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One of the frustrating things is how few people are using the Class function in QuickBooks. Just in the past few weeks, I've received several QB files from clients who didn't use it. This obviously makes my job of preparing tax returns much more difficult. More important, it also makes it much more difficult for the clients to monitor how each of their businesses is doing during the year, which is actually in many ways more important than looking back at the previous year.

A Class should be set up for each business schedule plus one for Personal things. For rental properties, there should be a separate class for each property, coinciding with each column on Schedule E. When you have QB prepare a profit and loss statement, select that the columns are by Class. This will give you great side by side P&Ls for each schedule. If an entry for an income or expense items was not assigned a Class, it will show up in the "Unclassified" column on the right side of the page. Books aren't ready for use until that column disappears.

Using classes also allows you to have a lot fewer income and expense accounts, keeping the chart of accounts from getting too large. For example, someone who has ten rental properties plus a home will only need one "Property Tax" expense account. Each payment would then be assigned the Class for the appropriate property and would show up in the proper column, ready to go onto the relevant schedule. Same thing for income accounts, such as Rents.

When classes are used, it also gives me a better sense of confidence that each item has been reviewed for deductibility. On their face, it's not readily apparent whether or not some expenses are for business or for personal things.

As I said, I work with P&Ls that have their columns by Class.  I don't like it when the next to last column has a lot of "Unclassified."  While many people think this is okay to just leave the nondeductible items with no class, that's not how it looks to me.  I can't tell if the clients have intentionally left the class off as being irrelevant or if they just forgot to enter one.  That's why I like to see every income and expense item entered with a class.  Ideally, there will be nothing showing up in the "Unclassified" column.

Using classes also makes it possible to account for several businesses in one QB company file. The way I like to see things set up is that a QB company file matches up with everything on a tax return. The corporate file has everything on the 1120. The personal file has everything, including all of the various businesses that are part of the 1040.

I do have several clients doing things very inefficiently, with a separate QB data file for each business. One has something like 21 different files. This makes working on the 1040 extremely time consuming because only one company file can be open at a time. If they were combined into one file, with classes to designate the various businesses, it would save a huge amount of time for the clients doing the daily bookkeeping, as well as for me doing the tax return.

For corporations, partnerships and trusts, there should not be a class set up called "Personal" as there is with the 1040 QB file.  It is important that the net profit or loss on the QB matches exactly with the net reported on the 1120, 1065 or 1041.  Since personal expenses paid for the owner are not deductible, those should be posted to the account that was set up for the amount owed between the corporation and the owner.  I usually use a liability account called "Loans From Shareholders" to reflect money loaned by the owner to the corp, as well as repayments.  It is generally increased for corp expenses paid from the owner's personal funds and decreased for personal expenses paid by the corp on behalf of the owner. 

I like to use classes in QuickBooks in such a way as they tie into the various schedules on the related tax returns.

For corporations (1120), there aren't as many different schedules as there are on individual returns (1040).   Investing and business activities all end up directly on the 1120 without having to be shown on preliminary schedules; so there is no need to worry about using different classes for these kinds of things.

Classes are needed for corporations when there are rental properties and farm activities because there are special schedules for those.

It's not possible to run a balance sheet by class; so those entries normally don't need to include a class.  One exception is for fixed assets.  If you enter a class to coincide with what business schedule an asset relates to, or if it is personal, it makes it much easier for me to enter those items into the tax return depreciation schedule




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This page was last updated:
Sunday, January 29, 2012


Kerry M. Kerstetter
11802 Deer Road
Harrison, AR  72601
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