QuickBooks Income Tax Preparation and Reporting

Income Tax Tracking
QuickBooks does not generate income tax returns. However, QuickBooks may be used to track the information needed to prepare income tax forms. QuickBooks can be used to link general ledger accounts to specific lines on income tax forms. When the company was set up either manually or with the "EasyStep Interview" and the appropriate tax form and a preset chart of accounts were selected, the accounts already have tax line assignments. However, if accounts have been added to the chart of accounts, they are not automatically assigned to tax lines. Users must assign tax lines as discussed in paragraph below.

QuickBooks cannot link accounts to income tax forms if users select "Other/None" as the income tax form. However, users who initially select "Other/None" subsequently can specify the applicable tax form by selecting "Company Information" from the "Company" menu. If users subsequently specify a different tax form, QuickBooks resets all of the links between the general ledger accounts and the income tax lines to "Unassigned." Consequently, users must link general ledger accounts to the applicable lines on the specified tax form manually. Likewise, users who add accounts to QuickBooks' preset chart of accounts or set up their own charts of accounts also must link general ledger accounts to the applicable lines on the specified tax form manually. In addition, users who select Forms 990, 990-PF, or 990-T as the income tax form must link general ledger accounts to lines on the nonprofit tax forms manually.

Linking General Ledger Accounts to Lines on Income Tax Forms
Tax professionals should assist their clients in linking general ledger accounts to the appropriate lines on income tax forms, particularly if the QuickBooks files will be used to prepare income tax forms. When the company was set up either manually or with the "EasyStep Interview" and the appropriate tax form and a preset chart of accounts were selected, the accounts already have tax line assignments. However, if accounts have been added to the chart of accounts, they are not automatically assigned to tax lines. QuickBooks users who add accounts to a preset chart of accounts, or set up their own charts of accounts can link tax-related general ledger accounts to specific income tax form lines manually. To do so:

• Select "Chart of Accounts" from the "Lists" menu.
• Select the account to be linked to a specific line on the income tax form.
• Click the "Account" button and select "New" or "Edit" from the drop-down list.
• Select the applicable "Tax Line" from the drop-down list in the "Add New Account" or "Edit Account" window. "Not tax related" should be selected if the account is not reported on the applicable income tax form. The "Tax Line" drop-down list does not appear in the "Edit Account" window if the user has not selected a tax form for the company.

QuickBooks users who have set up their own charts of accounts or changed the specified tax form may find it helpful to create a "dummy" company using the QuickBooks preset chart of accounts for their particular industry to see what income tax form lines QuickBooks assigns to certain general ledger accounts. To create a "dummy" company, users should:

• Select "New Company" from the "File" menu.
• Click the "Skip Interview" button.
• Enter the name of the "dummy" company in the "Enter your Company Information" screen.
• Select the applicable business entity in the "How is your Company Organized?" screen.
• Select the first month of the fiscal year.
• Select the type of business that is most similar to the user's business from the "Industry" drop-down list in the "Select your Industry" window.
• Save the file for the "dummy" company.
• Display the "dummy" company's chart of accounts by selecting "Chart of Accounts" from the "Lists" menu.
• Select "List" and then "Account Listing" from the "Report" menu.
• Locate accounts in the chart of accounts for the "dummy" company that track the same type of income or expense as the accounts set up by the user. The account names do not have to be the same.
• Use the "Income Tax Line" information in the "dummy" chart of accounts to assign income tax lines to the corresponding accounts set up by the user.

QuickBooks users who file Form 1040 need only assign income tax lines to income and expense accounts. Those users need not assign tax lines to balance sheet accounts. However, users that file Forms 1120, 1120S, or 1065 should assign income tax lines on Schedule L to applicable balance sheet accounts.

Linking Payroll Expense Accounts to Income Tax Forms
QuickBooks users should create separate payroll subaccounts for each type of payroll expense reported on income tax forms. Examples of payroll expenses that may need to be reported separately on income tax forms include officers compensation, commissions, pension and profit-sharing plans, and employee benefits. Users setting up payroll subaccounts should:

• Select "Chart of Accounts" from the "Lists" menu.
• Select "New" from the "Account" menu button.
• Select "Expense" in the "Add New Account: Choose Account Type" window.
• Enter the name of the expense subaccount and click the "Subaccount of" checkbox and select "Payroll Expenses" from the adjacent drop-down list.
• Select the applicable "Tax Line Mapping" from the drop-down list.

The following illustrates the "Add New Account" window:

New payroll subaccounts should be assigned to the applicable payroll items by selecting "Payroll Item List" from the "Lists" menu and editing existing payroll items or creating new payroll items and then assigning the payroll expense subaccount as the expense account for the item.

As noted above, QuickBooks users that file Forms 1120 or 1120S must report officers' compensation separately from employees' salaries and wages. To track officers' compensation separately from other compensation, users should:

• Select "Payroll Item List" from the "Lists" menu, click the "Payroll Item" button, and choose "New" to add payroll items for officers' salary, officers' sick salary, and officers' vacation salary.
• Click "Employee Center" on the toolbar, select the employee, and click "Edit Employee."
• For each applicable employee, select "Officer" from the "Type" drop-down list in the "Employment Info" tab.
• Select the payroll item for officers' salary from the "Item Name" drop-down list in the "Earnings" section of the "Payroll and Compensation Info" tab.

QuickBooks users can generate reports reflecting officers' salaries by selecting "Employees & Payroll" and "Payroll Item Detail" from the "Reports" menu.

Linking Depreciation Expense to Income Tax Forms
The IRS requires taxpayers to calculate depreciation expense on a tax form worksheet. Consequently, the depreciation expense in QuickBooks cannot be used on income tax forms or linked to an income tax line (except for linking depreciation expense for partnerships to the Schedule M-1 "Depreciation per books" line).

Generating Income Tax Reports
QuickBooks users can generate a report that may be used to prepare income tax forms by selecting "Accountant & Taxes" and "Income Tax Summary" from the "Reports" menu. The "Income Tax Summary" report reflects the amounts that QuickBooks recorded for each tax line on the tax form specified by the user. When generating the report, users should verify that the report specifies the correct date range. Users then can use the information on the report to verify income tax form line assignments and account distributions. To check and correct income tax line assignments using the "Income Tax Summary" report, users should:

• Double-click on the amount for "Tax line unassigned (income/expense)" at the end of the report. This generates the "Tax Line By Account" report that lists all income and expense transactions for which a tax line has not been assigned.
• Check the "Tax Line By Account" report for accounts that should be reported in the company's income tax form. (Note that some accounts may not be tax-related. It is not necessary to assign tax lines for those accounts with amounts that are not reported on income tax forms. The tax line for those accounts can remain "Unassigned" or be changed to "Not tax related.")
• Select "Chart of Accounts" from the "Lists" menu and edit the applicable account by selecting the appropriate "Tax Line Mapping" from the drop-down list in the "Edit Account" window.
• Return to the "Income Tax Summary" report after correcting any missing or incorrect tax line assignments in the chart of accounts and "Refresh" the report to verify that it has been updated appropriately.

To check and correct account distributions using the "Income Tax Summary" report, users should:

• Double-click on any amount that seems incorrect. This generates the "Tax Line By Account" report.
• Check the "Tax Line By Account" report for amounts that were distributed to the wrong income or expense account.
• If an income amount is not distributed to the correct account, select "Item List" from the "Lists" menu and enter the correct income account in the "Edit Item" window.
• If an expense amount is not distributed to the correct account, double-click the amount in the "Tax Line By Account" report to display the related transaction and select the correct expense account in the "Expenses" tab for non-payroll items and in the "Other Payroll Items" window of paychecks.

QuickBooks users should print the "Income Tax Summary" report after verifying the accuracy of the amounts, account distributions, and tax line assignments. The amounts in the report can be used to prepare income tax forms.

QuickBooks users also can use the "Income Tax Summary" report to obtain the amounts to be reported on income tax forms for gross sales and returns and allowances. The "Income Tax Summary" report automatically prints totals for "Gross receipts or sales" and "Returns and allowances" if income and discount accounts in the chart of accounts have been appropriately linked to the tax lines for "Income: Gross receipts or sales" and "Income: Returns and allowances." The "Gross receipts or sales" amount in the "Income Tax Summary" report should be the total of all sales for the tax year, net of any returns entered as credit memos or refund checks. The "Returns and allowances" amount should be the total of all discounts, including those entered as separate line items on sales forms and those given for early payments. QuickBooks users can use the sales and returns information in the "Income Tax Summary" report to prepare income tax forms as follows:

• Double-click the "Gross receipts or sales" amount. This generates the "Tax Line By Account" report.
• Click the "Modify Report" button in the "Tax Line By Account" report and check "Debit" and "Credit" in the "Columns" drop-down list on the "Display" tab.
• Enter the total amount in the "Credit" column as gross sales in the income tax form.
• Add the total amount in the "Debit" column to the total amount for "Returns and allowances" in the "Income Tax Summary" report and enter the results as returns and allowances in the income tax form.
• Subtract the previously calculated amount for returns and allowances from the previously calculated amount for gross sales and enter the result as net sales in the income tax form. The net sales amount should equal the "Gross receipts or sales" amount less the "Returns and allowances" amount in the "Income Tax Summary" report.

As discussed above, QuickBooks users can generate the "Income Tax Summary" report to verify tax line assignments. QuickBooks also allows users to generate the "Income Tax Preparation" report to quickly verify that general ledger accounts are associated with the correct income tax lines. Users generate the report by selecting "Accountant & Taxes" and "Income Tax Preparation" from the "Reports" menu. The "Income Tax Preparation" report contains columns for each account in the chart of accounts, sorted by account type" (i.e., income, expense, etc.). The report lists the tax line associated with each general ledger account. Users can quickly review this report to check for unassigned and incorrect tax lines.

Note: QuickBooks Premier-Accountant includes the amounts for each tax report line in the "Income Tax Preparation" report.

QuickBooks users can also generate the "Income Tax Detail" report to review the detail transactions for each tax line amount. Users generate the report by selecting "Accountant & Taxes" and "Income Tax Detail" from the "Reports" menu. The "Income Tax Detail" report is sorted by income tax line and lists detail information (including the general ledger account) for each transaction associated with the income tax line. Users can double-click on any amount in the report to view further details about the transaction.

Note: QuickBooks Premier-Accountant condenses this report into one-line summaries of transactions. Users needing additional detail about a transaction can double-click on it and the details will display.

When generating income tax reports in QuickBooks, users always should verify that the correct period and date range are specified. In addition, users should verify that the reporting preference is set to the appropriate method the company uses for income tax reporting (i.e., cash or accrual). Users can verify or change the reporting preference by selecting "Preferences" from the "Edit" menu and then selecting "Reports & Graphs" from the "Preferences" scroll box and clicking on the "Company Preferences" tab.

Reporting Income Taxes
As discussed above, QuickBooks does not generate income tax forms. However, QuickBooks users can enter the verified tax line amounts from the "Income Tax Summary" report in the appropriate lines of income tax forms. Alternatively, QuickBooks users can transfer income tax information from QuickBooks directly to TurboTax, TurboTax Business, and ProSeries.