I'm a sole proprietor. Should I set up my Owner's Equity Account with Company Earnings as a subaccount or Company Earnings as a separate income account?
Thanks,
Julia
Separate! The owner's equity account could be set up with sub accounts for investment, draw, IRA, health insurance, etc. Call 'company earnings' Retained Earnings.
Your company 'income account' will be created separately by QB. Owner's Capital and Retained Earnings will be set up by QB at the time of the 'easy step interview'. With respect to 'health insurance', I believe that item should not be reported as business expense for IRS Schedule C purposes. However, you can report 'health insurance' on line 29 of IRS Form 1040.
Yes, your health insurance is a personal tax deduction, not a business one. It does not go on your business tax return. If you insist on paying it out of your business books then it's considered an Owner's Draw. It would be better if you just took the draw and then deposited into your personal bank account and wrote the medical payment from there. Use the Easy Step Interview to at least set up the books for you. It's very important that each account be set up using the correct account type and Qb knows which accounts you need based on which type of company you tell it you are forming (i.e. retail, wholesale, service, etc.) All income is tracked during the year in income accounts and all expenses in expense type accounts. At year end Qb will close those out into your retained earnings account. This account will be on your books until you shut down the business. This account tracks all the money you have invested in the company and/or made in profits and have not taken back out.
SEPARATE your personal from business. If you must use a business check for that odd occaision or when you take an Owner's Draw these both must be accounted for as an Owner's Draw (disbursement from Owner's Equity). This will show up on your balance sheet un the equity section. This is also where you track personal capital contributions to your business. These will NOT show up on the P&L as they are not income nor expenses. We track all personal on Quicken as this allows a lot more options for tracking IRA accounts, SEP accounts and other PERSONAL tax and non tax related items. In doing the 2 different "books", personal and business, you must (as in our case) account for those Owner's draws in your personal accounts as well- they should always be identical. If you never had the disbursement enter your personal account as a deposit- use journal entries (debit and credit). Mixing personal and business is messy accounting. You can do it BUT you must track it carefully. Hope you don't feel spanked!
IRS very much frowns on co-mingling of funds. IF you do so they can disallow you as a company and throw out all deductions and tax you on your gross income without any expenses at all. I know a company that pretty much ran in the red all the time for years but they did this and IRS audited them and disallowed all deductions and said they weren't a company as they didn't act like one and so they taxed them on gross profits and they owed millions that they really didn't owe at all as they never made a profit. IRS then made them prove each and every deduction if they wanted to claim any expenses at all. IRS can also change your business status to a hobby and disallow your deductions if you don't act like a real company. Mixing personal funds with business is not acting like a business. Once you have a business license and call yourself a business, IRS expects you to act like all other businesses in this country. They have a bank account for just the business and they write checks only for business reasons. And they deposit only business related monies. Be very careful here. If you are a sole proprietor and want to take money out for personal reasons, then cut yourself a check and charge it to your Owner's Draw equity account. Then deposit it into your personal bank account and pay whatever personal expense you want to from there. Make sure you read the IRS publication 334 - Tax Guide for Small Business so you fully understand your legal requirements and what is business and what is personal. You can find it under Publications and Forms at this site:
http://www.irs.ustreas.gov/formspubs/lists/0,,id=97819,00.html
