How to Avoid Losing Deductions on Startup Expenses

If you have ever started a business, or maybe you are about to start a business, this video is definitely for you. As you may know, there are various startup expenses that may be happening in that startup period that you probably can't capture in the bank account. And why is that? That's because you don't have a bank account set up yet. Basically what happens is you'll have expenses like registered agent fees, you may have attorney fees, creating operating agreements, you may have subscription cost in that first few days of startup. Maybe you're eager to get started and want to hit the ground running. You can't capture any of those costs because you don't have a bank account yet. Typically, before you can set up a bank account, you have to have your operating agreement, you have to have your articles of incorporation and whatever else that your bank is requesting of you. So that kind of creates a problem where you can't really track those expenses. So a lot of times people are often writing personal checks and, you know, they're just going about their business and maybe they never give that information to their accountant. So at the end of the year, you're sitting there with, you know, $2,000 or whatever that number is in expenses that you can't claim on your taxes because you never really reported that information, or maybe you just didn't know how, especially if you're doing this yourself. So what I'm going to go over are step by step, how to capture those expenses in QuickBooks. So we're going to do this in three steps. So step one is really going to your chart of accounts and setting up the appropriate accounts so we can record those expenses in your financial statements. Step two, we're going to make the appropriate entries. And step three, we are going to record your actual expenses. So let's go ahead and dive right into QuickBooks. So I am going to open up QuickBooks and I really don't like when I'm watching videos and they're kind of walking through the steps at a high level, but they don't exactly show every single step of the way. And I'm going to do my best to show you step by step, like from the start, exactly what to do from the beginning. So the first thing I'm going to do is I'm going to set up my chart of accounts. So if I go under accounting now, your menu may look different. I know QuickBooks right now is doing a lot of upgrades, so the user experience may look a little different. But essentially you're going to go to accounting chart of accounts, which is the page I'm on right now. I'm going to go to new and this is where I'm going to set up my cash account. So you can see in here, I don't have a cash account set up yet, which is perfect. I'm going to go to banks. I'm going to. You can see we have available here on these accounts, I have a checking account and a savings account. Well, we're not really going to do any of that, but we're going to call this, we're going to save this under a bank account. And you can see there's an account here called Cash on Hand. And you can call this whatever you want. If you want to call it Cash on Hand, great. If you just want to call it cash, which is what I'm going to do, I'm going to leave it there as cash and I'm going to hit save. So you can see now we've created the cash account. Next step, we are going to create an account called Paid in Capital. And we're going to call this, we're going to save this under Equity. And we can see here, we are going to see this account called Paid in Capital. Now you could probably do this under owner's Equity or Paid in Capital. I'm going to use Paid in Capital because that's exactly what we're doing. So I'm going to call this Paid in Capital. And again, this is really up to you as far as whatever name you want to choose. In my instance, you know, we're calling this Paid in Capital. So I'm going to be very clear. So that way I know exactly what I'm looking at when I review the financial statements. So I'm going to hit save. And if we search Paid in Capital now, we will see Paid in Capital. Perfect. So next thing we're going to do is we are going to actually record this into our financial statements. So if I go into our financial statements, I'm going to do this by creating a journal entry. Now if you're on the most basic QuickBooks subscription, which I am not here, I'm actually in a sandbox test account. But this is an upgraded subscription. You may not be able to create journal entries. So you definitely want to upgrade your subscription to at least be able to create journal entries. So I'm going to create a journal entry and I'm going to record this on the date that it actually happens. So let's say I'm going to record this for Today, which is August 30th now, you may be wondering, what exactly am I recording here? So let's say you have a total of $2,000 that you spent in startup expenses. I want to record $2,000 in my paid in capital, and so we're going to record $2,000 of expenses. So I'm going to put a debit for $2,000 and I'm going to put a credit for $2,000. Now, again, this could represent 10 different expenses that you purchased over a period of time. If you wanted to do this one at a time, let's say you had one transaction where you spent $500 and you had a second transaction where you spent $1,000. You could break this up into two different journal entries and record the first one exactly like we're doing. You know, you could do it at $500, $500, create another journal entry for $1,000 and $1,000 on the cash and paid in capital. You can totally do that. But for simplicity, I'm going to record $2,000 because I know I have $2,000 of expenses that I have paid for out of my pocket. So I'm going to record this as my name. So I'm going to set myself up as an employee. You don't have to do this, but I do this. Especially if you got multiple partners. You want to know where the money's coming from just from a trackability perspective. And I'm going to put a comment in here. I always like to put descriptions in here because right now, in this moment, I know exactly what I'm doing. But in six months from now, I may completely forget about this transaction. And I'm sitting there looking at it and wondering, what the heck did I just do? Okay, so I'm going to put startup expenses paid personally out of personal bank account, and I'm going to put that in there as well. So I'm going to go ahead and close that. So we've recorded that, and we're going to go over to the balance sheet and let's take a look at what this is now on my channel. I'm going to go through an entire course that really walks you through, step by step, what all of this stuff means, what the balance sheet means, what the profit and loss statement means. So if you're looking at this and you're wondering, what the heck is this report, don't worry about it. We'll cover it in a different video and a whole series of videos, actually. But if we look at this as it is right now, you know, don't worry about all this other noise. Again, this is a test account. So some of this may not make sense, but if we look at the cash account which we have here, our $2,000. So what this balance sheet is telling us is we have $2,000 of available cash on hand. Now do you really have cash? No, you probably don't. But this is to recognize the fact that we paid $2,000 out of our personal pocket. And this is the mechanism in which we are using to recognize these expenses. So if we go to, we see this $2,000 cash and if I go down to the equity section, we can see that the $2,000 of paid in capital. So we want to show that we put $2,000 of money into our business. Right, and this is the mechanism in which you do that. So now it gets to recording expenses. So if we go to the profit and loss statement, I already have this pre saved. So again, going to go to. This is under custom reports. But if I go to standard, there is a profit and loss by month. Or you can do the profit and loss. I'm just going to do the profit and loss by month. So again we can ignore all these other accounts. This is just what I use for testing. We can see we don't have any expenses in here related to those $2,000, which we shouldn't at this point. So our next step is to actually record the expenses. So again, let's say we have those $2,000 worth of expenses. And what we're going to do is very similar to what we already did. We're going to create a journal entry, I'm going to use today's date. And let's say we have permits, right. So I'm going to select the permits account. And this could be anything like your registered agent fees, right? Let's just say this was $500. The offsetting account is going to be cash. So, so what this is going to do is it's going to take our $2,000 balance in cash and it's going to reduce it by $500 to recognize the fact that we spent money. And we also want to recognize this expense. So we're recognizing it under the permits category. Now if you were done, if this was the only transaction you wanted to do, you could literally hit save and close and that's it. So we're going to go in here and look now we see we have permits expenses. And if I go back to reports, go over to balance sheet and look at that. Our cash account is now $1500, right. Nothing is changing with our paid in capital because we put in $2,000 and we want to recognize that we put in $2,000. We don't want that number to ever change, but we do want this number to change. Really at the end of the day, if you're using this cash, debit, cash credit, paid in capital mechanism to record your startup expenses, you really should have that cash account down to zero by time you're done. So this tells me we have 1500 dollars more of expenses that we want to record. So I'm going to go back in here now. If all of this happened in the same month, I would just go ahead and use the same exact journal entry. So I'm going to open this back up and I'm just going to continue to add to it. And whether you want to leave this here, that's completely okay and just keep doing more expenses here, that is perfectly okay. Or you can just delete that and then just continue to go through all the expenses that you may have. So let's just say I'm going to order. Maybe I had checks. So I don't have checks set up. So I'm going to go ahead and set this up as an expense account. And in the interest of time, I'm just going to select this account under general and administrative expenses. Again, this is all personal preference on how you or your accountant would like to see this represented. I'm just going to select checks here and let's just say, you know, you're going to see this default to the credit side. You're going to get rid of this because QuickBooks is trying to say, hey, you have a debit, but you also need a credit and everything always has to balance. So what you can't do is have, you know, this show as $900 on the credit side and then the debit side shows at $500. Again, this is getting into accounting and this is not what this video is specifically about. So I'm going to say I spent $200 in checks, right? And well, let's just keep it, let's just keep the math simple here. So I spent $500 in checks. In reality, you know, if you're spending $500 in checks, that's a whole different other concern. I think you should look at automating, implementing automation in your business. So that way you're not writing that many checks. And but we're going to go with it. And let's just say we have subscriptions, dues and subscriptions I'm going to keep this really, really plain. I already have this account and let's just say we spent $1,000 and this could be any subscription related to your industry. So now what I'm going to do is select my cash account and you can see QuickBooks automatically said, hey, you know, you're missing the credit side. So we're going to put in $2,000 here. And again, in the interest of time, I won't go through this, but you really want to put in descriptions. You also really want to put in who the vendor is. Okay, so if you have, I'll just do one of them. I'm going to put in registered agent co and I'm going to change this to vendor and I'm going to save that registered agent fees for entity creation. So you're going to want to go through each line item and record that information. And then you can put in anything you want here recognizing expenses that were paid out of pocket. And your accountant should know exactly what that is. So I'm going to go ahead and save that. So I'm going to go back to the report summary and if you look at this, we actually have $2,000 in total expenses, which is exactly what we recorded. So if we go over to the balance sheet now, we're going to see that our cash is zero, which is exactly what we should see. And then again, we're not seeing any change in our paid in capital, which is exactly what we want. So to recap what we did here, we recognized $2,000 of startup expenses that came out of our pocket and we recorded that into our financial statements. This is really important when it comes to tax time because let's say you made $50,000 of profit, you're going to have $50,000 of tax liability. You want to maximize your eligible deductions. And one way to do that is to appropriately record all, all the expenses that you had. So if you had $2,000 of expenses in the very beginning, before you even got a bank account, we want to make sure that we have a mechanism in place to record that. And now you can do this yourself. You don't have to rely on your accountant. Now, if you're not an accountant, probably, you know, want to make sure that your accountant is reviewing everything. But this is something that you very easily can do yourself. So, so I hope you enjoyed. If you like the content, please subscribe. Definitely helps me out. And again, I'm going to go into much more debt later on and really do just start to finish basic accounting all the way to Advanced accounting. So subscribe and I will see you soon.