A reader asked this question about using QuickBooks Items in his contracting business, and went on to say: “It is counter-intuitive for me to call materials I purchase then resell a “service.” Would I benefit listing the materials purchased as Non-inventory Parts? Would this categorization help me with use tax tracking?”
I’ll talk about Use Tax and how I track it in a later post. You don’t track it the way you track Sales Tax in QuickBooks, and I don’t believe using Non-inventory Items (as opposed to Service Items) is particularly helpful for Use Tax purposes.
As relates to the current question, though, using Non-inventory Part Items for materials in your QuickBooks file could be helpful for tracking Sales Tax if you frequently buy your materials at wholesale and are required to collect and pay sales tax on them, and if your services are not taxable, since QuickBooks Sales Tax Tracking allows you to designate each Item as Tax(able) or Non. In this case, you would mark your Non-inventory Parts as Tax, and your Service Items Non.
In my day job, we are not required to collect Sales Tax: We rarely buy at wholesale, therefore our vendors generally pay the Sales tax, and where we live, services are not subject to Sales Tax. In our remodeling business, we use nothing but Service Items based on the CSI Divisions. One reason to use exclusively Service Items is that they can be used everywhere Items can be used. They are the only type of Item you can use on timesheets or in Payroll, and they can also be used for materials. We use QuickBooks Classes to distinguish materials, labor, subcontractors, etc.
A colleague of ours also follows the CSI divisions, and has separate sub-Items for Materials, Labor, Subs, etc. I have not wanted to make my list that long and complicated, and again, we use Classes to divide the Job Costs. I do have separate sub-Items for contractors, to point them at a separate Subcontractors COGS account, and I have sub-Items for Equipment, where we are likely to rent equipment, for 1099 purposes.
Having said all that, one major benefit to the use of Items is that they allow you to “slice and dice” your financial information in different ways. The most important question to consider before setting up your Items is how you want to see your data.
If you are using the CSI divisions, you could very well use a Non-inventory Part Item for materials as a companion to each of your Service Items (for labor), to show them separately on your QuickBooks Sales Reports. You can even point your Service Items and your Non-inventory Items to different COGS accounts if you want to see Labor and Materials separated on your P&L.
Consider ease of data entry before you set them up. Here's what I mean. We use 01 Plans & Permits, etc. When I start to type 20, I know it's Millwork, and I can just tab through. We use a single set of Service Items for all Job Costs, and enter QuickBooks Classes on each purchase to show what is Materials, Subs, etc.
If, on the other hand, you were separating materials and labor on your Item list, you would probably want to use M20 and S20 as the start of your Item names. Whatever tells you that one is Materials and one is Service should be near the beginning to save keystrokes and maintain consistency.
Bear in mind that your Sales Reports will list the Items used on a Job in the order they appear in your Item list. Also note that a sub-Item must be the same type (Service, Non-inventory Part, etc.) as its parent Item. If you want to use sub-Items for materials, labor, etc., and have them listed together on your Sales Reports, all will have to be Service Items.
I realize this is a long and complicated (and maybe even contradictory) answer. Unfortunately the QuickBooks Item list is one of the most complicated issues for a construction business. The two main points I want you to take away are these:
- Your Item list should be set up how you want to see your information in reports.
- Don't make your Item list so complicated that speed and consistency of data entry are compromised.
Be sure to review Disclaimers before employing this or any other QB Contractor Tip.
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