Most drycleaners take their paperwork to their accountant just before the April 15th deadline and hope for the best. But by being proactive, you can fine-tune the outcome, anticipate cashflow needs, reduce the chance of penalties and lower accountant fees.
Don’t just walk in with a box of paperwork. From the start, calculate what your year-end profits will be. If you’re computerized, you get monthly profit-and-loss reports. Add any adjustments — depreciation, prepaid rent, etc. — to the figures. If you don’t have a computer, estimate the figures based on the books.
Evaluate how your profit compares to last year’s results, how sales affect the bottom line, and how much in taxes you will owe. It might be too late to make any changes, but the effort will help you make decisions with your accountant.
If, however, you examine your operation now, you may still have time to make changes. If profit is coming in too fast and you’ll have to pay more income taxes than you want to, you can take steps to lower your tax liability.
Arrange to pay your vendors in advance. If you regularly pay a vendor $1,000 a month, an additional $2,000 will cover two months’ future purchases, cut your income taxes and save money during a slow period.
Buy equipment and take the full Section 179 tax deduction. Delay billing on commercial accounts until 2009. Increase your bonus. These steps will increase expenses or lower revenues, reducing profitability and lowering taxes.
If your profits are coming in too slow — say you need to show better results to a banker — you can act quickly to pump up earnings. Arrange with vendors to defer payments until the next cycle. Sell off disused equipment. Lower your income for a month or two.
Make sure your business’ quarterly estimated tax payments cover 90% of profits, or 100% of last year’s profits. Otherwise, there will be a penalty.
The penalty isn’t the real problem, though. The problem is that a business owner who delays making sufficient estimated payments will be shocked to find out how much he owes on April 15, and the firm will struggle all year to catch up. At year’s end, you should have made estimated payments sufficient to cover almost your entire federal and state obligation.WORK AND HOME
Most drycleaners should take a home-office deduction. In years past, a home office had to be your principal place of business, but now the government allows a home-office deduction to anyone who conducts substantial administrative activities at home, as long as the area is used exclusively and regularly for such work.
The critical word is “substantial.” If an owner does much of his administrative work from a home office, the deduction is permitted. Interestingly, the IRS doesn’t state how much “much” is — nor does it matter if the owner also has an office at the plant.
The deduction allows the drycleaner to deduct expenses associated with the home-office space proportionately. If 20% of the available space is devoted to a home office, the owner can deduct 20% of his mortgage, repair bills, maintenance costs, insurance, utilities and depreciation. In fact, almost anything done to the house can be a home-office expense — if it needs a new roof, for example, 20% of the cost is deductible.
The deduction also allows additional square footage for business storage, even it isn’t used exclusively and regularly for business. For instance, if there’s paperwork in the attic, the space can be added. If a drycleaner experiments with stain removal in a basement lab, he can include that space. If old equipment is stored in the garage, the space is included.
If total home expenses are $20,000 for the year, 20% is $4,000. That’s not even close to a ridiculous amount, since the depreciation on a $300,000 house could easily be $11,000. The $4,000 is an added expense you can use to reduce your profits.
An additional benefit is that an owner can deduct travel miles to and from home and work. In fact, with a home office, the owner is now going from one work venue to another. If you live 15 miles from the plant, it would result in expenses of more than $4,700 (8,100 X $.585 per mile) per year.
Your accountant might be conservative, but you should insist on this deduction. You can change a guest bedroom into a home office, or retrofit the rec room. Rearrange your schedule to perform paperwork at home. A home-office deduction costs your business nothing, but lowers its taxes.OTHER COSTS
Get vehicle costs in order, too. Your accountant can take either Actual Costs or Standard Mileage, which this year goes up to $0.585 per mile. Estimate the mileage of all business miles you traveled (including the commute, supply pickups, deliveries, association meetings, etc.).
Also have real costs on hand — insurance, gas, repairs, excise taxes and purchase cost, as well as loan-payment information (the interest on car loans is often deductible). Your accountant will decide which method is most advantageous.
Next, the Section 179 deduction allows drycleaners to deduct up to $250,000 on capital purchases. If you spent $28,000 on equipment this year, you can write all of it off as an expense instead of spreading it out as depreciation over five or seven years. Use a profit analysis and an estimate of future capital purchases to figure out whether you want to expense it this year or over time.
Review any out-of-town travel expenses. Did you attend any conventions? Did you visit other operations to see equipment at work? Did you travel to manufacturers? Did you attend association meetings? Have a list ready, along with relevant expenses. All or some of the costs may be deductible.
The question to ask is: “Is there a business component to this bill?” Look at your business use of cell phones, Internet connections, continuing education, periodical subscriptions, memberships, office supplies, books and software, interest on credit cards, and client gifts under $25.
If you take a prospective employee out to lunch, the tab is deductible. If you hire a tutor to teach you Spanish because a high proportion of your clientèle speaks Spanish, the costs are a business expense. Label a file folder “Potential Deductions” and slip paperwork into it any time you incur a cost that might be deductible.
Changing times call for new opinions, and you’ll never hear them unless you ask. Ask your accountant what can be done to increase sales and push profits up. An accountant counsels hundreds of firms, and is probably a good businessperson. He or she might have a few ideas for your business.
For instance, he might suggest offering $20 in free drycleaning to new residents. He might recommend speaking about the importance of proper drycleaning at the local Lion’s Club or chamber of commerce. Or he might come up with a scheme to reward the best employee of the week with a crisp $50 bill to improve morale. New ideas can revitalize a business.
Finally, get your books in order so that your accountant doesn’t have to be a bookkeeper. Update entries so they’re current, summarize payables and receivables, and print out lists of revenues, expenses and assets. Let your accountant devote his time to producing year-end P&Ls. And do all of these things before your visit to get a head start on tax preparation.
Have a question or comment? E-mail our editor Dave Davis at [email protected].