QuickBooks Tip: Using Time Tracking in QuickBooks

Previously, we learned about getting QuickBooks ready for time-tracking by activating it in Preferences. We also created a record for a service item. Now we’ll actually use that record in the two ways you’ll be using it in QuickBooks: to pay employees for their hourly work and to bill customers for services.

Recording Employee Hours
There are two ways to enter hours for your employees who provide services to customers and are paid by the hour. The first is to create a work ticket for a single activity. Click Enter Time on the home page, and then Time/Enter Single Activity to open this window:

Single-activity work tickets for employee hours are especially useful if you need to set a timer.

First, check the date to make sure it displays the day when the work was actually done, not recorded. Click the arrow in the field next to Name and select the employee’s name from the drop-down list that opens, then do the same in the Customer:Job field below. The Service Item field needs to display the name of the service performed by the employee.

If you want to time a period of activity, use the Start, Stop, and Pause buttons under Duration. You can also replace the 0:00 that appears by default with the number of hours and minutes that were worked.

In the middle column, you’ll select the correct Payroll Item from the drop-down list. You can add a new employee if necessary without completing his or her entire record, but be sure to go back and complete it before your next payroll.

Hidden behind the drop-down menu is a field titled WC Code, which stands for Workers’ Compensation Code. It will only appear if you’re using QuickBooks Enhanced Payroll and have that feature turned on.

Tip: If these two fields do not appear, you’ve selected an employee who isn’t timesheet-based.

In the upper right hand corner, you’ll see a field labeled Billable. Be sure you click in the box to create a checkmark if you’ll be invoicing a customer for the work done.

Save the activity record when you’ve completed it.

Using Timesheets

You can enter employees’ hours directly on a timesheet instead of creating a single activity record.

QuickBooks offers a second option for entering employee hours: timesheets. You’ll notice that there’s a Timesheet icon in the toolbar of the Time/Enter Single Activity window. If you click on it with a completed record open, a new window opens containing a graphical representation of a paper timesheet.

If you enter employee hours in a single activity record, they will appear on a timesheet, and vice versa. There are two advantages to entering hours directly on the timesheet, though. The first is that it’s faster. And secondly, you can click the Copy Last Sheet icon if you’re just going to duplicate an employee’s previous pay period’s hours. If you want to go there straight from the home page, click Enter Time | Use Weekly Timesheet.

Billing Customers for Time
QuickBooks makes it very easy to transfer billable hours worked by employees to the corresponding customers’ invoices. After you’ve entered blocks of time spent on services, open an invoice form and select the customer. This window will open:

Once you’ve entered billable hours worked by an employee, simply open an invoice form and select that customer to open this window.

By default, Select the outstanding billable time and costs to add to this invoice? is checked. When you click OK, a new window opens displaying a grid that contains all of that customer’s billable time. You can Select All or click in front of each entry you want to include. You’ll notice here that there are also tabs on the grid for Expenses, Mileage, and Items that can be billed back to the customer.

If you choose not to carry billable hours over to the invoice at the present time, you can always add them by clicking Add Time/Costs in the invoice’s toolbar.

Questions? We’re always available to help ensure that you’re billing customers for all costs they incur – and to talk about any other element of accounting that affects your cash flow.

Business Owners Beware – New Tax Law Severely Limits Entertainment Deductions

Note: This is one of a series of articles explaining how the various tax changes in the GOP’s Tax Cuts & Jobs Act (referred to as “the Act” in this article), which passed in late December of 2017, could affect you and your family, both in 2018 and future years. This series offers strategies that you can employ to reduce your tax liability under the new law.

If you are a business owner who is accustomed to treating clients to sporting events, golf getaways, concerts and the like, we have some bad news for you. The GOP’s tax-reform bill that President Trump signed on December 22nd of last year eliminated the business-related deduction for entertainment, amusement or recreation expenses, effective beginning in 2018.

This doesn’t mean you can’t still entertain your clients; it just means you can no longer deduct 50% of the cost of that entertainment as a business expense, making it more costly for you to entertain clients.

But all is not lost! The Act does retain a deduction for business meals that are directly related to or associated with the active conduct of your business. The term “directly related” means that actual business discussions were conducted during the meal and you anticipated a specific business benefit from the meal. The term “associated with” is more liberal and includes meals either preceding or following a bona fide business discussion. In either case, the business deduction continues to be 50% of the actual expense. Also remember that business meals must be documented, including the amount, business purpose, date, time, place and names of the guests as well as their business relationship with you.

That’s not all! In the past, employers have been accustomed to deducting 100% of the cost of food and beverages provided to employees at or near the place of business. That too has changed, and the Act now subjects food and beverages supplied to employees to the 50% limitation. But that deduction is only allowed through 2025. As of 2026, employers’ costs for food and beverages furnished to employees will not be deductible.

Meals while traveling out of town on business continue to be deductible and are also subject to the 50% limitation.

If you have questions related to entertainment and meal expenses, please give us a call.

Personal Casualty Losses Axed by the New Tax Law

Note: This is one of a series of articles explaining how the various tax changes in the GOP’s Tax Cuts & Jobs Act (referred to as “the Act” in this article), which passed in late December of 2017, could affect you and your family, both in 2018 and future years. This series offers strategies that you can employ to reduce your tax liability under the new law.

A casualty loss occurs when there is property damage from a sudden, unanticipated event, not from gradual, progressive damage. Examples of events qualifying as a casualty include: acts of nature like hurricanes, tornadoes, floods, storms, and volcanic eruptions; shipwrecks; sonic booms; vandalism; fires; car accidents; theft; and terrorist attacks.

For tax years 2018 through 2025, the Act has suspended the itemized deduction for personal casualty and theft losses. Prior to this change in law, personal casualty or theft losses were only deductible to the extent they exceeded $100 per casualty or theft event. In addition, the aggregate net casualty and theft losses for the year were deductible by those who itemized their deductions but only to the extent that the loss exceeded 10% of an individual’s adjusted gross income (AGI).

There is an exception to the suspension, in which a taxpayer has a gain as a result of another casualty (the insurance or other reimbursement is more than the loss), in which case the loss would be allowed to the extent of another casualty gain.

The Act did, however, retain a deduction for qualified disaster-related personal casualty losses for years 2018 through 2025. A qualified disaster-related personal casualty loss is one that occurs in a presidentially declared disaster area and is a result of the disaster.

For example, if your home was destroyed by a hurricane within an area the president has declared to be a disaster area and you have a casualty loss, you are able to deduct the loss. However, if your home is destroyed by a fire that was not in a disaster area (say, due to a fire that started in your kitchen when cooking), you cannot claim a casualty loss, even though your loss would be as great as that of the individual residing in the disaster zone.

In light of these changes, you may not qualify for any tax relief as the result of a casualty, and you are cautioned to review your risks for a casualty and your insurance coverage, should you be unfortunate enough to incur a non-deductible casualty loss. Because of inflation, make sure you are not underinsured.

If you have questions related to casualty losses, please give us a call.

First-Year Start-Up Tax Issues

If creating a start-up business were an easy thing to do, then a lot more people would be doing it. For those who make the decision to fulfill their dreams and go for it, success relies on being fully prepared. Some of the most common stressors encountered by entrepreneurs involve tax liabilities, whether business is booming or they’re struggling to keep their head above water. The best way to avoid these pitfalls is to learn about them ahead of time. Here’s what every entrepreneur needs to know.

Give Careful Consideration to the Type of Business Organization You Choose
The entity that you choose for your start-up will have a big impact on how your taxes are handled, so make sure you’ve done your research to find the option that works best for your specific situation. Factors like the state where you’re doing business and the type of business you’re operating will be a consideration, and so will your ownership profile. Businesses that don’t plan on adding partners or shareholders in the future or that anticipate changing owners in the near future are probably limited to establishing as a C corporation or an S corporation, with the former offering more flexibility on ownership shifts, as well as the possibility of international investors.

Though there’s no law to prevent you from shifting to another type of entity in the future, doing so can be disruptive, so it makes sense to take your time and choose the option that fits best and makes the most sense based on your current ownership plans.

Choosing an Accounting Method
Unless you’re an accountant or have experience and significant knowledge of accounting, it’s a good idea to sit down with a professional to determine whether you’re going to use a cash accounting method, an accrual method, or a hybrid of the two. If you don’t have a background in bookkeeping and taxes, it may seem like an academic question, but it plays a big part in determining your tax liability. A lot of the determination will also depend on the type of business you run. An experienced accountant will be able to walk you through the decision that makes the most sense and that will be easiest to implement in compliance with IRS regulations.

Putting Internal Controls in Place
As a start-up, there are certain internal controls you need to put in place to ensure that your business is running smoothly and according to your stated objectives and goals. You also want to be sure that you’re set up to provide comprehensive information for external investors. Company policies need to be written and communicated with an eye to regulations. A CPA will be invaluable in helping you get these controls in place.

Paying Attention to Compliance
Every entrepreneur likes to do things their own way, but there are some issues where compliance is key. Failure to follow the rules and regulations could lead to stiff penalties and fines, or even to your business either temporarily or permanently being shut down. In addition to paying taxes on your business’s income, you also need to find out whether your locale requires a business license and what the rules are if you’re selling either a digital or physical product over state lines. Sales tax will need to be paid, workers’ compensation insurance will need to be purchased and a policy put in place if you have even a single employee, and if you’ve organized yourself as a Delaware corporation, then you’ll need to have an annual franchise tax report prepared, filed and paid, whether you generate income or not.

Creating a Way to Track Performance and Stay on Budget
One of the biggest mistakes new business owners make is failing to create a budget and stick to it. Failure to do so can easily lead to a shortfall in available funds, including those you need to pay your tax liability. Take the time to make a reasonable budget and establish what your start-up’s key performance indicators (KPIs) are for both cutting expenses and generating income. With those issues addressed, you give yourself a solid way to measure how you’re doing, and you’re likely to find both short-term and long-term tax planning easier too.

Starting a new business is a dream come true for many, but your focus has to go beyond your own area of expertise and interest. By working with a tax professional, you can be sure that you’ve addressed the tax-related problems that have tripped up many start-up organizations.

Please call us with any questions related to creating a start-up business.

Employee Business Expenses & Tax Reform

Note: This is one of a series of articles explaining how the various tax changes in the GOP’s Tax Cuts & Jobs Act (referred to as “the Act” in this article), which passed in late December of 2017, could affect you and your family, both in 2018 and future years. This series offers strategies that you can employ to reduce your tax liability under the new law.

If you are an employee (i.e., a W-2 wage earner) with substantial work-related business expenses, the Act was not kind to you. It suspended (and effectively repealed), for 2018 through 2025, all miscellaneous itemized deductions, which were previously only subject to a floor of 2% of adjusted gross income (AGI). Employee business expenses are included in that category of miscellaneous itemized deductions.

This change affects those who are compensated as employees and who have work-related expenses—including salespeople with travel and entertainment expenses, long-haul truck drivers with away-from-home expenses, mechanics with tool expenses, and any other employees with large but unreimbursed business expenses. These employees, beginning in 2018, will no longer be able to count such expenses as itemized deductions.

Will this change hurt you? That depends. Because employee business expenses could previously only be deducted to the extent that they exceeded 2% of AGI, the effects of the Act will depend upon the extent of your expenses. Another consideration is whether your total itemized deductions would have exceeded the new standard deduction, which has increased for 2018.

As a remedy, you may want to contact your employer and try to negotiate an “accountable plan,” which is a business-expense reimbursement plan under which the employer can reimburse you, tax-free, for business expenses. With this arrangement, you would need to substantiate your business expenses to your employer and would have to return (within a specified time limit) any reimbursements that your employer pays in excess of the substantiated amount.

If you have questions related to the loss of this deduction or about how the change will impact your specific tax situation, please call us.

Tax Reform Cracks Down on IRA Recharacterizations

Note: This is one of a series of articles explaining how the various tax changes in the GOP’s Tax Cuts & Jobs Act (referred to as “the Act” in this article), which passed in late December of 2017, could affect you and your family, both in 2018 and future years. This series offers strategies that you can employ to reduce your tax liability under the new law.

If you have been or are anticipating converting your traditional IRA to a Roth IRA, you should be aware of a tax trap that Congress built into the Act.

Background: There are two types of IRA accounts:

  • Traditional IRA – Is a retirement plan that generally provides a taxpayer with a tax deduction when a contribution is made to the account. Then when distributions are taken from the account they are fully taxable, including earnings.
  • Roth IRA – Is also a retirement plan, but unlike the traditional IRA, a Roth IRA does not provide a tax deduction for the contribution. Thus, once a taxpayer reaches retirement age, all of the distributions are totally tax-free.

The big benefit here is that all the Roth account earnings over the years end up being tax-free as opposed to those from the traditional IRA, which are taxable. For that reason, many taxpayers take advantage of a provision in the law that allows them to convert a traditional IRA to a Roth IRA. However, for the year that a traditional IRA is converted to a Roth IRA, the converted amounts are taxable. Therefore, most IRA owners carefully plan the amount and timing of the conversions to be done in a year when they are in lower-than-normal tax brackets.

Prior law included a provision that allowed taxpayers to change their minds and undo a conversion by recharacterizing the Roth converted amounts back to traditional IRAs and thus also undoing the tax liability. This was helpful for those who had underestimated the tax liability, did not have money available to pay the tax, saw the value of the converted IRA drop (which would mean they’d be paying tax on a phantom value) or just changed their mind.

Unfortunately, the Act pulled the plug on recharacterizations, and beginning in 2018, taxpayers can no longer undo a conversion. Once a conversion is made, the IRA owner will have to live with the tax consequences. This rule applies for conversions from a traditional IRA, SEP or SIMPLE to a Roth IRA. The new law also prohibits recharacterizing amounts rolled over to a Roth IRA from other retirement plans, such as 401(k) or 403(b) plans.

However, for taxpayers who made a conversion to a Roth IRA in 2017, the IRS has announced the conversion may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by October 15, 2018. A Roth IRA conversion made on or after January 1, 2018, cannot be recharacterized.

Recharacterization is still permitted with respect to other contributions. For example, an individual may make a contribution to a Roth IRA for a particular year and, before the due date for their income tax return for that year, recharacterize it as a contribution to a traditional IRA or vice versa.

If you have questions related to converting a traditional IRA to a Roth IRA, please give this office a call. If you would like to strategize on how to minimize the tax on a conversion, please contact us.

Have Business Income? If So, You Score Big With The New Tax Reform

Note: This is one of a series of articles explaining how the various tax changes in the GOP’s Tax Cuts & Jobs Act (referred to as “the Act” in this article), which passed in late December of 2017, could affect you and your family, both in 2018 and future years. This series offers strategies that you can employ to reduce your tax liability under the new law.

As part of the Act, Congress changed the tax-rate structure for C-corporations to a flat rate of 21% instead of the former graduated rates that topped out at 35%. Needing a way to equalize the rate reduction for all taxpayers with business income, Congress came up with a new deduction for businesses that are not organized as C-corporations.

As a result, the Act has provided a new and substantial tax benefit for most non-C- corporation business owners in the form of a deduction that is equal to 20% of their qualified business income (QBI). This deduction is most commonly known as a pass-through income deduction because it applies to income from pass-through business entities such as partnerships and S-corporations. This category also includes income from sole proprietorships, rentals, and farms; Real Estate Investment Trust (REIT) dividends; pass-through income from publicly traded partnerships; and cooperative dividends. The shorthand term for this deduction is the Sec 199A deduction, as 199A is the Internal Revenue Code section number for this provision. Let’s look at how this deduction works.

QBI – QBI is defined as the net amount of income, gains, deductions, and losses with respect to trades or businesses that are conducted within the United States. QBI does not include:

  • Limitation thresholds
  • Wage limit
  • Capital gains or losses,
  • Interest income,
  • Dividends or payments in lieu of dividends,
  • Annuity income not received in connection with a trade or business,
  • Gain or loss from foreign currency transactions,
  • Trade or business of being an employee,
  • Reasonable compensation from an S-corporation, or
  • Guaranteed payments from a partnership.

The pass-through deduction is not a business deduction, as it is deducted after a taxpayer’s adjusted gross income. It can be claimed regardless of whether the taxpayer claims the standard deduction or itemizes deductions. Since it is not a business deduction, it does not affect the computation of self-employment tax. Where QBI is less than zero, it is treated as a loss from a qualified business on the next year’s taxes.

Complicated Computation – Congress ignored simplification for this deduction, which is quite complicated and which includes limitations at the entity level and for the combined deductions from all entities; furthermore, it is subject to a limitation based on taxable income.

Threshold – When determining the 20% of QBI deduction for each entity, the deductible amount may be reduced, phased-out or phased-in based on that year’s taxable income (without regard to the deduction itself). The thresholds for each limitation are $157,500 for individuals and $315,000 for joint filers. The maximum of any phase-out or phase-in is $50,000 more than the threshold for individuals and $100,000 more for joint filers, so the maximums are $207,500 for individuals and $415,000 for joint filers.

Specified Service Business – Special rules apply to specified service businesses, which are generally businesses that rely on the skill and reputation of the owners or employees. These include businesses focusing on health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and so on. This category specifically does not include engineering or architecture businesses and trades or businesses whose services consist of investment-type activities. For specified service businesses, if the taxable income is equal to or below the threshold, the entity’s deductible amount is the full 20% of QBI. When the taxable income is above the threshold, the deduction is pro rata phased out between the threshold and the cap. Thus, a specified service business entity has no deduction when the taxable income exceeds $207,500 for individuals or $415,000 for joint filers.

Wage Limit – Before learning how the deduction is determined for other business entities, one must understand the wage limit and how it is determined. An entity’s deduction is limited to the lesser of 20% of QBI or the wage limit. The wage limit is the greater of

  • 50% of the W-2 wages from the business or
  • 25% of the W-2 wages from the business plus 2.5% of the unadjusted basis of the business’s qualified property.

Other Businesses – Computing the deduction for other entities gets significantly more complicated depending upon the taxable income. The computations fall into three categories:

  • Taxable income below the threshold ($157,500 for individuals or $315,000 for joint filers),
  • Taxable income above the threshold but less than the cap, and
  • Taxable income exceeding the cap ($207,500 for individuals or $415,000 for joint filers).

Income below the threshold – The entity’s deductible amount is the full 20% of QBI.

Income above the threshold but less than the cap – This is the most complicated computation because the wage limit is phased-in between the threshold and the cap; it only applies to a pro rata portion of the deduction.

Income above the cap – The deduction is equal to the lesser of the wage limit or 25% of QBI.

Example: A single taxpayer has a taxable income of $125,000. He runs a small car-repair business that has a net profit (QBI) of $100,000. Because his taxable income is below the threshold, his deduction for the business entity is $20,000 (20% of $100,000).

Example: A married taxpayer with a taxable income of $500,000 is a shareholder in an S-corporation. The K-1 from the S-corporation shows pass-through income (QBI) of $300,000. The pro rata share of that taxpayer’s wages that were paid by the corporation is $100,000, and the pro rata share of the taxpayer’s qualified business property is $75,000.

Because the taxable income is above the cap, the deduction for this business entity is the lesser of the wage limitation or 20% of the QBI. The wage limitation is the greater of $50,000 (50% of the $100,000 in wages) or $26,875 (25% of the $100,000 in wages plus 2.5% of the $75,000 in qualified business property). Thus, the wage limitation is $50,000. This is less than $60,000 (20% of the $300,000 in QBI), so the taxpayer’s deduction for this business is limited to $50,000.

Aggregating Amounts – Once the deductions have been determined for each of a taxpayer’s business entities, they are combined in a rather complicated computation. First, the total deduction is added to 20% of the taxpayer’s REIT dividends and all of the taxpayer’s publicly traded partnership income and cooperative dividends (after limitations). The final step is to compare this combined deduction amount to the taxpayer’s adjusted taxable income (i.e., taxable income minus capital gains); the lesser of the two becomes the actual deductible amount.

As you can see, this deduction provides a great tax benefit for business owners, but it can be quite complicated. Please contact us with any questions.

Surprise! Extender Bill Passed: Do You Benefit?

Congress passed the Budget Bill, and the President signed it on Friday, February 9th. To the surprise of many, the bill included a number of extenders that retroactively apply to 2017 returns. Were you lucky enough to benefit?

Needless to say, these last-minute changes may create a problem for taxpayers who have already filed their returns and will need to file amended returns to take advantage of these extenders. The retroactive changes will cause the IRS some headaches as well. Since the 2017 forms do not accommodate some of the extended provisions, the IRS will have redesign and issue updated forms or provide workaround procedures.

Listed below are the extenders that apply to individuals and small businesses. Please review them to determine if any of them may apply to you. If you have already filed, please give this office a call and let us know, so that an amended return can be prepared to take advantage of any of these changes. In some cases, it may be necessary to wait for IRS guidance if the current 2017 forms do not accommodate the extended provisions. If you have not filed yet and any of the provisions apply to you, be sure to bring them to our attention.

  • Mortgage Insurance Premiums – For years 2007 through 2016, premiums paid on mortgage insurance contracts, in connection with acquisition debt, issued after 2006 were deductible as home mortgage interest. The deductibility of these premiums has been retroactively extended through 2017. The deductible amount of the premiums phases out ratably by 10% for each $1,000 by which the taxpayer’s AGI exceeds $100,000 (10% for each $500 by which a married separate taxpayer’s AGI exceeds $50,000). If your AGI is over $109,000 ($54,500 for married separate), the deduction is totally phased out. If you itemize your deductions and have deducted the insurance premiums in the past, you generally will be able to deduct them on your 2017 return. Please note that the 2017 Schedule A does not have an entry for mortgage insurance premiums; we will have to wait for IRS guidance on how to report it on the tax return.
  • Above-the-Line Education Expenses – For years 2001 through 2016, taxpayers had the option to take a deduction, without itemizing, for higher-education tuition and related expenses. The deduction has been retroactively extended for 2017. The deduction is capped at $4,000 for an individual whose adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers). Individuals who were unable to claim an education credit generally take this deduction. This deduction is claimed on Form 1040, but the current form does not provide an entry for this deduction, so we will have to wait for IRS guidance on how to handle this deduction.
  • Exclusion of Home Cancellation of Debt Income – When a lender takes a home back and the home’s fair market is less than the balance on the loan, the taxpayers will generally have cancellation of debt (COD) income. For years 2007 and through 2016 taxpayers were able to exclude up to $2 million ($1 million for married taxpayers filing separate) of the COD income. This exclusion is limited to debt that was used purchase or substantially improves a taxpayer’s primary residence and has been extended through 2017.
  • Credit For Nonbusiness Energy Property – The provision to make existing homes more energy efficient has been extended through 2017. The provision allows a credit of 10% of the amount paid or incurred by the taxpayer for qualified energy-efficient improvements such as qualifying exterior doors, windows and skylights, metal and asphalt roofs, qualifying heating and AC systems and certain insulation materials or systems, all of which must meet energy-savings requirements certified by the manufacturer. This is a lifetime credit, meaning the $500 maximum credit is reduced by credit taken in any prior year, going back as far as 2006.

The following are less frequently encountered provisions that were also extended:

  • Extension of Credit for New Qualified Fuel Cell Motor Vehicles – This provision extends through 2017 the credit for purchases of new qualified fuel cell motor vehicles. The provision allows a credit of between $4,000 and $40,000, depending on the weight of the vehicle.
  • Extension of Credit for Alternative Fuel Vehicle Refueling Property – This provision extends through 2017 the credit for installing non-hydrogen alternative fuel vehicle refueling property. (Under current law, hydrogen-related property is already eligible for the credit.) Taxpayers are allowed a credit of up to 30% of the cost to install the qualified alternative fuel vehicle refueling property.
  • Extension of Credit for 2-Wheeled Plug-In Electric Vehicles – This provision extends through 2017 the 10% credit for two-wheeled plug-in electric vehicles (capped at $2,500).
  • Extension of Credit for Energy-Efficient New Homes – The provision extends through 2017 the tax credit for manufacturers of energy-efficient residential homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy-efficient home that meets qualifying criteria.
  • Extension of the Classification of Certain Race Horses as 3-Year Property – The provision extends the 3-year recovery period for racehorses to property placed in service during 2017.
  • Extension of Energy-Efficient Commercial Buildings Deduction – The provision extends through 2017 the deduction for energy efficiency improvements to lighting, heating, cooling, ventilation and hot water systems of commercial buildings.

There are additional provisions that generally apply to utilities, large businesses and special interests and are not included in this article.

If you have questions related to any of the above, please contact us.