Accounting & Bookkeeping & Small Business Forum

First off, I am self employed and have been self employed for many years. Not sure about a few items. First off, I want to say, I have my personal and business expenses merged in the same accounting (qbooks) I know that that isn't the best way to do it, but I think I have a pretty good system. All personal expenses, I list as an Equity Draw Account so I have, for example:
Paid In Capital (I have it set up like this bc I used to have a business partner)
PIC:Draw
And then Paid In Capital, other categorized personal expenses

Clothes Expense - I have to wear certain clothes to be presentable at work for my clients. Can this be written off as an business expense?
Haircut Expense - typically, I wait 2 months to get a hair cut, but being self employed, I'm forced to do this twice as much, is this possible to write off as a business expense?
Gym Expense - I mostly do yoga which I NEED to stay sane, any possible write off?
Drycleaning - the ONLY clothes I dry clean are my work clothes and I wouldn't do it otherwise, can this be written off?

Moving Costs - I had someone help me set up my books when I first set up my qbooks, it shows as an Other Asset on my balance sheet. This just seems odd because after I move, there is no asset, it's done, it's moved, it's over. Last year, I switched into a new office and thought to write off my expense, but moving costs is an Other Asset. Any help and/or explanation would be greatly appreciated.

Bad Debts - I've lent lots of money over the years and if I go into my accounts receivable, it shows a list of people that currently owes me money. Now, out of the 4-5 people on that list, the only person I know for a fact owes me money and it's a Bad Debt is one person in particular. I've decided to write that off as a Bad Debt EXPENSE and remove it from my A/R. I don't know what to do with the other ones. I don't know if they owe me or not, do I just 0 it out like they gave me cash? Do I write it all off as bad debts? not sure and i want to do it right.

Asset Accounts
Furniture and Equipment - When the person set up my books when I opened my business, I had purchased an office liquidation for $12,000. So I have that as an asset. I moved offices last year and trashed a LOT of stuff, donated a lot of stuff, and moved into a smaller office. So, technically speaking, my Asset called Furniture and Equipment should be cut down severely, is that the proper way to do it? Just guess?
Improvements - when I opened up my original office, I spent several thousand dollars doing Tenant Improvements and subsequently, I had an Asset called Improvements. When I moved into the new office, I didn't have to do any Improvements, since I no longer am in that office where those Improvements took place, I would 0 this account out???

I was reading about Equity Accounts in general, it read:
“Closing Sole Proprietor Draw Accounts
At the end of each year, create a General Journal Entry to zero out the Owner’s Drawing account and close it into Owner’s Equity. You could also close out the Owner’s Investment account, but it might be best to let the balance in the Owner’s Investments account continue to accumulate over time. That way, the Balance Sheet will always show the total investments made by the owner.” - Should I be doing this? If you read above about how I have my Equity Accounts set up with my Paid In Capital and then MULTIPLE draw accounts to categorize my personal expenses, not sure what to do or if I should care.

Last question, when I view my P&L statement, it says, Accrual Basis, but I'm 99.9% sure I do Cash Basis accounting. I went with my tax guy (who won't help AT ALL) and he was inputting the basics to do my taxes into his system (lacerte) and he listed Cash Basis in the system. I'm not sure what I should do here, but if I opened my P&L, it would show as Accrual Basis.

Thanks in advance, I appreciate any help.

Sounds like you have a mess on your hands.

First, as to the personal expenses. I would (IMHO) classify them as such, in which case they shouldn't be run through your books, nor are they deductible. To me, those are the same kind of personal expenses you would have if you were not self-employed.

The IRS definition of a deductible expense is:"To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. "
This seems to make the case that these expenses would be then deductible, I, however tend to err on the side of caution when it comes to the gray line. Perhaps one of fine tax experts will weigh in with an opinion on this part.

Moving costs - I'm not sure why your bookkeper would have classifed this as an other asset. If they were ordinary moving costs, they should have been expensed. To clear the account balance you will have to reclass (cr the asset account and dr an expense account) to an expense. Hopefully the move didn't happen in your last fiscal year, as the reclass will affect your P&L for this year.

Bad Debts - Hopefully you have invoices to support the charges you've charged to your customers. Those invoices should have payments applied to them if they actually paid you. I would think you would want to make every effort possible to verify if they do owe you money, and if so get it collected. Even if you have to pay part to a collection agency, then at least you're not out completely. However, if you do decide to write it all off, you need to (cr A/R and dr Bad Debt Expense). This will again affect your P&L.

Furniture and Equipment - yes, you need to adjust this. Do you have an asset listing showing everything you purchased in the office liquidation? If you do, you need to go through that and figure out what you got rid of. Once you determine what you no longer have, you need to (cr the asset account and dr asset disposal expense).

Improvements - I would do the same as above.

Yes, you should close out your owner draw account. What you'll have to do is take the balance in each of those draw accounts and (cr draw account and dr owner equity).

If you are selling goods to customers on account (accounts receivable) or paying bills to vendors on terms, not COD (accounts payable) then you are on accrual basis accounting. Your tax guy is not necessarily an accountant - he's a tax guy, which is why he's not helpful when it comes to your accounting. You need an accountant or bookkeeper for that. It is possible to switch to cash basis accounting at tax time, which may be why he did that.

If you are anything other than a sole proprietorship, mixing personal with business matters destroys the argument that your business is separate from you personally. Therefore, if you are a corp, an S Corp. or an LLC, I doubt limited liability would hold up legally for you.

The only thing I see as a possibility as a business/tax expense is possibly the clothing and dry cleaning, but I doubt it. Haircuts - no, gym expense - no. and I doubt the clothing either.

It's conceivable that setting up your books could be classified as a "startup" expense, i.e. an expense you incurred before opening for business. You capitalize that along with other startup expenses and amortize it over time, no matter how many times you move, assuming it's the same company. The moving expense I would expense. I see that as a period cost which doesn't benefit future periods.

Depending upon what you did with the Furniture you may have a deductible loss, and also with the improvement you may have a deductible loss. Gift to charity will not result in a loss, but an abandonment of an asset would, assuming it is not fully depreciated. You need to consult a competent tax person to determine if you have a deductible loss.

Being able to write off a bad debt depends upon your basis of accounting. If you are on an accrual basis, then you have recognized revenue which may be written off as uncollectible, provided you meet the IRS requirements for the write-off. However, if you are a cash basis taxpayer, you have not recognized revenue yet because you haven't been paid, and, therefore, may not write off a bad debt as expense because you have not yet recognized it as revenue.

ruthie,



Not necessarily. You can do this and still be on cash basis as far as when you recognize revenue and expense for tax purposes. The revenue would not be recognized until cash is received. Expense would not be recognized until accounts payable is paid, with the exception of inventory. With inventory the expense would be recognized the later of when the item is sold or it is paid for.

Hi,

I promise you mingling your personal expenses with your business expenses, no matter, how clean is NOT a good idea. If you want a draw, take a draw. In the event of an audit, it will take more time to examine and if there is any gray at all the business deduction will be disallowed. Besiedes, it's a matter of time before an honest misclass happens.


Clothing, Haircut, Drycleaning Expense: NO strictly personal.
Gym: not sure. If you have employees and offer this as part of a benefit package to them, perhaps you can take it too. Otherwise, NO.
Moving Costs: Costs to mover out of old office should be expensed. You no longer have that asset. I was wondering if there was anything to do with moving to the new office that did not expire and stayed with the new office? I would contact the bookkeeper and ask her what is in the account and her premise for putting it there.
Bad Debt is a tough one. It sounds like you made personal loans to people who have not paid you back. Your company is not a bank and therefore is not in the business of making loans. This constitutes personal loans which are even harder to write off. I would suggest you make every effort to collect and sent notices requesting payment. Hopefully you have a signed promissory note for each debt. You need to take them to court it sounds like. Short of this I doubt you can even take the deduction.

As far as being accrual or cash. If you have inventory, pretty much you are accrual. At any rate it is easy to convert back and forth from cash to accrual when needed. I would probably keep my books accrual and switch to cash basis when needed. That way you can keep track of receivables, parables etc. Your accountant will be adjusting for tax basis anyway.

Lastly, you are paying for your accountant's time. Ask the questions. He/She might not give you the answer you want to hear but he/she should be able to explain why they are doing something.

In regards to Bad Debts, I was assuming these were business bad debts. If they are personal loans made then they shouldn't be on your books period, and unless you have something in writing from them stating they promise to pay you back, I think you'd have a hard time taking a personal deduction for it on your taxes. I mean I think the IRS would disallow it if ever audited. You can't take a business deduction for personal loans period. It's not a business expense.

If you have inventory you can still be on the cash basis of accounting for tax purposes provided your average annual revenues for the last 3 years are 1 million dollars or less. See link below under Exceptions:

http://www.irs.gov/publications/p538/ar02.html#d0e1136





Excellent points. Heed our warnings, get the personal stuff off your business books.

Thank you so much, it has helped a lot. I've made the necessary adjustments and most importantly, I'm going to shift all personal expenses out of my business expenses. It's just a pain in the neck sometimes shifting money to different accounts, but I don't want any problems in the future.