Learning Why You Owe What You Owe (Conclusion)

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Howard Scott |

Tax preparer suggest ideas for what to ask your accountant next year

PEMBROKE, Mass. — I write a tax column annually, and this year, let’s review several tax concepts through a hypothetical discussion between a Laundromat operator and his accountant.

Often, in the rush of business, your accountant gives you the end-of-year results and you make out a check and that’s the end of it. The accountant doesn’t call you in to explain why you owe what you owe, or explain why this year’s results differ from last year’s. If you’re one to basically go along with whatever the accountant says, this article might suggest ideas of what to ask him/her next year:

Q: HOW EFFECTIVE AM I COMPARED TO YOUR OTHER LAUNDROMAT CUSTOMERS?

It’s always hard to compare, since every business is unique. But OK, I’ll give you some pointers. You don’t do enough business out of your stores. Others do more, perhaps because they take in commercial trade. You need to keep those machines moving. As a result, I don’t think attendants are kept busy enough; they have too much spare time on their hands.

Your per-dollar cost is up. Perhaps this is the time to raise prices. Finally, you personally pull too much money out of the business. It is more than most of your competitors. You say you need it, but it affects your growth potential because there isn’t enough left over to provide for expansion strategies. Cash flow is always barely in the positive side. Rather, you’re just getting by, year after year.

Q: WHAT IS THE RELATIONSHIP BETWEEN PAYING PERSONAL TAXES AND PAYING BUSINESS TAXES?

You elected to be a corporation, so the tax division matters. At your income level personally, you are in the 15% bracket on the margin. Plus, you had a $30,000 exemption. So, while you make $80,000, you only paid $6,500 federal plus $3,500 state plus $5,200 Social Security, for a total tax liability of $15,200. This is 19% of your income. Your corporate income of $10,000 paid 15% federal plus 5% state, for a total of 20%. So it really doesn’t make much difference. We’re dividing the burden as best we can. If you elected to be a Schedule C business, it wouldn’t matter either, because both the personal and company are combined.

Q: HOW DO SOME CORPORATIONS PAY ZERO TAXES?

It is true that General Electric made $42 billion in profit in the last eight years and paid no federal taxes. But it did pay state, Social Security contribution, property and all kinds of other taxes. You’re right, GE doesn’t pay its fair share. That’s because it employs 75 tax attorneys and experts to figure out legal ways for avoiding taxes. For example, when GE builds a plant, it demands tax considerations such as local tax relief, and it gets it because it is such a powerful entity. On the other hand, the vast majority of companies, large and small, pay their fair share. For example, the largest 100 corporations in America averaged 25.4% federal taxes.

Q: HOW DO I KNOW THAT MY FIGURES ARE ACCURATE ON THE P&L STATEMENTS?

Check with your bookkeeper. But if something seems incorrect, do some research. For example, if it surprises you that utilities are 30%, add several months’ utilities bills and see if you average 30%. You should be as intimate with these figures as you are with members of your family. You should know your break-even point in each store, know when utility costs go up and when they go down. You should know what percentage of your business is walk-in, know how much additional volume would double profits. You should know your daily nut, what it costs to open your doors every day.

I’m glad we had this conversation. With a better understanding, you’ll better grasp this year’s taxes.

Missed Part 1? You read it HERE.

Editor’s note: This column is not intended to provide specific tax advice or individual recommendations. Consult your tax adviser for advice regarding your particular situation.

About the author

Howard Scott

Industry Writer and Drycleaning Consultant

Howard Scott is a former business owner, longtime industry writer and drycleaning consultant. He welcomes questions and comments and can be reached by writing Howard Scott, Dancing Hill, Pembroke, MA 02359; by calling 781-293-9027; or via e-mail at dancinghill@gmail.com.

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