3 Ways to Improve Accounting by Using QuickBooks Classes - dummies

3 Ways to Improve Accounting by Using QuickBooks Classes

By Stephen L. Nelson

Most often, you use the QuickBooks chart of accounts to achieve the level of financial granularity required for your accounting. But sometimes, using QuickBooks classes is the only way for you to gain richer data — perhaps in situations such as these:

  • To support DPAD accounting

  • For realty investments

  • For ABC analysis

Use QuickBooks classes for DPAD

The DPAD (domestic production activities deduction) is a big deduction for some small businesses. You should know more about this tax loophole if you’re operating a manufacturing business or one of the other businesses that the U.S. Congress allows to use the tax loophole (including engineering and architectural firms, construction companies, oil and gas producers, and so forth).

Without getting too far into the weeds, the DPAD loophole lets you take a “fake” deduction equal to 9% of your profit earned in manufacturing stuff. For example, if your business made $200,000 by manufacturing stuff, you can cut 9% of this, or $18,000, from your taxable income.

Here’s the deal with the DPAD deduction, though: In many cases, to take the deduction you need to break all your income and deductions into “manufacturing” and “nonmanufacturing.” To break down your income and deductions, you would use “manufacturing” and “nonmanufacturing” as classes and then religiously tag income, cost of goods sold, and expense transactions by using these two tags.

Use QuickBooks classes for rental and royalty investments

Rental real estate properties and royalty properties also present situations where you probably need to use QuickBooks classes.

When you report rental property income or royalty income to the federal and state government, you need to segregate income and deductions by property. For an individual taxpayer, for example, you show this segregation on Schedule E. For partnerships and subchapter S corporations, you show this segregation on an 8825 form.

If you’re an individual or partnership or small corporation that holds rental property investments, therefore, you probably want to use QuickBooks classes to breakdown the income and expense data by property. To do this, you set up a class for each property and then tag each income or expense transaction with the appropriate class when entering your data.

Use QuickBooks classes for activity-based costing

If you want to do simple activity-based costing (ABC) using QuickBooks, make sure to turn on class tracking and then religiously use class tracking to trace overhead costs to products and services. This would mean using classes when entering transactions that record overhead costs to connect the overhead to specific products or services.

What ABC basically does is individually trace overhead to specific products or services in a way that lets you more accurately gauge the profitability of those products and services. (QuickBooks and your computer make this individual tracing possible.)

When you know that, for example, product A should be allocated $8,000 of the rent expense and that product B should be allocated $2,000 of the rent expense, the bookkeeping is mechanically easy. You should use classes to assign $8,000 of rent to product A and $2,000 to product B.