A private educational therapy practice is a business.  Whether you are in a sole proprietorship or some other structure, there are accounting requirements.  This section is written by an educational therapist in the USA.  The considerations presented are based on a US centric point of view.  With that said, it is intended to give you an idea of what to think about in establishing your ET practice.  It is not a list of rules and regulations, and it is not instructions on how to do accounting.  It is important to understand the specific accounting needs for the community in which you practice and to be sure you are in compliance with legal requirements.  For requirements specific to your city, state, or country, you must consult an accountant with local knowledge.  This is not a course on accounting, nor is it all encompassing.

Why Do Accounting?

Accounting is important because it provides a financial record of your business activities.  This record is used to manage your business.  By comparing costs from year to year, you can see where costs are getting out of proportion and may require further analysis of the impact on your overall profitability.  By analyzing the sources of income and changes over time, you can identify areas for new investment and/or expansion.  Business people, including educational therapists, are responsible for meeting the licensing, documentation, reporting, and tax requirements of the communities in which they operate.  These requirements can differ from city to city, state to state, and country to country.  For requirements specific to your city, state, or country,  consult an accountant and/or lawyer with local knowledge.

Key Terms

Revenue is the money generated from normal business operations.  It may be acquired in exchange for goods or services.  Client payments for hourly charges, purchase of consumable materials like workbooks, and payments for reports are all examples of revenue.  Some businesses have other sources of income as well.  For example, if you have some business funds invested in mutual funds, you may have interest income that is not a direct result of doing business.

Expenses are payments made for goods, services, and materials you require to do business.  Payments you make for office rent, telecommunications, materials, office supplies, and travel are all examples of expenses.  See below for additional types of expenses to consider.

Profit is the amount earned after all expenses are paid from revenue and other income.  In essence, Profit = Income (revenue and other income) - Expenses.

Deductible expenses are expenses that the taxing authorities allow you to deduct in determining how much tax you must pay.  In the US, for example, many business expenses are tax deductible.  This means that after reporting all income from the business, you may reduce the amount that is taxable by your business expenses.  For example, if the business produced $75,000 in income, and had $25,000 in expenses, then the amount of tax to pay would be determined as a percentage of the difference, $75,000 - $25,000 = $50,000. 

In the USA, there are several nuances involved in determining deductions available.  For example, the Internal Revenue Service allows deductions as described above to determine net profit.  The IRS also allows other deductions for self-employed people including Individual Retirement Account (IRA) contributions and health insurance premiums on a different form.  It is important to consult a tax professional to determine what deductions your business and personal taxes can use and how to report them.  

Government Reporting

For self-employed people, many states and the US government require you to pay estimated taxes every quarter.  Having a good accounting system will allow you to calculate the estimated tax for each quarter.  As a business that tends to run school year to school year, the amount of estimated tax you pay each quarter may be different.

Some Thoughts About Accounting

All revenue and income must be reported to the taxing authorities.  You need to keep a record of the date received, source, amount, and what the revenue is for in order to be certain to report all of it.

Many business expenses are deductible, which reduces the amount of tax your business will be required to pay.  You need to keep a record of all business expenses in order to reduce your tax bill as much as allowed.  Your record should include the date incurred, what it was paid for, and the amount of the expense.

Some ETs are more disciplined than others about keeping track of revenue and expenses.  It is possible to keep track of revenue and expenses in a paper ledger or spreadsheet, but the use of a program designed for business is highly recommended.  You can use an accounting program to capture your income and expense data.  Once it is in the database, you can use the system to give you reports and to calculate totals for you.  This will help you use some of the spreadsheets in the AET Practice Support section.  

Business Technology

There are many different types of business systems that ETs use.  Systems may be used for scheduling, accounting, billing, communication (email, text), marketing (website), record keeping, payment collection, banking, etc.  There are systems that address some or all of these areas.  For example, there are accounting systems that also do billing and others that do not.  There are client management systems that include scheduling, accounting, and billing as well as record keeping. 

Generally, if a system does more for you, it will require more of your time to set it up initially, and it may cost more, but it may also save you more time once it is set up.  For a richer discussion of  different types of technology and pros and cons of using each type, see the Technology Considerations section.

What Gets Measured Can Be Managed

In order to manage a business, it is important to know how it is doing.  When you set up your systems, it helps to capture your information in an organized set of categories.  This allows you to take advantage of system capabilities to give you reporting by category.  For example, you would be able to compare how much you spent on materials for reading, math, and executive function, to compare this year to last year’s spending.  There will be different categories that will be useful for income and expenses. 

• A word about complexity: The more categories you have, the more effort it will take to set up and maintain your system. When you input new expenses or income, you will code each transaction for the category to which it belongs. If you forget to indicate a category, or if you miscategorize a transaction, the totals by category may be misleading.  So the goal is to have a system that gives you the information you need to manage your business in the most straightforward way. 

Category Examples

Here are some examples of categories that may be useful.  It is only meant to help you think about your business.  It is not a recommendation.  In order to make your system works for you, it may be helpful to ask an experienced ET what they do and always, check with your accountant about what is needed for reporting purposes.  It is especially helpful to have your categories aligned with your taxing authority’s tax forms (for example, Schedule C in the USA) to make it easier at tax time.

Income

• is typically captured by source.  You may have categories for
  • direct service hours
  • client

• school service contract hours
  • school served
• speaker engagements
• training / workshops conducted
• consulting
• consumables sold (Note, if the cost is passed through without any markup, then it would not produce any revenue.)
• client, product purchases
  • product category e.g., readers, math manipulatives, time management tools
• interest earned
  • account that interest came from

Expenses are typically categorized by type of expense. 

• student specific materials
  • consumables you provide within your session rate
    • g., notebooks, readers to be kept by student, math worksheets kept by the student
    • special tools specific to that student e.g., special manipulative for student’s interest
  • materials for students but not specific to a single students
    • reading
    • writing
    • math
    • executive functioning
    • educational testing materials
  • marketing
    • signage
    • business cards
    • printed materials for marketing
    • website development and maintenance
    • photography for website or marketing materials
    • mail costs if sending marketing by mail
  • site costs
    • office rent
    • utilities
    • property insurance
    • liability insurance
    • equipment
    • office supplies
    • furniture
    • cleaning
  • technology
    • computer
    • printer
    • phone
    • document camera
    • software
    • educational programs
    • subscriptions
    • systems costs (e.g., accounting system or client management system)
  • insurance
    • liability–errors and omissions
    • property–damage or loss, e.g., fire
    • liability–if someone is injured at your office
  • AET member requirements
    • continuing education–includes conferences and workshops
      • include travel costs if applicable
    • membership
    • subscriptions for continuing education
    • supervision/mentorship
  • transportation: (In the USA, businesses have the option to track all costs separately or use the mileage rate method. If using the mileage rate method, you only need to track mileage, tolls, parking, and public transportation costs.)
    • gas
    • car
    • repairs
    • toll
    • public transportation
  • licensing and other government costs
    • business licenses
    • inspection fees
  • business support services
    • legal fees
    • tax preparation fees
    • bookkeeping/Billing receiving

More About Deductions

There are many types of deductions that may be available to you.  If you are self employed, you may be able to deduct costs for:

• start up costs
• use of a home office or out building on your property
• health insurance
• retirement plans
• others

You should consult your accountant to be sure you are accounting for these correctly to take advantage of deductions for your state, federal, or country tax laws.

Documentation Requirements

It is important to understand what documentation is required for each type of expense.  Even though you have the information entered into your system at a detailed level, that is not enough to prove you actually paid the expense.  You need to check with your accountant by category to be sure you keep the proper documentation.  In some categories you only need to keep receipts for expenses over a dollar amount (e.g,travel receipts over $75) and in other categories you may need to keep all receipts. 

For large expenses like the purchase of a new computer, you may be able to spread the cost over several years.  This is called “depreciation.”  This can be especially helpful in your beginning years as you make significant investments.  Again, check with your accountant to determine what can be depreciated and over what time period. 

Start-up costs may be deductible.  This can be especially helpful in the first few years when you are building your practice as it will reduce the amount of tax you pay.  Your accountant can help you determine which are start up costs and which are not.

Supporting Documentation

In addition to keeping receipts for expenses, it is a requirement in the US that you keep a journal or other record of the work you did each day to support your need for the expenses.  This record can be kept on a system or on paper.  The record can include your appointment book, billing records, daily expenses incurred with receipts where required, bank deposit slips, bank statements, client lists, and frequency of visit.  Your session notes are confidential and should not be used as your business log.  Your accountant should advise you of the best way to keep your business records.

Some Things Are NOT Deductible

Here are some things that are not deductible in the US Federal tax laws.  You need to check with an accountant in your area to see about additional expenses that are not deductible for you.  This is not an exhaustive list. 

• While entertaining a prospect may be deductible if you participate in a working lunch, holiday parties, birthday parties, and gifts are not deductible.
• Some insurance is not deductible. For a self-employed person, health insurance may be deductible from your income tax. It is not deductible for your business.   What is deductible is insurance that is purchased specifically to protect the business such as liability, property, and errors and omissions.
• Meals that you take on your lunch break and are not for business meetings are not deductible.
• Personal travel costs that are not related to your business travel are not deductible. For example, if you are at a conference and you have dinner with a relative who lives in the city of the conference but is not a participant, the cost for that dinner is not deductible.
• Reduced rate services are not deductible, but if you use student specific materials that you do not charge for, the costs for them are deductible.

Some deductions may be claimed if you use a separate tax form to report the information but not if you are using simpler tax forms.  It is important that you work with a tax preparer to determine the best way to handle your deductions. 

Benefits of Starting Out Strong

When you are starting your business, it is worth investing in consultation with a lawyer and an accountant to help you set up your systems and accounting.  If you build a routine and systematic method of capturing your accounting information, you will find that your end of quarter and/or end of year reporting will be much easier.  You will also find that the information will be helpful as you reflect from year to year on how your practice is going, what opportunities to improve are and what areas are going particularly strong.