcome based on your income for the first part of the year. If you would like to arrange an office or teleconference appointment to review your specific circumstances, please give this office a call.

If you have questions regarding any of the topics included in this article, this office can help you.

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How to Cut Your Utility Bills While Reducing Your Taxes

How would you like to get paid to reduce your utility bills? You can do that by taking advantage of tax credits now available for making energy improvements to your home. Generally, you’ll be able to claim a tax credit of 30% of the cost of the improvements, which will also lead to lower energy consumption resulting in lower utilities bills. This is a win-win deal for energy-conscious taxpayers.

The home energy credits are for specific energy improvements that are broken down into two distinct groups, one for making efficiency improvements and the other for tapping solar, wind and geothermal energy sources. Although they both provide a 30% tax credit, each has its own specific list of items that qualify for the credits, overall credit limitations, and years in which the credits are effective. These credits are available for dwellings located within the United States.

• Residential Energy Property Credit – The name Congress gave to this credit is not as descriptive as it could have been and is easily confused with other credits. This credit is for energy-saving improvements to a taxpayer’s principal residence. The credit is limited to $1,500 (30% of up to $5,000 of qualified expenditures) for improvements made in 2009 and 2010. Qualified improvements, the use of which must originate with the taxpayer, must have a reasonable expected life of at least five years, and include:

o Energy-efficient Exterior Windows and Skylights;
o Energy-efficient Exterior Doors;
o Energy-efficient Metal Roofs with appropriate pigmented coatings;
o Energy-efficient Asphalt Roofing with appropriate cooling granules;
o Energy-efficient Heating Systems;
o Energy-efficient Air Conditioning Systems; and
o Insulation Materials or Systems designed to reduce heat loss or gain.

Credit is not allowed for onsite preparation, assembly, or the installation of the component. The credit is a nonrefundable personal credit; thus, the credit can only be used to bring your tax (including the alternative minimum tax) down to zero. Any excess is not refundable and cannot be carried over to a subsequent year.

Of course, the question is how does one determine whether or not a specific manufacturer’s component qualifies as “energy efficient”? Each manufacturer must comply with the government’s established standards for the product to be qualified as "energy efficient.” And each manufacturer who meets those standards will provide a written certification that a taxpayer can rely upon for purposes of the credit. Although the IRS is planning to issue new guidance to manufacturers for their certifications, taxpayers may continue to rely on Energy Star labels in determining whether property purchased before June 1, 2009 qualifies for the credit.

• Residential Energy-Efficient Property (REEP) Credit – This is a 30% tax credit for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. These all represent major home modifications and the labor costs allocable to onsite preparation, assembly, or original installation of property qualify for the credit. Refer to each item below for total credit limitations, if any.

o Qualifying solar water heating property – This qualifies if used in a dwelling unit used by the taxpayer as a main or second residence where at least half of the energy used by the property for such purpose is derived from the sun. Heating water for swimming pools or hot tubs does not qualify for the credit. The property must be certified for performance by the Solar Rating Certification Corporation or a comparable entity endorsed by the state government where the property is installed. The credit is 30% of the cost with no cap.

o Qualified solar electric property – The property must use solar energy to generate electricity for use in a dwelling unit used as a main or second residence by the taxpayer. The credit is 30% with no cap.

o Qualified fuel-cell property – This is a fuel-cell power plant installed in the taxpayer’s principal residence that converts a fuel into electricity using electrochemical means. It must have an electricity-only generation efficiency of greater than 30%, and generate at least 0.5 kilowatt of electricity. The credit is 30% of qualified fuel-cell expenditures but limited to $500 for each 0.5 kilowatt of the fuel-cell property’s capacity to produce electricity. If two or more individuals jointly occupy a residence, the maximum amount of expenditures that can be taken into account between them (not each) is $1,667 for each 0.5 kilowatt of capacity.

o Qualified small wind energy property – This is property that uses a wind turbine to generate electricity for use in connection with a dwelling unit used as a main or second residence by the taxpayer. The credit is 30% with no cap.

o Qualified geothermal heat pump property - Any equipment that uses the ground or ground water as a thermal energy source to heat the dwelling unit used as a main or second residence by the taxpayer or as a thermal energy sink to cool the dwelling unit, and meets the Energy Star program requirements in effect when the expenditure is made. The credit is 30% with no cap.

The REEP credit is a nonrefundable personal credit which can only be used to bring your tax (including the alternative minimum tax) down to zero, and any excess is not refundable. However, the excess can be carried forward to the next tax year and added to the credit allowable for that year.

A taxpayer may rely on manufacturers’ written certifications that the property qualifies for the REEP credit. While the certification does not have to be attached to the tax return, it must be kept as part of the taxpayer’s tax records. The IRS has set out specific information that the manufacturers must include in the certifications.
In addition to these federal credits, some states also have solar or other alternative energy programs that provide credits, grants or rebates which may make these home energy-saving improvements even more affordable.

These credits can be complicated but can provide you with substantial tax benefits, not to mention reduce your energy costs. If you are contemplating one or more of these expenditures, gather the information related to the particular home energy modification you have in mind and then call this office for a consultation appointment. Everyone’s tax situation is different and you may wish to determine just how these tax credits will impact your particular tax circumstances before committing to the expenditure.

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Haven't Received Your Refund Yet?

Are you one of the many who filed their returns near the deadline, or were on extension and filed after April 15, and still have not received your refund? If so, you can easily check the status of your refund on the IRS web site, whether you opted for direct deposit or asked the IRS to mail you a check.

You can generally access information about your refund 72 hours after the IRS acknowledges receipt of your e-filed return, or three to four weeks after mailing a paper return.

For security reasons, you will need to have the following information available before you can use the online “Where’s My Refund” query provided by the IRS:

• Your Social Security Number (or Individual Taxpayer Identification Number)
• Filing Status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er))
• The exact whole dollar amount of your refund

If the IRS web site indicates that the IRS was unable to deliver your refund, the web site allows you to change your address online. Once your address has been updated, they can reissue your refund to the new address.

If, for some reason, you have not received it within 28 days of the date indicated on “Where’s My Refund,” you can initiate a refund trace online.

Word of Caution – The IRS never initiates e-mails. Don’t get caught up with an online scam. If you receive an unsolicited e-mail from the IRS, DO NOT respond. Instead, call this office for assistance.

You can access “Where’s My Refund” using your own computer or if you need assistance in following up, please call this office.

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Recording Infrequent Transactions in QuickBooks

Day-to-day transactions like receiving payments from customers or paying vendors occur so frequently that most QuickBooks users do them automatically. However, from time to time you may encounter an infrequent transaction that will stop you in your tracks. In this article we'll discuss several common tricky transactions and offer advice on how to handle them.

Security Deposits

Security deposits, such as for a rental space or to a utility company, require special tracking so that you can be sure to get the money back later. It's best to maintain a separate account for each security deposit so that you can track each individually. If you have numerous security deposits, consider creating individual subaccounts for each deposit:

1. Choose Lists, and then Chart of Accounts (or press Ctrl-A).

2. Click the Account button, and then choose New (or press Ctrl-N).

3. As shown in Figure 1, choose Other Account Type, Other Current Asset, and then click Continue.

4. Assign an Account Name such as Contributions from Owner, (and account number if applicable). If necessary, click Subaccount Of, and specify the Deposits account. Click Save and Close to save the new account.



Figure 1: An easy way to manage security deposits is to post them to a new Other Current Asset account.

Refunds from utility companies, insurance companies, or other sources

Choose Banking, and then Make Deposits. Specify the vendor, and then choose the account. In the case of deposit refunds, you should have an asset account that you'll apply the money against, as shown in Figure 2. For other types of refunds, use the expense account from which you originally paid the money.



Figure 2: Apply utility deposit refunds back to the deposit account on your balance sheet.

Owner Contributions

This is a situation where an owner of the company invests money into the firm. The owner does so in hopes of making a return on their investment, but does not have a specific timetable in mind for repayment of the loan.  If you don't already have a Contributions from Owner account, follow these steps described previously for creating a new account, but choose Equity and name the account Contributions from Owner.

Distributions to Owner

Distributions allow an owner to take profits out of the company on a non-salary basis. Distributions can be paid through payroll or on a separate check. Your chart of accounts should already include a Distributions to Owner account, but if it doesn't, you can establish this new Equity account, which you can then use in either of these types of transactions.

• Payroll: Distributions require special treatment in payroll because they're not subject to income or payroll taxes in QuickBooks. The owner settles the income tax due when filing their annual return. Before you can pay distributions through payroll you must establish a payroll item. To do so, follow these steps:

1. Choose Employees, Manage Payroll Items, and then New Payroll Item.

2. Choose Custom Setup, and then click Next.

3. Choose Addition, and then click Next.

4. Enter the word Distribution and then click Next.

5. Choose the Distributions to Owner account from your chart of accounts, and then click Next.

6. Choose None for the Tax Tracking type, and then click Next.

7. Leave all of the taxes unselected, and then click Next.

8. Choose Calculate This Item Based on Quantity and then click Next when the Calculate Based on Quantity screen appears.

9. Accept the default choice of Gross Pay and then click Next.

10. Leave the Default Rate and Limit fields at zero and then click Finish.

Next, select the employee in the Employee Center, and then choose Edit Employee. Choose Payroll and Compensation Info from the Change Tabs list, and then add Distributions to the Additions, Deductions, and Company Contributions list, as shown in Figure 3. You can fill in the distribution amount now if you know the ongoing amount, or you can fill it in on the fly during the payroll process. Simply display the Paycheck Detail during the payroll process to access this field and enter the distribution amount.



Figure 3: Add Distributions to the Additions, Deductions, and Company Contributions section.

• Separate check: A much simpler approach is to write a separate check to the owner. To do so, choose Banking, and then Write Checks. Choose the Distributions to Owner account and fill in the amount.

Loans to the Company

From time to time the owner may need to make a loan to the company. If the owner expects this money to be repaid, establish a Loan account on the chart of accounts and record the deposit of the loan to this new account.

Company Loans Money to Others

Sometimes your company may make a salary advance to an employee, or the firm may loan money to an affiliate. In such cases it's important to always establish a separate Current Asset account for such transactions so that you can easily track the outstanding balance. Such accounts can be a subaccount of a general Loans Receivable account, as shown in Figure 4.  As shown in Figure 5, you'll code the check to that subaccount.



Figure 4: Make sure to create individual subaccounts for loans to employees or other parties.



Figure 5: Be sure to use the proper subaccount when issuing an employee loan.

Loan Payments

Many users struggle with loan payments because there are usually three different scenarios:

• Interest only payment: In this case there's only one account to charge, which will be Interest Expense, as shown in Figure 6.

• Interest and principal payment: If you're amortizing the loan over time—your payments include principal and interest— then you'll have to charge two accounts on the transaction, both the Interest Expense and the Loan account itself, as shown in Figure 7. These amounts will be different each month. Your lender can provide an amortization table, or you can search for one for free on the Internet. Simply use the search term "amortization table" to uncover a variety of free resources, or use this search term to locate an Excel-based solution:  "amortization table site:microsoft.com"

• Extra principal payment: Extra principal payments being submitted on a separate check should be applied directly to the Loan account.



Figure 6: Interest-only loan payments post directly to the Interest Expense account.



Figure 7: Make sure to break out principal and interest when a loan payment reduces the outstanding balance.

Expert tip: You can use the QuickBooks Account Reconciliation feature to reconcile your loan balance with the periodic statement that you receive from your lender. This ensures that your financial statements are correct, and helps you confirm that the lender is applying your principal payments correctly.

Petty Cash

Many offices keep a small amount of cash on hand to simply accounting for activities like running to the post office to buy stamps or make small purchases for the office. To establish a petty cash fund, you first write a check to Cash, which you then exchange for money at your bank. Let's say that you establish a $100 petty cash account, and need to replenish it to cover three purchases:

• Lunch for the office: $24.72
• Postage stamps: $44.00
• Office supplies: $23.18

In QuickBooks, you would choose Banking, Write Checks, and then write another check to Cash, and code it to the corresponding expense accounts for the three purchases.

Expert tip: Petty cash is easily subjected to abuse, so be sure to require receipts for all petty cash transactions.

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