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: WHY DIDN’T MY COMPANY MAKE MORE MONEY?
A: You didn’t make more because labor costs are 20% of revenue and that is too high. You didn’t make more money because you draw too much money out of the business, both on the books and off, in order to minimize tax liability. You didn’t make more money because your capital payments are excessive. That is, between bank borrowing, remodeling, and buying new equipment, you’re overleveraged. As a result, finance notes are eating up profits. You didn’t make more money because your rents are greater than they should be. You need to get more business coming in, such as wash-dry-fold, or pickup/delivery or commercial.
Q: WHY CAN’T YOU CONCEAL MORE PROFITS?
A: You made money, and you have to pay taxes on it. If we were to put down that your sales were $40,000 less than they actually were, this would create several imbalances. First, last year’s sales wouldn’t tally to this year’s. Second, what about next year? Do we increase the lie? Third, the ratios of sales to utilities cost would be off. A tax auditor looking at this might suspect tampering with figures. The same with expenses. If I were to increase administrative costs by $15,000, the exaggeration would be a dead giveaway.
I would hate to be representing you in a tax auditor’s office when he asks why administrative costs are so out of line when they were only X last year. But besides all that, what you are suggesting is fraud. I would be stripped of my license to practice. You don’t expect me to risk that, do you? Finally, by being honest and aboveboard, you can sleep soundly at night.
Q: WHAT WAS NEW IN THE TAX CODE THIS YEAR THAT HELPED MY BOTTOM LINE?
A: There are really no new provisions in the tax code that apply to you. Mileage allowance dropped from 54 cents to 53.5 cents to reflect relatively low gas prices. Section 179 Depreciation deduction remains at $500,000. On the other hand, all indices of personal taxes—standard deduction, exemptions—have increased a bit to slightly reduce your personal taxes, but basically the same tax code exists that churned out last year’s taxes.
Q: WHAT ARE YOU DOING TO LOWER MY TAXES?
A: I gave you a home office deduction, because you do some administrative work at home and have a designated space for it, even though you have an office at your place of business. (A home office is allowed as a business deduction if you have a space at home where you do some administrative work, like paying bills, and use the space regularly and exclusively for business.) Because home office deductions are so common these days, I thought the deduction is reasonable. That resulted in a $4,000 expense.
I used Section 179 to take all this year’s capital purchases, which totaled $12,000 off this year, which reduced profits much more than if I had depreciated it over the expected seven-year life of the asset. (Depreciation covers asset cost. Section 179 allows you to take the full amount of the purchases, up to $500,000 in the year of purchase.) I used Actual Costs of your vehicles—gas, repairs, insurance, truck payments—rather than Standard Mileage rate (.535 per/mile)—because Actual came out higher, especially with all your repair bills. (Car and truck expenses can be figured through Actual or Standard Cost, a per-mile estimate, whichever is higher.)
In Travel, Meals and Entertainment, I included all your meal and entertainment expenses. (Travel, Meals and Entertainment includes all expenses such as taking out customers to dinner or treating employees to a company outing.) In Other Expenses, I included memberships to organizations, under the basis that you gained several new customers. (Other Expenses includes any of the miscellaneous expenses, which helps the owner do his work.) In total, all these provisions lowered your tax liability by $1,500.
In Thursday’s conclusion: Comparing your operation to others, and understanding the relationship between paying personal taxes and paying business taxes
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.