Other expenses and not within those two big categories I'm just going to go down the list pretty quickly. Product development. So this is a materials, patterns, tools that you use for developing new products or for developing products that are not for sale. So like if I put together um actually jay kay will you hand me that hand please? Let's use another visual example thank you so much. So this ham I put to get this team is like more than ten years old. Um this is one of my my hand sewed ham's from my early, like two thousand five etsy days in fact, the photo of the hand that you see on the sales from two thousand five our photo of this exact ham can you believe it? It's still alive and well, this uh this attests to the quality of my handmade products uh, yeah. So I never finished this ham you can see on this side that I have all of the embroidery of the twine here. Nicely done on done on this side. I never finished it because I just use this as a photography prop. Um you'll also noti...
ce that it looks very different on one side than on the other that's because I created it to look good at a particular angle for a photograph which at the time I thought looked really professional if we go back to that page um I can show you just like how sad that actually is a comparison to when I hired someone to take professional photographs we'll talk more about that when we talk about like how to grow and invest in your business and stop doing everything yourself because we can't all be good at everything. Um so this would be the cost of the materials for this would go under product development um because this is something that I put together not to sell to someone else um but to either let's say test new patterns or test new colors um two I don't know to use in this case as ah photography prop um etcetera, etcetera professional development is stuff like this course. Um that is education that you do for your business so it includes subscriptions to trade publications it includes conferences. It includes things like all I'm learning so this class is tax deductible who ray so I mean just think about that for a second. This class is normally thirty nine dollars uh today it's twenty nine dollars if you take off thirty percent for taxes is only twenty bucks it's only twenty bucks if you buy this today, how cheap is that? My gosh, um I don't know I feel about that pricing that we need to look at that uh so professional development and then we've got the home office which is one that I get a lot of questions about and this is where we categorize any expenses that have to do with you running your business out of your home. Now you cannot deduct this although I suppose you could track it if you wanted to um unless your work space in your house is separate from everything else. So this applies tio you know a separate room that you have as your studio or it applies to like a little desk that you have in the corner where on ly business happens it does not apply to the dining room table where during the day you work on your business but then at night your family eats there right because it's really difficult otherwise to separate your personal and your business expenses and it is so critical that you separate your personal and your business expenses otherwise there's no good way to track if your business is doing well or not um so home office includes all of the expenses that your home incurs that you would use within your business so for example my husband and I have a separate room in our house that is our studio we both have our workspace is there it is used on lee for work, nothing else happens there we do not eat there we do not enter thirteen guests there that is not our daughter's playroom it is just for business um so we can deduct um and we track the percentage of our home that we use just for business so in my case is twenty two percent of the square footage of my houses that studio so I track and I deduct twenty two percent of my mortgage or your rent twenty two percent of the insurance the homeowner's insurance twenty two percent of the utilities that I use so my gas and electric right my heat in my electric I don't include plumbing in there I don't have a bathroom in that space so I'm not including water there, right? I'm not including sewer in that quote in that cost um the interest on my mortgage any of that stuff that you're paying for in your home that you're also using as part of your business you contract as a percentage because there are two of us using that to the studio space we can each take eleven percent right split it in half or depending on whose business was doing better that year and needs to take more of a deduction we can shift it to one person or the other we each have our own businesses so he fills out his schedule c attacks time I fill up my schedule c it tax time and we have to coordinate beforehand um who's taking the deduction and who's not um this is equally applicable if you have roommates so somebody asked me in the bookkeeping for crafters cross will if I have two other roommates and we all split the internet and then I only use had the internet half the time for business how much of that do I put in my ledger so you would take half of third of the internet for the whole apartment, right or the whole house? Um does that make sense home office? Okay, great. Um then we have car and truck, so this is your vehicle expenses? This is not transit, by the way that will go under travel. It is not public transit if you own your own car or truck um, I suppose you could put in here, um expenses if you were renting a car like a city car, share a zipcar, one of those other services just for your business because on ly, sometimes you need a car to like cart goods around to a craft show or something like that. Um if you own your own car or truck or other vehicle and you use it both for personal and business, you need to keep track of the miles that you're driving for business versus the miles that you're driving for personal ease um and you can just, you know, mark down the start and the stop ah, mileage. When you get it and you get out, you have to keep a running list of this, um, in the bookkeeping for crafters class. I have a bonus material where actually have a mileage diary already laid out and made for people, um, that you can just print and use. Ah, but you need to write down the start and stop mileage. You need to write down what the expense was that you incur. Did you get gas? Did you pay for parking where their tolls? Um and then you would need to write down the date, of course. And what your business purpose wass driving to pick up, you know, materials driving to craft their going to conference, whatever business purpose it was, you got to mark that down. Um, and then that counts as a record of your car expenses. You don't then need to keep all the little receipts for the like three dollars parking fee you had. You don't need to get receipts for the toll that, you know, got paid on the ah little transponder and then separate out the business tolls from the personal tolls right? S o that mileage diary will be your evidence for tax time, purposes of those expenses. On that at the end of the year you have to calculate out of the total miles you drove that year how many of them were for business if you drove a thousand miles that year in one hundred of them were for business you can deduct ten percent of all of those expenses right? Um so the car and truck stuff we'll look at it in the ledger is a little hard to track until you get to the end of the year um what I tend to do is I tend to put in well these days I don't drive very much so I don't even track my car and truck expensive anymore, but what I used to do is I used to enter in the full expense the full amount of the gas, the full amount of the parking, the tolls, et cetera and then at the end of the year I would update that percentage or if you know already it's your second year bookkeeping and you know that you tend to drive ten to twenty percent of the time for business you can just guesstimating and put in ten percent of that toll ten percent of that gas and then adjust it later on so that you have a more accurate picture um in general, when we're talking about like what expenses are deductible, the irs says they have to be ordinary both ordinary and necessary so what does that mean like I'm not gonna get into any specifics about what's deductible and what isn't I'm not a c p a I'm not a lawyer so if you have questions about what uh expenses are deductible on what or not you should check with one of those professionals and their services would go under the legal and professional services account we'll get to that but in general a business expense needs to be both ordinary and necessary eso an example of an expense that is ordinary um but not necessary is let's say you use your businesses shipping supplies to send a birthday gift to your grandma totally ordinary use of businesses business materials but that was not necessary to your business to send a birthday gift to your grandma unless maybe your grandma's like one of your big investors I don't know um what is something that is necessary but not ordinary? Well, maybe for employee retention you've decided that you need to fly everyone on a private jet teo you know a fancy holiday party um that would be something that you deem necessary but is not ordinary so that would not fit either so it's a little bit subjective s o if you have questions about that, you should really check with epa or a lawyer about that okay moving on assets and appreciation this is for big capital purchases depreciation means that um, you're basically paying it off over time, even if you've actually paid for it all up front, you're counting it as an expense over time. So as an example, you buy a new computer for your business, it cost two thousand dollars. You expect that computer the last five years. What you can do is you can mark it as two hundred dollars a year as an expense, as opposed to a thousand dollars that first year, even though you pay two thousand dollars that first year, um, it might be more useful to your business, and it certainly might be more useful to your tax return to market as an expense over time, the depreciated expense, as opposed to one expense right up front, because your first year in business especially, you're already going to be spending a lot more money, probably more money than you're making you're probably already not profitable your first year if you are, I mean, hallelujah, that's amazing, but it's by no means common, um, and not even necessarily advisable if you're not spending enough money to really get started. Uh, if your first year in business, you're spending a lot more than you're making, um you don't need more deductions, right? Because there's nothing left to deduct all your money is already gone um, so it might be nice to save some of that deduction for that big purchase for years when you are making money and you do need that lower tax bill. S o that's. Really nice on, by the way, this is not just for physical items like a computer, you could deduct software. If you spend a thousand dollars on adobe software and you expect to use it for the next three years before you know the next version comes out, you have to switch. You could appreciate that over three years. Um, you could do it, even excuse me with with that new website, decide if you spent eight thousand dollars on a new web site designing, you expect that you will not change that for another two years. You can capitalize that expensive four thousand dollars each year, as opposed to eight thousand dollars in one year tax is, um, this is employment taxes, so if you have employees, this is not your own personal taxes. All of these things refer to your business specifically. So if I say utilities it's for your business, if you have a separate location for your business, the utilities there is where you would, uh, categorize that, um, repairs and maintenance that's for your business, right, this is taxes for your business, you don't you wouldn't track like your own income taxes in here you wouldn't track your own social security and medicare taxes in here if you have employees and social security and medicare are cost for your business that's where you would track that business licenses ah most district or cities will require that you have one of these it's technically attacks um sales tax that you have paid on things you can if you want to pull that out and track it separately you certainly can um I tend not to, um because it's rare that I have a lot of you know uh that sales tax is like a huge expense for me and that I need to start buying more things out of state because the sales tax is just running me out of business um and it's very tedious to pull that out we'll talk about when you should pull out sales tax and when not to sometimes it really makes sense other times not really worth it d be a doing business ads so if you have ah fictitious business name that you've registered if you're running a business under a name other than your own um you would put that in taxes and then travel includes basically everything associated with travel other than meal so airfare hotel gas rental car, et cetera, public transit you would put that in there as well neil's get pulled out separately and maybe you don't need to do this in other countries but here in the u s for some reason meals and entertainment only half of that is deductible it's the on ly category were only half of the expenses deductible I don't know why they've set it up that way um but you have to pull it out separately because for tax purposes essentially um insurance again this is related to your business so if you have liability insurance for your business if you have, um commercial insurance for business if you have your whole business in a retail store or a separate studio space and that has insurance great that does not cover your own health insurance any other personal costs like that um interest payments same thing as it applies to your business on lee so uh mortgage interest on a business property if it's mortgage interest on your home that goes under home office right that's why we covered that first um home office kind of trumps any of these other categories cost of goods sold also trumps any of these other categories ah interest payments again business on lee so your business credit card your business property rental payments again business homely legal and professional services again, I don't know why this is pulled out separately from the rest of contract labor but it is on that applies to lawyers, accountants and association memberships and virtually nothing else so if you've hired a lawyer or an accountant or you're a member of like the chamber of commerce you could put that in legal and professional services otherwise you would put it in contract labor so again that cost of goods sold category where you're using either employees or contractors to help you make your actual products that would go in the cost of goods sold production labor everybody else minus those lawyers and accountants goes in contract labor so that person who helped you with the craft fair the person who designed your web site the pr consultant you hired right before the holidays those going contract labor repairs and maintenance for your business utilities for your business employee wages rate salaries et cetera employee benefits like health insurance and retirement plan if you have those again cost of goods sold trumps that category so if you have employees that are solely working on production of goods I would track those in production labor before I tracked them an employee wages and benefits and you can further split those out you could have cost of goods sold employee wages cost of goods sold uh employee benefits but you you always want to track the actual cost of making your products separately and sort of first and foremost because of that's not profitable that side of your business none of this other stuff matters none of it uh that's why it's a trump category and then we've got miscellaneous expenses in which I've put bank charges and business related gift's you know, sending a product to that guy who got you that piece in the new york times um as a thank you or whatever okay, we've gone through the chart of accounts does anyone have any questions have been a few have come in from online people asking about things like depreciation office see we've you apply your whatever supplies you have a home like a printer so that you have to then calculate appreciation of over a few years or so is that not something really need to get to the nitty gritty off and other people are saying, well, they don't have a separate space for that work they really just use the dining room table, so don't does that give them any opportunity to write off a percentage off there calls for tax purposes? No, absolutely not. The irs is very clear about that. Um if you don't have a separate space in your home for doing business that's not deductible just right off the bat um a lot of people have asked me, you know, well, can I still track it separately in my book keeping the answer is technically yes, if you know that you absolutely use that dining room table half the time for your business and the other half the time for personal use then you could take, you know and it's like twenty two percent of your house you could take eleven percent of that and track it is a business expense although you'd have to be really careful not to put that in as a business expense at tax time um but more often than not it's really difficult to separate the business time from the personal time if it's a shared space like that dining table s o I just would not count that as a business expense it all because otherwise you're really mixing in the business and the personal expenses and that just really muddies the water and I think hinders making really clear and confident business decisions and that sort of the goal that we have today with the bookkeeping is to get the information really solid and detailed in place in order to make those confident business decisions so anything that works against that I probably wouldn't recommend other other questions about the homeowners face do they come in? Yeah h o a dues absolutely homeowners association fees yeah. You can absolutely make that part of your home office if, um you do in fact have a separate space in your home for your business yeah, including the maybe just a clarification so you would would you encourage um people to sort of have a supper being account as soon as they possibly can or for personal and for business accounts yes absolutely uh I would separate everything as much as possible as early as possible separate bank account for sure separate credit cards yes, absolutely I have a whole separate business wallet where I keep my business bank cards I keep my business cash because it's very easy to mix the cash together when it's personal and business right? How do you know that like this? You know that these three quarters in your change purse where for a business purchase these other two quarters were for personal um so yeah, I have a whole separate business while it some people just use a little pouch keep it all together and that has my petty cash in it the cash just for my business it has my business credit cards in it it has all my business receipts so that also when I'm doing my bookkeeping I'm not digging through my purse in my wallet and trying to separate everything out well, this I think this time I went to the hardware store it was for, you know, business purposes and not for personal um and then I also have uh what do I name already? I have my business credit cards in there have my receipts I had my petty cash and then I have my separate business bank account yeah um so absolutely yes can't make that clear now yeah, yeah, yes, yes um a big and resounding yes to separating everything out as quickly as early as humanly possible. Okay, um and then I think there was a question about depreciating something that you already own was that the question okay prints or something like that off supplies or a printer that you already own. So I'm not really clear uh for tax purposes if you can deduct something that you already own I mean, technically anything that you already own that you bring to the business is part of that owners equity so it's not really income or an expense? Um I would not recommend tracking it as such. Um if you wanted to sort of like, have the let's say use you were using that printer for personal purposes and now you're using it solely for business purposes. If you wanted to have your business sort of by that printer from you, then you could track it as an expense and then depreciated over the remainder of its life if it's going to last two or three more years um you could do that. Otherwise anything that you bring to the business either meet material goods or just investing your own money um would be owners equity and equities just a fancy word for what you could walk away with at any given time. If your business shut down tomorrow, what could you walk away with with, um, what would you get to take out of it, um, and used for something else in the future. But, um, anything that you add or take away is not income or an expense, because in most cases, you are not separate from your business. If you are a sole proprietor, if you're part of a partnership, you are your business. So you cannot be. You do not affect the prophet of your business. You you can affect the cash that the business has to work with or the supplies that the business has to work with. Um, but you as an owner, can only provide equity, you can only provide sort of breathing room and materials to work with. From a financial perspective, you do not make your own income. You are not your own expense. If that makes sense, we'll talk about it a little more when we do some actual transactions in the ledger. But yeah, for equipment you already own, I would say generally treated his owner's equity, which is neither an income nor an expense. Um, okay, so, uh, let's breeze through here really quickly and then open up that ledger. So I talked about we're going to break down some different typical fees for etc sellers, so listing fees I would put in advertising and promotion that's what gets you in search you could also put that in selling fees if you wanted to it depends on how you want to track it transaction fees I would put in commissions that's pretty simple and straightforward the direct check out or paypal fees that's merchant service fees and then coupons and discounts we would put in allowances which is a negative income account and we'll look at that on the ledger as well um most income is positive right it's stuff you sell its you know services you provide to other people it's that random cash back or rebate you got from the bank there's one negative type of income and that's the's allowances and it's nice to pull those out and track those separately because you want to make sure that you're not giving away too much right you want to make sure that you're not giving away the store as they say are you giving away too much in coupons and discounts is it actually getting to the point where you know you may have mohr sales but less profit um that's definitely an area want to look at on its own and then let's break down the storage and shipping a little bit as well because this is also a common category for etc sellers so containers that are part of your product packaging like that bag that we looked at before that's part of product packaging and your cost of goods sold boxes, patting labels, postage it used for shipping. I put that under office expenses. If you want to break your office expenses out into further categories, like shipping supplies, perfectly reasonable and fine thing to do, ah, fulfillment services. If somebody else packages and ships your goods for you and etc allows fulfillment services now. So this is absolutely a possibility. Um, I would put that under contract, labor and outside storage, I would put another cost of goods sold expenses.