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FRANCHISE OWNERS

GUIDE TO
BOOKKEEPING
ANAGO CLEANING SYSTEMS, INC.
1100 PARK CENTRAL BLVD SOUTH, SUITE 1200
POMPANO BEACH, FL 33064

PREPARED FOR FRANCHISE OWNERS

Revised 11/02/11
The Guide to Franchise Bookkeepings the property of Anago Cleaning Systems, Inc.,
assigned to the Franchise Owner listed above for that person's use. It is intended as a
reference tool only. This manual is not intended to replace the need for professional
accounting services for the business owner. Tax laws and business rules change and
Franchise owners should always retain the services of a professional accountant.

Edited by:

S.D. Savage
T. M. Mollica (Anago Cleaning Systems)

TABLE OF CONTENTS
INTRODUCTION TO FRANCHISE ACCOUNTING.........................................................................1
I. OPENING A NEW BUSINESS.............................................................................................. 2
WHAT TYPE OF COMPANY SHOULD I FORM?................................................................2
WHAT KIND OF COMPUTER SHOULD I BUY?................................................................2
SHOULD I ENGAGE AN OUTSIDE PAYROLL SERVICE?...................................................2
II. Bank Accounts................................................................................................................. 3
Deposit Slips............................................................................................................... 3
Disbursements............................................................................................................ 4
Petty Cash.................................................................................................................. 5
Cash Control............................................................................................................... 5
Labor.......................................................................................................................... 6
Loans.......................................................................................................................... 6
III. TAXES............................................................................................................................. 7
IV. FINANCIAL REPORTS....................................................................................................... 9
V. INCOME SOURCES......................................................................................................... 10
Taxable Sales............................................................................................................ 10
Miscellaneous Deposits............................................................................................. 10
Miscellaneous Receipts.............................................................................................11
Cash Receipts........................................................................................................... 11
VI. EXPENSE AND OWNER ACCOUNTS...............................................................................12
Advertising............................................................................................................... 12
Automobile............................................................................................................... 12
Commissions............................................................................................................ 13
Contributions & Donations........................................................................................ 13
Depreciation/Amortization........................................................................................13
Interest..................................................................................................................... 14

Meals and Entertainment.......................................................................................... 14


Medical Expenses..................................................................................................... 14
Office supplies.......................................................................................................... 14
Officer Salary............................................................................................................ 14
Owner Draws/Dividends/Distributions.......................................................................15
Petty Cash................................................................................................................ 15
Rent.......................................................................................................................... 15
Royalty/Franchise Costs............................................................................................16
Sub-contractors/Contract Labor/Casual Labor/Independent Contractors..................16
Supplies.................................................................................................................... 16
Travel........................................................................................................................ 16
Use of Home............................................................................................................. 17
Utility and Rent Deposits.......................................................................................... 17
Utility expenses........................................................................................................ 17
Other Items............................................................................................................... 17
Shareholder Loans.................................................................................................... 17
Corporate Stock........................................................................................................ 18
VII. documentation............................................................................................................ 19
VIII. how to fail in business................................................................................................ 20
IX. how to succeed in business.......................................................................................... 21

INTRODUCTION TO FRANCHISE ACCOUNTING


While new Franchisees are acquiring the knowledge to start up and run their business they
must also take on the responsibility of keeping records and accounting for each cash
transaction that occurs. Because this activity requires a lot of detail work and because much
of it is technical in nature, it is recommended that the Franchise Owner engage a local
accountant who will discuss the relative complexity in the tax laws as well as the specific
procedures to follow on a day to day basis.
The prudent business person should understand the importance why good accounting
techniques benefits "the bottom line" in addition to becoming familiar with accounting
terminology that will be encountered in everyday business operations.
It is the purpose of this manual to touch upon all these aspects. While it does not intend to
be a basic course in accounting, or to answer all of your specific questions, this accounting
manual should give you a "feel" on how to report your income, how to control your
expenses, and how to pay the least statutory taxes on a timely basis.
All forms mentioned in this manual are available either from your accountant or you can
order them from the U.S. Government printing office. Consult Circular E for phone numbers
and addresses. Do not stockpile these forms in any great quantities as the government in its
infinite wisdom sees the need to change the look and format of its forms without notice or
reason, as well as changing requirements for computer filings.

I. OPENING A NEW BUSINESS


FRANCHISE ACCOUNTING has the same Internal Revenue Service regulations
as is required for any small business. Your Franchise License Agreement
requires that you open a separate business banking account. The co-mingling
of personal funds is not allowed as per your agreement with Anago. One key
to a successful operation is to hire or retain an accountant in your area. This
person should be familiar with small businesses, be available to answer questions during the
entire year, and instruct you on meeting all tax filing deadlines. Three questions you should
ask your accountant:
WHAT TYPE OF COMPANY SHOULD I FORM?

Not an easy question. What works for one person does not always work for
another. Your Federal citizenship status is a factor as is the personal wealth you have at risk.
Generally, the benefits of an S incorporation outweigh a C corporation and an LLC has
advantages over both, but on an individual basis you need to discuss the pros and cons with
your accountant.
WHAT KIND OF COMPUTER SHOULD I BUY?
A much easier question would be; unless you are quite knowledgeable about current
available hardware and software, or own a computer having business software,
then do not put excessive dollars into a computer at this time. Get a basic work
computer. Your main emphasis is earning a living, and a computer will only
detract from the time needed to manage and supervise. The business purpose of
a computer is to serve management. Eventually, you may purchase an upgraded
computer if your reason is to facilitate end results like faster and better collections, generate
accurate customer billings, send out promotional material, have better cash control, or
maintain customer lists. These are but a few examples.
SHOULD I ENGAGE AN OUTSIDE PAYROLL SERVICE?

This is the one type of service that is in your best interest: The one that needs your
consideration, either now or later. Timing is the key question. If you have less than three
employees, it probably does not pay to use a payroll service. Also, once into a payroll service
you need enough positive cash flow to pay taxes as instructed by the payroll service. Not
using a payroll service requires a careful reading of the accounting section on LABOR. (Page
6.)

II. BANK ACCOUNTS

A separate bank account is required by the Franchise License agreement. Bank requirements
to open an account, whether proprietorship or corporate, varies slightly from bank to bank,
but all banks now require a Federal Employer Identification Number (FEIN) at time of opening
the account. To obtain this number takes as little as a five-minute phone call to a special
Internal Revenue Serv. person in your area. Your accountant will prepare form SS-4 and
assist you in making this call. Additionally, your bank may require an occupational license.
You will need to go to the City or County Licensing Department for this form, if necessary.
Keep a record (cancelled checks and receipts) of all personal checks you issue prior to
starting the business bank account. Whether to expense or Capitalize these
payouts are a matter for your accountant to handle. Computers have not
done away with the retention of documents. Each time you write a check,
deposit a check, send out a bill, or pay cash for a business purpose you
receive or create some documentation in writing. It is important that these "pieces of paper"
do not get lost or destroyed. Each in its own way substantiates a business activity and will
likely be required to be produced in the course of an I.R.S. audit, should that ever happen. It
becomes only a matter of discipline and routine. Keep your filing system simple and on a
regular daily basis.
This manual at different times may give you two ways of doing something, but once you
have elected to do it one way, then stay with that procedure until there is good reason to
change.
DEPOSIT SLIPS

Deposit slips should be made out in duplicate. Either have the bank validate your
copy or receive their validation ticket and later attach the ticket to your deposit copy. Retain
the copy chronologically in its booklet or staple same to your check stub where you entered
the deposit total.
Step one: Making out a deposit slip is an important record of who paid you. While some
banks request their accounts to use a numerical method of writing in the check owner's
name, we recommend you write the name as it appears on the check. Should a particular
check be from a source differently than your records then write your customer's name just
below the name on the check. You may then need to change your records to the new name
for filing purposes and for future billing purposes. It is a good idea to make a copy of a check
before depositing it when there is a need to retain source information contained on any
particular check, especially if the check is from the U.S. Treasury.

Step two: Mark the deposit date as paid on your records of the open receivable for each
check deposited. Then file the "paid" receivable invoice into the paid customer's file.
Step three: Add the amounts on the deposit slip and place in space provided. Be sure to total
checks and confirm same total as placed on deposit slip. Any discrepancy needs to be
checked out.
Step four: Be sure to endorse checks before going to the bank. Your bank will order an
endorsement stamp for your convenience in doing this routine.
Step five: If "Cash" is deposited into the account, a notation needs to be made on your
deposit copy as to the source of this cash. Is it "income" or a "loan"? Since the IRS considers
all receipts as "income", unless otherwise documented, you must reflect any deposits that
are Loans, Returns, Refunds, Repayments, or Re-deposits, etc. As to "loans" made to the
business please contact your accountant for procedures to follow. (See LOANS, page 7.)
DISBURSEMENTS

Disbursements are most often done by check. Whenever you sign a contract,
agree to purchase a product or service, or in any other way commit your company to an
obligation it is best to make payment by check, both as proof of payment when the check
clears and as a record to use when bookkeeping is required. Types of checks and check
registers vary from bank to bank. The three to a page generally works best as the stub
provides enough space to record deposits, purpose of check, and any other notes you wish
to make on the stub side.
Step one: Write out the check in the prescribed manner.
Step two: Fill in the stub with check information: namely date, payer's name, and amount of
check.
Step three: After recording the deposits for the day on the stub, total down cash balances
through the last check for the day.
Step four: Each check written has a reason or purpose. Indicate on the stub this reason, such
as the expense account, or note payment, refund, owner's draw, etc. As you do not want to
ever pay twice for the same service or product take the time to write your check number
and the word "paid" on the invoice, note or other original document you are now paying
Step five: After the invoice has been paid in full, file it away in your yearly vendor files. You
will likely want this file maintained alphabetically as this provides you with quick access to
previously paid bills should you (1) want to know the prices of something previously
purchased, (2) how much business you have given any one supplier, and (3) to hopefully
insure that a "duplicate" invoice doesn't get paid twice.
Lastly, since you will not likely have an inventory of merchandise to sell, your accountant will
recommend you be on a cash accounting basis. Any unpaid bills or expense invoices can be
kept in an "unpaid" file either alphabetically or by due date. This file does not constitute an

expense to your operations until such time as you withdraw an invoice and pay it.
Remember, delaying or late payments may cause you to lose a valuable supplier.

PETTY CASH

Reimbursements are for minor business expenses one pays for with cash from
their pocket, such as fuel, office supplies, a client meal, on the spot equipment rental,
sundry job supplies, etc. Since this cash came from your own funds you need to reimburse
this cash from the company bank account so as to thereby get an allowable deduction. The
main point is for you to get a bill or receipt for any cash paid out. It should be dated, state
what the product or service is, show your company name on the bill, and be signed or
headed by the preparer. It may be necessary to explain how the product or service was used
by your company if ever audited by a taxing authority.
CASH CONTROL

Cash Control should maximize company income and minimize expenses. Any
deposits for which the bank fails to give you credit, any duplicate vendor payments, any
unauthorized signed check charged by the bank to your company account, any loans given
to employees who fail to pay back, any stolen asset or damaged equipment requiring repairs
all negatively affect the bottom line cash flow.
Step one: Immediately upon receiving your bank statement (usually by the 5th or 6th
working day of the following month) you should open the envelope and check off deposits on
the statement to your deposit slips for the period. Any missing item will be taken up with
your bank. (Un-posted deposits are very rare, so if you have more than one bank account be
on the watch for deposits being recorded by you in the wrong check book).
Step two: Sort checks in numerical order, making sure each has an authorized signature
(usually yours). Discuss discrepancies with all authorized check signers, review
endorsements if questionable, immediately take up any bank problem with your bank
representative.
Step three: Now reconcile the bank statement with your check book. If you need help, your
accountant will show you how to do this in the minimal amount of time. This step should not
be delayed, as you want your check book balance to be current and correct.
CAPITAL transactions (over $200) are purchases of tangible assets that will be depreciated.
Specific examples are:
Original Franchise Fee is a long term capital investment that may be amortized over
the life of the Franchise.
Equipment and vehicular purchases are long term assets, so are capitalized as well
as depreciated, either as Sec. 179 assets or straight lined. (see your accountant)
These newly purchased capital assets require special accounting when cash is paid out. The
unpaid balance usually is secured by a note agreement at some specific interest rate. In
order to record the full asset, it's related liability, and any pre-determined interest you will

need to give full disclosure to your accountant. When the business begins using vehicle(s),
furniture, or any equipment owned by the Franchisee prior to start-up then careful
evaluation is required by your accountant so as to take the expense portion to which you are
entitled. Any fixed or long term asset documentation will be retained in a Permanent file
folder for a minimum of five years after disposal or write-off.
LABOR

Whenever LABOR is expended the question usually is, "Should this labor be treated
as employment labor (wages) or as Contract labor (self-employment)?" Invariably, all or
most of the people you pay labor to will be Employees. I.R.S. has so defined "employees"
that rarely does a person qualify as self employed. Therefore, your hiring practices will have
each person hired complete an employment application (verify as best you can the
information contained thereon), a W-4 form requesting personal tax status information, and
an I-9 Dept. of Immigration Form relating to citizenship status information. Be sure that
before the first check is given to a new employee, you see, and if possible, make a copy of
the social security card or green card to verify name and number. Place all employment
forms in an employee folder and retain in a permanent file for at least five years. VERIFY
past employers.
Daily Time Sheets will be kept on each employee. It is important to know the hours, the job
locations, and dates worked so as to prepare the weekly, bi-weekly, or monthly payroll. This
information may also be invaluable for insurance claims should they occur.
If you do not use a payroll service then Payroll Earnings Ledger Sheets will be kept on each
employee After the employee's gross earnings have been determined, you calculate the
Social Security Tax deduction, Medicare Tax deduction and the Income Tax Withholding
deduction (see circular E) and any advance loan recovery to arrive at a net payroll amount
due. Enter all these figures on the Payroll Earnings Ledger Sheet on the appropriate date
line. Your accountant will total the quarterly amounts and prepare the required quarterly
Federal & State payroll reports. See TAXES concerning payment of these withholding
amounts.
LOANS

Any business from time to time needs capital infusion. Franchise operations
usually begin with the owner/operator making payments from his own resources
before starting up. You must inform your accountant of these personal business loans
whenever they occur so as to get the full benefit for them. If the Franchisee borrows monies
in his personal name, then only those amounts actually used for the business are important
to record on the books. Often in the running of your business you will use your own cash to
pay for supplies, automobile fuel, repairs, etc. These operating expenses are recorded on the
books when you submit the receipts obtained from each one, tabulate the totals, and then
write a business check to either yourself or "cash". (See "automobile" expenses and "petty
cash" reimbursements, page 14 and 16, respectfully.)

III. TAXES

All labor/wage in America is taxed. As an employer, you are responsible for the
collecting, remitting, and reporting of these taxes.
Federal Social Security taxes and Medicare taxes are computed at the rate
determined by IRS (Circular E)
Employee Withholding amounts are determined by comparing gross wages for a
particular period with that period sheet in the Federal Circular E booklet. Check the
employee W-4 for filing status.
Remitting is done timely and periodically on form 8109B. The total to remit is
computed by adding the employee withholding amount to the social security and
Medicare deductions plus the matching employer taxes (see accountant for
rates/amounts). Make a check payable to your bank and take both check and form
8109B to your bank by the due date. (Usually the 15th of the month) Attach the
bank's validation slip to your check stub or into to your 8109B booklet.
Currently, a federal unemployment tax (FUTA) is also paid on first $7000 paid to each
employee in a calendar year. There are no FUTA taxes due on wages paid in excess of
$7000 during the same calendar year. The rate of tax is determined by the amount of
State unemployment tax you pay for each of your employees. Check with your
State's Department of Revenue for rules and rates. Generally, the reporting and
annual payment of the Federal Unemployment taxes is computed on form #940.
Because all of these Unemployment forms are cross-matched by the Internal
Revenue Service sometimes after the close of each year, it is important that your
accountant or Payroll service confirms that these Unemployment totals agree with
the Annual Employers Wage form W-3 summary. Some states do have wage income
taxes, so you must check with your state for information on procedures to follow
regarding withholding, remittance and their reporting requirements.
There are other business taxes needing your attention also. Depending on your
corporate status, you may have to pay Corporate Income Tax, Corporate Intangible
Tax, Corporate Tangible Tax and possibly a State Sales Tax. Your accountant has the
initial forms and will guide you should any of these taxes be required. It should be
added, though, that most state sale tax is due periodically (usually monthly) should
you buy merchandise or parts for resale. You must check with your state's
requirements on the collecting and remittance of sales taxes, if any. In some states
corporations must file an annual State Income Tax report, again check your state
requirements. Corporations that apply and are accepted for a Federal S corporate
status pay no Federal or State income tax on operating profits, as profits are
considered Dividend Distribution to Shareholders and taxed by the Federal
Government to each shareholder according to their percentage of ownership. Due to
the complexity and tax rate variances, reference is again directed to your accountant

for the preparation of these tax reports. Some states have an Intangible Tax on
corporate net worth. Small operations usually do not exceed the minimum taxable
values to owe a tax, but filing still may be required. Lastly, please know that current
rates change, new taxes get created, rules and regulations change, sometimes
dramatically, and you are responsible to follow these modifications. Your accountant
is constantly being made aware of the changes and will advise you when you are
affected.
Proprietary operations generally have advantages over incorporated operations when
a venture is new. It has few employees plus few assets, sells primarily a service, has
very limited operating funds, and the owner has personal net worth mostly invested
in a personal residence.
In an Incorporated structure the owner/operator will be on the corporate payroll and
have payroll taxes deducted similarly to other employees. In a Proprietorship
operation the owner cannot be on the payroll. Therefore, the net profit of the latter
type of business will be 100% taxable as well as subject to the full applicable social
security taxes. Therefore, the self-employed owner needs to know his (her) personal
tax situation quarterly so that estimated taxes on the net profits can be paid as due,
namely, January 15, April 15, June15, and September 15. Form 1040ES is used for
this purpose. Estimated payments are not required when there is no tax due (usually
caused by an operating loss). To determine what amount to pay for any particular
period involves a complex formula that should be worked out by your accountant.
All estimates sent to the IRS are treated as a credit on the self-employed person's
personal income tax return, when filed the following year. Any non-payment or underpayment of payroll taxes and/or personal estimated taxes carries a heavy interest
and penalty burden. Interest rates currently are approximately 1% per month for any
tax not paid when due. Additionally, penalty rates can be assessed anywhere from
12% to 100% depending on the circumstances underlying why the taxes were not
paid when due. Several ideas on how to prevent late payments are (1) open a
separate payroll bank account. Deposit all employee payroll tax withholdings plus
matching employer's taxes into this account as soon as the payroll for the period is
paid. Checks will then be issued as directed by your accountant or payroll service; (2)
Issue checks directly to your bank (as agent for the I.R.S.) at each payroll period as
directed by your accountant/payroll service; (3) determine when taxes due equals a
minimum of $500 on form #941 and $100 due on #940. Then issue a check to your
banks agent (form 8109B). Your accountant will help you prepare the quarterly #941
and determine the exact amount due at that time. Payroll taxes are a necessary
burden for all businesses. While stories abound about companies hiring sub-contract
persons so as to avoid most of these problems, your Franchise License agreement
does not permit the hiring of Sub Contract workers, because the IRS defines your
labor as "employees". Retaining attorneys or accountants for professional
advice/services is not considered Labor, and when properly accounted for do not
require #1099's to be issued at year end.

IV. FINANCIAL REPORTS

Annual financial reports give management the opportunity to review the past year's
operations, to oversee all payrolls, to close out and file away day to day records, and make
plans for the New Year.
All individuals receiving wages or sub-contract monies need to be given specific
income documentation by January 31 of the year following. A payroll service
automatically prepares W-2's, W-3, #940, #941's, #1099's, #1096, and state forms,
if any, in January with instructions on where to sign, amounts due, and where to mail
each form, respectively. With only a few employees you may wish to have your
accountant do all of the above forms when you give him your records for the yearend. It is not recommended that you try to accomplish these reports on your own, as
totals of W-2's, 941's, 940, W-3 and state reports must all dove-tail together. Your
accountant has the responsibility to see that they balance correctly.
Closing out the year-end Journals and Financials requires technical knowledge best
available to you by your accountant. Timely gathering of your checkbook stubs, bank
statements, payroll records, deposit slips, capital improvement documentation, etc.
should be given to your accountant by January 15th. He will prepare Journals, closing
entries, a depreciation schedule, review and finalize payroll reports, submit a
preliminary Operating Statement and Balance Sheet, and then get your approval to
finalize financials in order to prepare either the Corporate Federal Tax Return or the
Proprietorship Statement of Operations.
March 15 is the deadline to file Federal corporate income tax returns, unless
extensions are filed on time. It is in your best interest to file on time, and under the S
corporate rules you need the K-1 report (part of the corporate return) in order to
complete your personal tax return by April 15th. Take the time to review these final
year-end reports before signing the tax returns. Discuss any questions you have with
your accountant before mailing the tax returns to the I.R.S. or your state's
Department of Revenue. State rules vary on the corporate filings and due dates.
The storage of records needs your careful attention for just a short time after the end
of each calendar year. If during the whole business year you filed paid receipts for
expenses in alpha order by vendor or payee, and you filed Capital acquisitions in
separate "permanent" folders, and all your bank records for the year are in one place
(after being returned by the accountant) you can now gather and place into a box or
large Pendaflex folder all paid expense documents for the year as well as the bank
statements, cancelled checks, payroll reports, time sheets, and deposit slips. Mark
the appropriate year on the outside of the box and file it in a secure dry place. Your
"permanent" files remain in the office where you will add information to either
employee files or business asset acquisition files.

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V. INCOME SOURCES

Your regular and normal cash receipts should come in from Franchise Revenue.
Accompanying the check will be an explanation of gross earnings less various deductions
you will need to retain and give these monthly reports to your accountant who will record
the income and expenses accordingly.
Prepare deposit slip list each check by maker
Endorse back side of check properly as drawn
Take deposit slip and check(s) to bank as soon as possible
Record validated deposit onto check-book stub immediately
File validated deposit slip consistently in same place
TAXABLE SALES

(If subject to your state law.) Should you make a sale of merchandise/supplies
where the buyer would be the consumer of the product (i.e. a sale to someone who will not
resell then you must charge your customer a sales tax, (check local law for percentage rates
to charge). Follow these procedures:
Obtain a Sales Tax Identification number. Call your accountant or your State's Sales
Tax Dept. for the application form.
Usually monthly, or as required, complete a sales report to the state dept. of
revenue. Payment is due as required by the state law.
Any products you buy for resale to someone else do not require you to pay sales tax
on your purchase of these products. You tell your supplier that you are buying for
resale and you wish to fill out a Certificate of Exemption. Your supplier will not charge
you sales tax on those products you purchase for resale.
MISCELLANEOUS DEPOSITS

Refunds from Utility companies separate deposit slip is best.


Loans from Officers, employees, etc. separate deposit

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Customers NSF check redeposit on separate deposit slip


Note on the deposit slip there is a brief explanation for the deposit. Your accountant will
credit the appropriate account as so noted. A loan given to the company usually has
supporting documentation, usually in the manner of a note or contract. Retain any of these
obligatory documents in a permanent file, and have copies available for your accountant.
MISCELLANEOUS RECEIPTS

Such as I.R.S. refunds of tax overpayments should be put on separate deposit


slips also. Note on the slip where you are keeping any related correspondence relating to
this particular deposit.
CASH RECEIPTS

The last point relating to Cash Receipts is that all receipts of monies is
considered Income to the business unless you can document it as a loan, refund, or
something else should there ever be an I.R.S. audit.
Cash Receipts Construed Income includes BARTERING Income (exchanging your services for
another's service or product). The service or product you receive may be a business
expense, and as such can be deducted in the appropriate expense account when supported
with the proper documentation. Your service offsetting the "received" product/service is
considered by IRS as constructive income.

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VI. EXPENSE AND OWNER ACCOUNTS

The following comments briefly describe or explain frequently used expense accounts. For
special tax considerations or implications consult with your accountant.
ADVERTISING

Advertising describes expenditures for the promotion of your business. This


normally would be advertising media or promotional materials purchased to be given out to
prospects, etc.
AUTOMOBILE

Vehicular expenses are deductible to the extent that you keep certain records.
Generally, any business use of a vehicle is a business deduction. The following options apply:
OPTION 1: Actual method: Since a car can be used to make personal errands, or use on
vacations, or commute between residence and office then a mileage record is required to
determine percentage of business use to total use. Total use is easy write down odometer
reading the first day you put the vehicle into business service. Another reading is taken on
the last day of the year. Daily mileage is also kept as incurred. These recordings can be done
in a special auto log book or in your business appointment book. However, it is important to
be consistent and timely in these periodic recordings. The auto log book can be kept in the
vehicle used. Either in the auto book or the appointment book you should keep the following
information:
The purpose of the trip: "Do job so and so", etc.
Amount of any car expenses: fuel, repairs, etc.
Number of business miles: from start to finish that day.
At year-end you tabulate the total business miles from log book register. Divide business
total by the total of all miles driven while auto was in service that year. The resulting
business use percentage will be applied against all car fuel, repairs, insurance, and
depreciation. Should the vehicle be owned by your corporation then your accountant will
allocate the "personal use" portion of these bills to your personal account. Multi-car use of
100% business use of vehicle may require different recording methods see your
accountant.

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OPTION 2: Business mileage rate: Use when the vehicle is personally owned. After logging in
the day to day business miles driven, you tabulate the total business miles driven in say a
month. Then write a business check payable to the owner of the car computed at the current
rate of thirty two cents per mile. This option at this rate covers the wear and tear on the car,
fuel and oil, the repairs, etc. The owner must pay for these items from his own pocket.
OPTION 3: The owner may execute, throughout the business use of the car, a lease between
himself and the corporation. The corporation has an Auto Lease expense account. The owner
must keep a mileage log record in order to determine the percentage of business use (see
Option 1 above). The owner reports the lease income and deducts allowable depreciation on
Schedule E on the personal tax return. The auto insurance, repairs, fuel, etc. will be a
percentage, and taken as a deduction by whomever is allowed to do so under the terms of
the lease.
COMMISSIONS

Commissions to individuals become taxable income to these individuals. As the


payer is required to issue a #1099 form for the total commission paid to any person in a
calendar year, it is important to obtain and verify (by seeing social security or green card)
the name, address, social security number usually before payment is made. Make a record
of this information. Read (O) Sub-Contractors below for other considerations. Note: Under
$600 payments exclude making a 1099 form.
CONTRIBUTIONS & DONATIONS

Recognized charitable entities are generally small in dollars. A receipt or


document acknowledging payment should support payment. If personal benefits were
received (such as a gift or meal) only the net benefit to the organization is deductible.
DEPRECIATION/AMORTIZATION

Depreciation on equipment, initial franchise fee, furniture, leasehold


improvements, vehicles, etc. requires special tax treatment by your accountant, who will
prepare schedules on this expense. Be sure to keep all invoices and finance agreements in a
"permanent" file rather than in the current years "expense" files. Sec. 179 write offs give
you considerable tax benefits if you have bottom line profits.

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INTEREST

Interest on debt is deductible when paid (cash basis) or when incurred (accrual
basis). Loans by corporate officers requires interest be paid at current rate (check with
accountant to obtain I.R.S. minimum in effect).
MEALS AND ENTERTAINMENT

Meals and entertainment have deductible limitations and record keeping


requirements. Dates, persons present, business reason for entertainment should be written
down. Currently, the law allows a percentage to be deducted. See your accountant for
information on these business expenses.
MEDICAL EXPENSES

Medical expenses incurred because of job related injuries or illnesses are


deductible. Note: Medical insurance premiums covering officers/employees have limitations,
so check with your accountant.
OFFICE SUPPLIES

Office supply expenses deduction cover ordinary office needs, office printing
materials, and that occasional small (under $200) office furniture or office equipment.
OFFICER SALARY

Officers salary will be taxed similarly to other employees when the


owner/officer is also the manager and operator of the business. The corporate minutes
should reflect the gross maximum annual salary to be paid. However, available operating
funds usually dictate when and how much can be paid. As cash flow eases and profits
increase the owner/ operators salaries should increase. This delicate balance of how much
salary to pay should be discussed with your accountant.
OWNER DRAWS/DIVIDENDS/DISTRIBUTIONS

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Owners draws, dividends, and distributions occur when the owner(s) withdraws
funds from the business for personal use. Careful records of these withdrawals must be
made and given to your accountant who will allocate them to the proper net worth account.
Certain "expense" accounts should be allocated to these net worth accounts due to the
personal use concept such as: (1) 50% of meals/entertainment with clients, (2) personal use
of a car when business pays the entire bill for fuel, insurance, or repairs, (3) that part of
travel costs relating to non-business family traveling, (4) excessive hotel or restaurant
charges over and above the limits allowed by the IRS. These accounts are affected in the
year-end closing entries as prepared by your accountant. Consult with your accountant
about these items.
PETTY CASH

Petty cash expenditures occur when either the business uses "cash" to pay for
business related purchases or the owner/ employee use "cash from their pocket" to pay for
company related expenses. Periodically, usually weekly or monthly, you gather together all
receipts for this type of sundry business expense, tabulate them, and write a check for the
exact amount to either yourself, the employee who used his funds, or to "cash". Do not
include auto expenses (fuel, etc.) if the mileage rate is being used. File receipts into a Paid
Petty Cash envelope, noting the check number and date paid. The check stub can allocate
the reimbursed expenses into the various expense categories; however, as amounts are
relatively small your accountant may suggest expensing this under one heading. When you
notice one vendor repeating often, try to get them to place you on an open account for an
agreed upon period of time so as to be able to pay them by check rather than cash.
RENT

Rental of office, storage, equipment, or vehicles usually entails a periodic


contract or lease, whether for a day, a month to month, or for several years. Generally,
rental expenditures are expenses to the business operations. Nevertheless, deposits that are
refundable are assets until either refunded or "used" up. Give your accountant copies of any
leases you have that extend beyond a year. You need to determine at what point it is better
to "buy" when a rental becomes frequent or is continuous. Shop and compare before
purchasing a car or equipment. Getting recommendations from fellow users can also help in
choosing the best buy for your dollar.

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ROYALTY/FRANCHISE COSTS

Royalty and Franchise costs are usually deducted by the Franchisor each month
before making payment. Your accountant will record income and fees from these reports.
SUB-CONTRACTORS/CONTRACT LABOR/CASUAL LABOR/INDEPENDENT
CONTRACTORS

These are payments, if incurred, due to individuals or corporations who do not


qualify as employees. You should obtain and verify social security numbers, obtain full
addresses, and keep a record of payments made to each during the year. Your accountant
will then prepare a #1099 form for each person receiving $600 or more.
SUPPLIES

Supplies (not for resale) are a significant Franchise expense. You should pay the
sales tax on these purchases as these products are consumed in the performance of your
employees duties at your customer's location. Supplies used in your office will be classified
as a Supply Expense. Any supply purchased by the company but used personally (taken
home) should be recorded in a memo book, later to be tabulated and given to your
accountant for proper entry to Owner Draws. Returns to your supplier, such as spoilage,
wrongly received merchandise, or recall notices should be done promptly and in the manner
prescribed by the supplier. Retain the "credit memo" receipt and follow up that you receive
either an exchange of equal value or a check for the full amount you are entitled to.
TRAVEL

Travel and Out-of-Town Entertainment when supported with the proper


documentation are 100% deductible. Keeping a log book or an appointment book of your
business activities will most often satisfy questions by the I.R.S. if names, places, dates, and
purpose of the travel are stated therein. Any non-business personal amounts or percentages
need to be recorded in memo form for proper allocation by your accountant.

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USE OF HOME

Use of home deductions have restrictions and are generally of minimal tax
consequences. You may deduct certain amounts for an office in the home if certain strict
conditions are met. Check with your accountant for the applicable rules. However, the cost
to keep specific records and the recapture rules does not warrant the tax benefits derived,
not to mention the higher risk of audit one may subject himself to.
UTILITY AND RENT DEPOSITS

Utility and rent deposits are assets of the business, since they can be refunded
at some time in the future. Should the utility company or landlord make a refund by
crediting your account later on, then notify you accountant of this happening.
UTILITY EXPENSES

Utility expenses such as telephone, electricity, or water payments need special


allocation when the underlying bill has some personal use built into the total due amount.
Business operating out of the home can deduct only those amounts directly relating to the
business, such as long distance charges for business purposes or electricity used only in the
office area (usually too minimal to have a tax consequence). If you have a separate business
telephone in the home and billed as a business, then all base charges are business
deductions.
OTHER ITEMS

Other items that should be discussed with your accountant are (1) opening a
second bank account, (2) purchasing inventory for resale, (3) barter exchanges, (4) legal
actions being anticipated either by you or against you.
SHAREHOLDER LOANS

Some care should be taken when an incorporated business does not create an
asset called Loans Due from Shareholder which exceeds his (her) basis in the company. The
usual situation has the company with ONE shareholder, in which case your accountant
should keep records of loans made to the business and repayments on those loans.

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CORPORATE STOCK

Each state authorizes a maximum number of shares for a minimum fee. Unless
your attorney recommends otherwise, this writer suggests the incorporated apply for the
maximum. The number of shares initially issued or later issued need to be discussed with
your attorney or accountant because of the variables involved. Be sure to properly complete
the stock certificates as purchased. Your attorney or accountant can assist in this, if
necessary. Whether to have Preferred Stock or Treasury Stock are best left to your attorney
and accountant at some later date.

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VII. DOCUMENTATION

In conclusion you need some kind of documentation (payroll records, bills, receipts, notes,
schedules, agreements, invoices, etc.) underlining every business deduction. You do not
need support documentation for Draws or Distribution since neither affects expenses. All
receipts of monies is considered Income unless you have evidence substantiating otherwise.

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VIII. HOW TO FAIL IN BUSINESS

Pitfalls to watch out for in business usually start with not paying taxes that are
due, thus incurring penalties and interest that could easily have been avoided if a
qualified accounting service were being used. There is an old saying in business
regarding taxes Never borrow from Uncle Sam!" The I.R.S does not make any
exceptions, whether you intended to avoid paying taxes, innocently overlooked
payment, or just simply didn't know the law, they will assess penalties and interest
with glee. Hire an accountant early on.
Pay what the job is worth. Never pay more than you should, just because someone
else thinks it is worth more.
Do not sell for less than it cost you. There is the old story of the car dealership
owner that seemed to be losing money. His accountant came to him and said, Sir,
you are selling the cars for less than we paid for them! The owner thought for a brief
time and then replied, Yes we are, but dont worry, we will make it up on volume!
Seems like a no-brainer but sadly many people think and do just that. Then they go
out of business.
Do not forget your raisins! As you grow remember the customers that believed in
you and helped get you started. Keep them happy.

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IX. HOW TO SUCCEED IN BUSINESS

Develop or have a skill, talent, product, service or combination of these that exceeds
that of your client or customer.
If you need an office (store) research your local area for a suitable location, one which
offers: (a) a clean and attractive store (office) environment, (b) easy for your
clients/customers to enter, park, and egress, (c) a landlord who maintains, promotes,
and has drawing power, (d) a rental fee that allows your cash flow to give you a
desirable life style.
Promote and advertise your business 100% of your waking time. This means that if
you are enjoying personal time for whatever reasons and a business idea enters your
mind, take the time to write it down and be sure to later expand on it with pros and
cons until a course of action is either instituted or rejected. Discuss or research your
ideas with knowledgeable and receptive people - do not expect free advice but seek
those who are mostly interested in your success rather than theirs. Let others know
you are in business without being obnoxious about it.
Keep renewing your contacts with your clients/customers in a variety of ways. Give
them your best at all times. Redo or replace any defective product/service without
charge in a gracious way.
Reinvest your time and money into the business by buying new equipment, products,
or services, and particularly update your business knowledge.
Let your clients/customers/prospects feel that you want to serve them more than
anything else.
As you can see it takes at least two more steps to succeed than to fail. - TMM.

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