What’s the best way to manage the finances for a small business that is not a separate corporation or LLC (i.e., the income will be reported on Schedule C)?
Currently, I have some income from my writing, photography, and consulting work (e.g., as a software expert witness; litigation turns out to be a growth industry in the U.S.). I deposit this into my personal checking account. I pay for expenses with my personal Visa card or by writing checks from the personal checking account.
I am also renting out an apartment that I own and the money flows in the same manner, deposited into my personal checking account with expenses being written from the personal account.
Running a small business plus the apartment means that I get to assist the U.S. Congress in its efforts to make the United States the world’s best country in which to be a lawyer or an accountant. The tax forms filed in 2009 occupied 119 pages. Paying the accountant for all of this labor was somewhat painful, but not nearly as painful as the bookkeeping task of having to go through an entire year of checking account statements and credit card bills to figure out which expenditures were business expenses and, if so, how each should be categorized (“insurance” or “postage and shipping”, etc.).
The advantage of my current system is simplicity during the year. I carry just one credit card in my wallet. I keep track of just one checkbook. I log into a single online banking site when I want to pay bills, both personal and business. All of the bookkeeping is pushed into a single day of pain in March of every year.
I’m wondering if it wouldn’t make sense to set up a dedicated account, with associated credit card, and try to do the bookkeeping on a more standard continuous basis. Here then are the questions…
- can one checking account and/or credit card suffice for both the Schedule C business and the Schedule E (rental apartment) business?
- is there good software for separating business expenses into two schedule Cs (in case I decide to separate some of the different kinds of work)?
- is there a system that is smart about categorizing expenses, e.g., if it sees a credit card charge from Delta Airlines will automatically put that into “travel”
Requirements:
- should be Web-based, ideally, though I am back at my desk pretty frequently so a Windows-based application would be acceptable if much better than Web-based systems
- should not make it much harder/more tedious to pay a bill then currently
- should include the capability to mail checks to vendors (I do this currently with online bill paying from the bank; it would be nice if I could transfer the vendors and their street addresses but I doubt that will be possible)
Ideas and experience?
[Separately, how come small business accounting and bookkeeping hasn’t been offshored to India or China? I do like my accountant, but I would think that someone in China could learn U.S. regulations and provide the same service.]
I do this with a few Excel spreadsheets. I think it all depends on how often you have transactions.
In the case of my rental apartment, there are really very few entries. For income it’s just monthly rent * 12, and then I list my expenses in a spreadsheet. Most are infrequent, like insurance (once a year), property taxes (twice a year). Condo fees are fixed so it’s just monthly fee * 12. Then maybe the cost for maintenance once or twice a year. For the mortage, you can only expense the interest paid (not principal..instead you take depreciation), so you get that on your 1098 statement already computed for you.
For my Sch C business, which is just me, I record the expenses as I incur them in an Excel spreadsheet, and then keep those paper receipts in a separate folder. I actually have few and infrequent expenses, so that’s not much of a hassle.
I think the overall trick is to organize as you go i.e. record the information as an expense is incurred. When tax time rolls around, it takes me just a few minutes to put all this together.
In terms of categorizing expenses, have a look at Schedules C and E (rental income). There aren’t that many categories, so you can just note which it falls into as a column in the spreadsheet as you go along.
I’m actually a bit surprised someone like you (given your technical mind) doesn’t do your own taxes. If the reason is your value of time, then OK that’s understandable. But it’s really not that hard. I use TurboTax and my return is 70+ pages including income from a foreign business, and Schedules A,B,C,D,E along with related forms. I can turn the whole thing out in a matter of hours.
I generally use my AmEx for business expenses and my Visa for personal expenses, but that’s more so I can see each month how much I ran up on each as an easy analysis of personal spending.
Justin: Thanks. I don’t have that many transactions. Maybe 200 for the whole year? I use Google Spreadsheets and record each expense under a separate section of the spreadsheet. This means that I’m rekeying check numbers, dates, and amounts, from credit card and bank statements. So there is a potential for errors as well as tedium.
Why don’t I do my own taxes? The accounting questions just get too complex for me, e.g., whether to treat something as capital expense or current expense or the fact that the IRS makes you pay tax if you have income from a rental property, but won’t let you deduct a loss if you lose money on it one year (the asymmetry would never have occurred to me), but then will let you use that loss to adjust your basis when you finally sell the albatross.
I did my own taxes in the 1990s, but honestly I think the tax code was simpler then. The Alternative Minimum Tax was not as much of a factor, I don’t think. I don’t remember paying AMT until more recently.
Doesn’t it make a lot of sense to set up an S-corp and get the limited liability protection? Doing much business simply as yourself in modern america seems risky, per your point about litigation.
kkrv: Running a corporation or LLC in Massachusetts involves additional annoying paperwork and an annual fee of at least $500. I think my liability from being a pilot and flight instructor is much greater than from the rest of the stuff that I do, so I haven’t given a lot of thought to the LLC idea.
Definitely open a separate business checking account and credit card. It makes the year-end tracking much easier since you no longer need to filter business from personal, you just need to categorize and total the business expenses. Open it at the same bank as your existing account and you can manage everything with a single login, move money easily from account to account, etc.
My sole-proprietor brother is a big fan of Quicken. I’ve personally used QuickBooks for an LLC and a C Corp, but that might be more overhead than you’re looking for, though honestly it’s pretty straightforward and does a nice job of keeping everything organized. To be honest, Intuit the company can be kind of a hassle sometimes (forced obsolescence, nagginess, reinstall hassles)… but on the whole I’ve found using their products much easier than the methods I’ve tried before (which included the empty-the-shoebox-at-end-of-year method, and the custom-Excel-spreadsheet method).
Supposedly Quicken can sync up with your bank and auto-categorize expenses, though I have no firsthand experience with that. I do believe that even without auto-categorization, every “vendor” you set up (which is not at all odious) can have a default category, so that every time you enter “Delta Airlines” and an amount it gets put into Travel unless you override it.
I also know Quicken can let you tag transactions so you can easily separate them into multiple schedule Cs/Es/whatever. No idea about bill pay since I still use my bank’s online bill pay. There might be a Web version but I couldn’t say.
Most of the accounting software I tried quickly became constraining. I ended up using “ledger”, it’s open source and has Mac/Win/Linux clients. It’s strictly suitable for hackers as it takes text files as input which it compiles and has no GUI so you won’t read about it on main stream accounting or business sites.
The text format & CLI make it easy to hack together a python/ruby script that converts your bank statements into ledger’s format so it’s extremely flexible. The documentation is a bit patchy though and you need a pretty firm grip of accounting since there is no handholding anywhere. You can upload your ledger files to github to make it web based 😉
If you do end up using Quicken or QuickBooks (PC not Web version), be sure to cage in a Virtual Machine. I can’t stand how it runs updates when I don’t want and installs crap I can do without. Now that it is locked in a VM, we are both happier.
I have a few quasi-business expenses like this, and I find using Quicken it’s pretty easy to round up everything for the tax accountant every March. I don’t have separate accounts for these activities; I just set up Quicken categories for the “business” related stuff. There is some fiddling every month to make sure the expenses are properly categorized, but the automated facilities usually work pretty well.
Quicken has proven to be a good memory hole for finance stuff, I have records in it going back two decades. This is also helpful when dealing with investment stuff (stock cost basis, etc.).
There’s an on-line SAAS version from Intuit, Mint. I have yet to reach the level of confidence needed to hand over bank and brokerage passwords over to such a service to let it do it’s magic.
[Funny story: Back in the ’90s, Intuit hired a Marketing Genius to boost Quicken sales. The M.G. suggested running a $20 rebate on Quicken purchases. The Intuit people were worried, “won’t that cost us a lot of money?” The M.G. replied, “don’t worry – statistics show only about 10% of the customers actually send in their forms and claim their rebates.”
But the M.G. failed to recognize what type of people Quicken customers are: Detail oriented types who care a lot about money. The rebate rate was 90%.]
Might want to check out Mint.com. It’s not really meant for this specifically, but the set-up is very flexible and allows you to categorize rev & expenses easily in a variety of ways. It’s free, web-based & links to all your accounts automatically.
I’ve been using Mint for the past year or so, and have been happy with a) it’s ability to link to many different online accounts (banks, lenders, creditors, brokerages, etc.) and b) it’s ability to categorize expenses with high degree of accuracy (and there’s some ability to create custom rules for the cases where it is consistently wrong). On a monthly basis, I export out the transactions into a spreadsheet which allows me to slice and dice however I need to.
Over the course of the year, I’ve been finding myself reinventing portions of a personal finance program (e.g. Quicken) in my spreadsheets, so I’ve been taking Quicken 2011 Deluxe out for a spin for the past couple of months. It’s generally been working out, but lacks the same breadth of online account linking as Mint, which is curious, given both are owned by Intuit though I know how slow big companies are at cross-pollinating their products.
Specific reasons for using Quicken included:
a) Ability to create and track expenses in logical accounts independent of physical accounts; it sounds like you might benefit from that
b) Ability to regularly (often monthly) set aside money for one-time expenses e.g. I pay auto insurance annually, but budget for it monthly.
c) Ability to plan at varying time horizons (Mint is great for month to month; I had to resort to spreadsheets to plan on annual, 5-year, 10-year, pre-retirement, post-retirement, etc., time-scales).
Hope that helps.
I use iBank on a Mac, which is similar to Quicken for Windows, though I find iBank much simpler & more streamlined. Each can import bank and credit card transactions pretty easily. (I’ve given up tracking investments this way, I just use the online interfaces from Vanguard, etc -they are plenty robust nowadays).
Once you’ve imported transactions for a while, each will automatically categorize recurring transactions (i.e: once you tell the software “Delta” should go to “Travel,” it will automatically each time it appears after that). I drop my rental home income and expenses into separate categories from my personal expenses. I download and categorizes my expenses once a month, so I can recall what the cryptic ones are. Then at the end of the year it’s not too hard to break out the business income and expenses. One of my flight students is an accountant, so I do his bi-annual reviews and he does my taxes, a nice deal for each of us.
As you see from the comments, its a hassle however you do it. Quicken is probably the best compromise, but the real estate will still be quirky. Best day of my marriage was filing taxes for the last year we owned her condo – good riddance.
Phil: While the profit/loss issues may get complicated with a rental apartment, that’s not really a judgement call but rather something Turbotax and similar software will compute for you. In other words, you just key in your revenues and expenses related to it, and it runs all the numbers to determine a profit or loss and handles it accordingly. There’s also a benefit in using the same software from year to year, as it imports the previous year’s tax information like the depreciation schedule and carryforward losses and so on (so in your case, this might be a reason to stay with your accountant since they have the historical information already keyed in).
In terms of when to treat something like a capital or current expense, the decision isn’t that complicated (you can solve that question by running some numbers in Excel usually), and you probably aren’t faced with this decision that often as it should generally only apply to big-ticket items.
I have at most 5 transactions per month, so keeping it in a spreadsheet isnt’ too tedious for me. I can see where 200+ transactions per month could start to be annoying.
(As if you don’t have enough to occupy your time:) I recommend you try to do your own taxes one year with a program like Turbotax. I think anyone who thinks like a programmer will have no trouble understanding it, and may even find it a bit fun as you watch how inputting each item changes the running count of your tax bill/refund. You can always have the accountant do the “real” return if you’re worried about inaccuracy.
Very happy with Quicken since 1990.
Takes a bit of thinking to smartly establish the chart of accounts.
VERY useful for history… “How much did I pay for that . Particularly useful for long term record keeping for capital improvements to real estate.
Everyone seems to like Quicken… if I use Quicken do I need separate checking accounts or will it be sufficient simply to classify everything correctly?
What is the difference between Quicken and Quickbooks anyway? The Intuit Web site is pretty crummy. They say the best way to do things is with their free Mint service, but they will also sell you Quicken. And then a separate Web site has Quickbooks and doesn’t say how it is different from Quicken.
Quickbooks is for SMEs, if you’re a LLC with >3 employees, you’d defintely want to use Quickbooks.
Quicken is for personal use.
Brad: I don’t have any employees! Should I be using Quicken? I’m my only employee and it is not an LLC. It is a Schedule C business.
I’ve been using a combination of QuickBooks with Xpenser. Xpenser allows me to capture expenses incurred almost as soon as I spend the money – submitting them by email or SMS or through the web. I specify them as business or personal and they get categorized based upon QuickBooks chart of accounts. You can track time as well for different clients, but I don’t bother as I typically work a week or more for any one client, but it’s nice to allocate expenses to clients
I’ve been in exactly this situation for years, and use Quicken. I track a rental, some photography, and my wife’s small business using transactions from whatever account and credit cards I happen to use. It doesn’t really matter if you have a separate account or not, Quicken uses “tags” to track which business an expense belongs to. So, you can have a category called “Repairs” that could be untagged (personal), tagged as “Rental” (business), or whatever else. Basically a double-categorization system. A separate account comes in handy when you need to be able to simply see balances without having to run a report.
Quickbooks is an entirely different proposition, which I’ve had some exposure to. It’s completely unnecessary for the few things you’re doing, and is completely incompatible with Quicken, for some strange reason. Quickbooks does have an online version available that pretty much duplicates the PC version.
Speaking of incompatabilities, the most frustrating part about Intuit is that Mint is also a separate island of data from both Quicken and Quickbooks. Mint seems to be a pretty good replacement for Quicken and has a pretty good iPhone app (no other mobile OSes, unfortunately, and the website is decidedly mobile-unfriendly). The key part is that that the same power in categories and tags exists, just like Quicken. Like others that have posted, I have years of history, and Mint cannot import that.
I’ve started my kids on Mint because it’s free, does all the tracking and reporting they’ll ever need, and they won’t have to worry about upgrading software in the future. I vastly prefer hosting my own services and data on my own server (or PC), but the convenience of the transactions auto-downloading is too great to turn down. I’ll have to check if I could export all data from Mint . . .
One more suggestion is GnuCash, a mature open-source Quicken alternative. It handles the accounting very well, but isn’t easy to configure auto-download, and requires run-as-administrator on a Windows PC, making it not an option for my kids.
Folks: I’m kind of shocked that Quicken remains the answer. The program dates from the 1980s. Shouldn’t its core capabilities have been rolled into standard online bill paying systems and Web sites for credit cards? I guess Mint is supposed to be the replacement, but it seems strange that there would be so little competition here.
One other tip about Quicken: The Mac and Windows versions of this app are completely data and feature incompatible. The only way to transfer from one platform to the other is to export and re-import data, incurring some serious loss of data in the process..
The Mac version typically trails the Windows version in features and capability.
J: If I were rich enough to afford a Macintosh, I wouldn’t have to work at all!
Phil,
Have you looked at services like Freshbook (http://freshbooks.com) or LessAccounting (http://lessaccounting.com/). You can sign up for their free or trial accounts to get a sense of whether they would work for you or not. Looks like LessAccounting changed their pricing model since I last tried them, they used to have less expensive plans.
As many people that recommend Quickbooks or Quicken you’ll find just as many who’ve had bad experiences with them so I would recommend doing the trial versions of the software first.
Personally I use Harvest (http://www.getharvest.com/) but that’s mainly for invoicing and payment tracking, while it also gives you the ability to export reports.
The other thing I do is have a business checking account and business AmEx. At tax time, I export reports from the AmEx website directly so I don’t need to be adding up expense receipts by hand. Makes the tax preparation much quicker.
Thanks, Chris. I hadn’t heard of those. My prejudice against Quicken stems from its age. It is hard to translate a DOS program into the Web age and I have to believe that a lot of stuff would be more efficient if done from scratch. For example, in Quickbooks Online, a bunch of transactions were miscategorized. I would have thought I could search for them, select a bunch of checkboxes, and then do a “bulk recategorize”. Quickbooks telephone support was helpful, but the woman on the phone didn’t know how to it except by laboriously going into each transaction (and I hadn’t found an efficient way either). Quickbooks doesn’t seem to take much advantage of the fact that the data are in a computer. It seems like a first pass done by a programmer who’d see how bookkeeping was done on paper.
Phil,
I share your frustration with the lack of innovation and scarcity of options. Intuit’s purchase of Mint is proof of how little confidence they have in their own R&D. However, also worth considering is the demand for tools to manage personal finances: how many hard working Americans would you guess care for such software?
Re the question of using one or two banks: tools such as Mint and Quicken will provide you all that you need to logically separate the expenses. At that point, the only consideration left is of how “clean” you want your books to be. Since your assessment of your exposure to liability is low, a single bank and a single credit card should continue to work.
Re difference between Quickbooks and Quicken: Quickbooks helps if you need features such as double-entry accounting, tree of accounts that can “roll-up”, invoice generation, etc. These seem to be beyond what you need.
I hope that helps.
Quicken and Quickbooks always strike me as clunky. But that’s probably because I’m young enough that the first financial software I ever used was Mint.
For my simple, small business (a $50/year Wyoming LLC), Mint has worked well. I periodically categorize transactions, and recurring transactions get categorized automatically. At the end of the year, I can search by category to get totals to use on the tax return and can export transactions to csv when I need line item documentation.
Indinero (http://inderino.com) is very similar but offers more business-y features like primitive cash-flow analysis, multiple user accounts (say for your accountant) and charging you if you require more than 50 transactions a month.
Mint.com is fairly useful, in terms of marking something under certain tags (i.e. “Reimbursable”, “Schedule C”, etc) and it automatically categorizing transactions. I’ve done this in the past with Schedule C, and download a CSV file from them at the end of the year, and use Excel to clean it up prior to sending over to the accountant. (Apparently they also have TurboTax integration, which I haven’t tried).
I’m mostly a wage slave, but have a few side businesses that I report for taxes. The side businesses income/expenses get run through an account at ING. You can send checks and make electronic payments from the account and they give you a Master Card credit/cash card, so paying for stuff online and in-person is simple and all the transactions go through the one account.
Tie the account to Mint and you can flag stuff as tax-important or not as the case may be. I really only use Mint to get the transaction alerts across a number of accounts.
I use to be Quicken user (the business edition, the personal / home edition won’t do P&L) and gave it up because it’s was no more than an electronic checkbook.
For 5 years now, I have been using Excel. Why? With some effort, you can customize it any way you want. In Excel, I have created sheets for various usage (I have rental income, and a side consultant that I do). In Excel, I have a sheet for the bank account, income, expenses, and reports. Heck, I even have graphs, and tables to go with it all. I can generate reports via category, quarterly, and fiscal year. I can also compare reports and create custom views.
For deposits and writing check, I have a separate business account with a checkbook. I only write checks for those that don’t take credit card. For credit card, I have one personal AmEx and I use it for business and personal need. At the end of the month, if I used my AmEx for business expanses, I write myself a check from the business account. I use 1 AmEx to maximize my cash back.
Oh, and did I say how easy it is to backup my Excel file and open it on any machine that has Excel! 🙂
No need to have multiple checking accounts with Quicken. The classification process will drop money into the correct tax bucket.
Do spend some time thinking about your charter of accounts/classification scheme. Mine’s a mess, but works. Would be well worth it to hire professional help… this stuff is so basic, it’ll be with you a long time. Best do it right the first time.
I don’t use it, so I can’t comment on how seamless the process is, but there are hookups to credit cards & checking accounts that automate the data input drudgery.
Loooong ago I used to build/maintain a spreadsheet for taxes. Huge maintenance pain.
Now with TurboTax (owned by Intuit), I print out the tax schedules from Quicken (could do it automagically between Quicken & TurboTax, but don’t trust such things) manually enter them in to TurboTax & file.
One oddity… it’s free to file electronically to the Feds & $20 to file electronically with the state. I’m doing the state a favor & they want to charge me for it? Huh?
Why would you have negative thoughts about Quicken because it’s 20 years old? What’s changed in 20-30-40-50+ years in check book record keeping? You get a prettier interface? Big deal. The foundational process is still exactly the same. And will be the same 20 years from now.
Phil, a guy as brilliant as you are should already know the answers to these questions!
Of course you should have a separate checking account and credit/debit card. It makes things so much easier. If you deposit all of your revenue into the business account and only charge from that account business expenses, then (ignoring purchases that are capitalized) you can simply look at the cash balances at the beginning of the year and end of the year to determine your income.
Come up with a sensible chart of accounts, that you can easily tie into the tax forms. You could simply use the categories in the tax forms or add more detail and then roll up.
The fact is that web based software often is inferior to desktop software. As to Quickbooks, they have been serving the small business market for a few decades and generally they do a good job, so it is not surprising Quickbooks is the best solution. In addition, almost every accountant is familiar with Quickbooks.
From my past experience using Quick*, Quickbooks is targeted at people who know the difference between an accounting credit and a debit. Quicken is targeted at people who don’t.
If you have less than a dozen things to track (“accounts”) and work on a cash (as opposed to accrual) basis, a spreadsheet beats them both.