When people ask me about my tax experience I will sometimes reply that I have been doing my tax return since I was a teenager, and I have yet to encounter a client whose taxes are more complicated than mine. Not only do I own my own business, a law firm, but my wife and I control various other investment properties and various entities and investment vehicles that result in a rather thick, and cumbersome, tax form. In discussing my own record keeping processes, I will simplify things to just the law office and the office building, which is in a real estate trust that is controlled by my wife. I do not think that it is necessary to get into every entity that my wife and/or I control, or to discuss the way that they are set up in a blog about record keeping. Just know that for purposes of asset protection and estate planning, as well as tax management, every property that we own is in a different entity, but not all of those entities are of the same design. People are welcome to consult with me on that whole range of issues, but it is outside the scope of this specific blog.
The first thing to understand is that each entity is its own “person” with its own finances, accounts, income, expenses and liabilities. So while I am Louis Haskell, the Law Office of Louis S. Haskell is something completely different from me, and the building that houses the law office is something completely different from both me, as I have no legal or equitable interest in it, and from the law office, which is merely a tenant. As a lawyer, I am very hung up on the idea of maintaining the “veils” between the various entities. If I want to say that I am unrelated to 16 Pine Street, other than my status as owning an entity that is a tenant of 16 Pine Street, then I cannot treat 16 Pine Street’s income as if it were my own personal money. Similarly, if I want the Internal Revenue Service to respect the fact that 16 Pine Street is its own separate entitiy, then my wife and I need to treat it as if it were its own separate entity. As such, my wife and I have our own personal bank accounts, the Law Office of Louis S. Haskell has its own operating account and 16 Pine Realty Trust has its own operating account. All revenue of the Law Office of Louis S. Haskell goes into its own operating account. The law office then writes a check to 16 Pine Realty Trust with which to pay rent. All revenue of 16 Pine Street go into its operating account. If the money that my wife and I use to pay the mortgage comes out from our joint account, which may receive money from another entity where appropriate.
In addition, all of the expenses of the law office are paid out of the law office operating account, while all of the expenses of the building are paid out of the building operating account. My personal expenses are paid from my own accounts. We are very scrupulous to try and make sure that everything leaves the correct account. The business and the realty trust expend almost no cash. Each entity also has its own credit cards. My wife and I have personal credit cards which we only use for ourselves. The law office has its own credit cards, and the building has its own credit cards. I believe my wife carries four different Lowes cards.
There was a recent case where a local lawyer was disbarred for stealing $2,000.00 from his boss. Apparently his boss kept a brown paper bag full of cash in the office for “petty cash”. What I found interesting about that case is, why would a lawyer have a bag of cash in his office for “petty cash”? We have no equivalent to that. The office pays all of its vendors by check. If any member of my staff goes out and spends a small sum of money on behalf of the office and seeks reimbursement, then they receive a check. Occasionally I will pay a toll, or pay to park or for some other reason make a small cash expenditure. I keep a little shoe box in my office where I throw such receipts. At the end of the year, I write myself a check so that there is a record of the small expenditures in QuickBooks.
QuickBooks is probably the greatest thing that has ever happened in the area of taxes and accounting. Before there was Quicken and QuickBooks, we would take all of our cancelled checks at the end of the year and divide them up into piles depending on what the nature of the expenditure was. So all rent checks would go into one pile, while checks for office supplies would go into another and utilities would go into another pile and the like. Then I would take out my calculator and add up each pile and that was how I did my taxes. Now with QuickBooks, I just print out a report and the expenses of the office come out nice and neat, all added up and characterized. QuickBooks does the expenses for the realty trust the same. My charitable donations are also calculated by QuickBooks from my personal accounts. By the way, I try to avoid giving cash to a charity, although I have certainly done so. However, just to make life easier at tax time, I really do make an effort to make sure that any donation of any significance, even if it is only $100.00, is made by check. Of course, if a donation is truly tax deductable, then the entity receiving the check is not paying tax anyway, and really should be depositing all of its income into the bank. I do not see why any legitimate charity should be put off by receiving a check. Again, all of this makes my record keeping easier. At the end of the year I have an accurate tally of every tax deductable donation that I have personally made, every tax deductible expense that the law office has incurred and every tax deductible expense that the building has incurred. What is more, all of these expenses are documented by my bank statements, and by my QuickBooks ledger, both of which are very easy to produce. In addition, they are all documented by cancelled checks, which are less easy to produce, but still not very difficult. Then behind all of that, we have expandable folders full of receipts if anyone may want to look at them. Even for the small so-called “petty cash” items, we have the receipts that backup the checks for these items.
As a result, at tax time, my statement of income and expenses is accurate. It is well documented. It is bulletproof. And frankly, it is not that time consuming to put together because of the effort we have made throughout the year to write checks on QuickBooks and properly categorize them. What is more, because I have so much financial information at my fingertips, and because it is segregated by entity, as well as by type, it really is easy for me to see where spending is getting out of control and where spending is in line with what is necessary to run a business or maintain a property. I can also follow my revenue streams to make sure that everything is performing as it should be. As such, I think that the discipline that I have imposed upon myself in order not to overpay my taxes has made me into a better manager and better business person.