Now that the holiday season is here, it’s getting close to tax time — if you are one who likes to plan ahead and be organized.
Most self-service laundry owners probably bring their paperwork to their accountant just before the deadline and hope for the best, but by being proactive about taxes, you can fine-tune the outcome, anticipate your cash-flow needs, and reduce your accountant’s fee.
(Editor’s note: Howard Scott spent 13 years as an H&R Block tax preparer specializing in small businesses.)
Being proactive means you do some work in advance. As a first step, calculate what your year-end profit will be. Most likely, your records are computerized and you receive monthly P&Ls. Be sure to add any extraneous flows — depreciation, prepaid rent, etc. — to these figures.
If your records aren’t computerized, estimate based on your current book figures. Evaluate how profit compares to last year’s results, how sales affected the bottom line, and how much tax you will owe. If the results vary from expectations, there are steps you can take.
If the profit is too high — that means you will have to pay more taxes than you expected to pay — spend as much as possible by your year’s end. Take advantage of deals and purchase equipment. Arrange with vendors to pay in advance on account. For example, if you are spending $2,000 a month with a supplier, pay $4,000 up front to cover two months’ bills. Delay billing any commercial accounts for one month. If you are the landlord, raise the rent. All of this activity will increase expenses, which in turn lowers profits and reduces tax liability. Of course, the spent money will earn its keep next year, and is not thrown away.
If anticipated profit is too low, show the bank better results. With vendors, try to defer payment to a later month. If you’re thinking of selling any equipment, do it. Consider discussing advanced billing with selected commercial accounts. All of these things will punch up profits just in time to show your banker improved results.
Make sure estimated deposits are sufficient. Our tax system requires all businesses to make quarterly estimates of profits, enough to cover 90% of profits or 100% of last year’s profits. Otherwise, there’s a penalty. But the penalty isn’t the serious problem. The problem is that the business owner who delays making sufficient estimated deposits is shocked to find that he owes so much on April 15.
HOME IS WHERE THE OFFICE IS
Most of you should be taking the large home-office deduction. In previous years, the home office had to be your principal place of business, but now the government allows a home-office deduction to an owner who conducts substantial administrative activities at home, as long as the office is used exclusively and regularly for such work. The critical word is “substantial.” If an owner does much of his administrative work in a home office, he/she is permitted the deduction. Interestingly, the IRS doesn’t state how much “much” is.
This deduction allows the owner to deduct all expenses or proportionate expenses associated with the home-office space. If 20% of the house space is devoted to the home office, the owner can deduct 20% of his mortgage, repair bills, insurance, utilities, and depreciation on the property. Plus, the owner can add additional space that is used for business storage, even if the space isn’t used exclusively and regularly. If such expenses are $3,000, that’s an additional $3,000 expense that can be used to reduce your profits.
Your accountant might be old-fashioned or conservative, but my advice is to insist on taking the home-office deduction, then figure out how to do it. You could possibly convert a guest bedroom into a home office, or rearrange your daily schedule to do some paperwork at home.
ON THE ROAD
Get your vehicle costs in order. Your accountant can take either actual costs or standard mileage, which is 58.5 cents/mile. Estimate mileage for all the business miles you traveled, including commuting if you have a home office, supply pickups, delivery runs, association meetings, etc. Also, have your real costs on hand — insurance, gas, repairs, and purchase cost. Your accountant will decide which method is advantageous.
TAKE A BREAK
Section 179 deduction allows self-service laundry owners to take up to $185,000 on capital purchases. If you bought $28,000 in equipment this year, you can write it all off as expense rather than take a spread-out depreciation expense over five or seven years. From the profit analysis and the estimate of future capital purchases, consider whether you want to expense it this year or over time. Your opinion will greatly influence the accountant’s decision.
Review travel expenses. Did you attend any conventions? Did you visit other laundry operations to see equipment at work? Did you travel to any manufacturer locations? Make a list of these things, along with relevant expenses, to discuss with your accountant. All or a portion of the costs might be deductible.
Don’t neglect other expenses. These include cell phones (business portion), briefcases, subscriptions, association fees, home-office purchases and entertainment expenses that have a business portion. For example, if you have a gun and keep it at work, the permit fee is a business expense.
In your personal situation, evaluate what you are doing with savings plans. A business might set up a 401(k), or an owner might elect the various personal savings programs, including traditional IRAs, Roth IRAs, or SIMPLE IRA. Get familiar with the options.
Finally, put your books in order so that your accountant doesn’t have to be a bookkeeper. Let your accountant devote his/her time to producing the year-end P&Ls.
If you do all of these things in advance, you’ll have a head start toward tax preparation.