small business taxes for the U.S.

[esantoro]

Each business has its own peculiar ways of accounting for expenses, so I thought I'd start a thread on taxes.

For 2008, I will have to be itemizing deductions and declaring profits and losses.

On schedule C, there are a few options for lists material costs. One option is "other." I have a list of materials and there costs for one leather bag: glue, conditioner, leather, rivets, thread, etc. I've figured out the costs for all of these. Is it appropriate to use this standard cost sheet for all bags?

Thanks,

Ed

[Ian]

I don't itemize in that detail - Just add up the total reciepts - seperate material costs from tools ('Other') and then there's 'Office' for any junk I buy from Staples, even if it's something like poster board for making patterns. It doesn't really matter how you categorize, as long as you have reciepts to justify it all. Other places for rent, advertising, mileage, etc all have their own place on the form.

I use a cash register, so I don't even remember what the actual items were that I sold. As long as I have a daily total. Credit card saless are recorded on the reciept. And, the credit card company charges, I throw in with 'Other'.

I don't it like that for quite a while and no problems so far (cross fingers). Just watch me get an audit after saying that.

Ian

[esantoro]

I don't itemize in that detail - Just add up the total reciepts - seperate material costs from tools ('Other') and then there's 'Office' for any junk I buy from Staples, even if it's something like poster board for making patterns. It doesn't really matter how you categorize, as long as you have reciepts to justify it all. Other places for rent, advertising, mileage, etc all have their own place on the form.

I use a cash register, so I don't even remember what the actual items were that I sold. As long as I have a daily total. Credit card saless are recorded on the reciept. And, the credit card company charges, I throw in with 'Other'.

I don't it like that for quite a while and no problems so far (cross fingers). Just watch me get an audit after saying that.

Ian

Thanks, Ian. This was a big help. I think I'll write up a standard materials sheet that can be added to or subtracted from.

Ed

[LadyJ]

I don't mean to confuse you, but the difference in your approach and Ed's is the difference between a Cash accounting method and an Accrual accounting method. Either is acceptable but once you choose a method, you need to stay with it.

The cash method assumes that all materials purchased are an expense when you buy them (cost of goods) and all goods sold are income when you recieve the money for them. This method is generally used for most retail sales businesses and is probably your best choice. It is the method Ed is using.

You are describing the accrual method when you talk about recapturing your expenses from an item at the time you actually sell that item. For some of the saddlemakers in this group who have commissions for custom saddles that take longer than a year to complete, an accrual method might have some advantages. For example, you get an order for an expensive saddle in October in a slow year. You bought and paid for the materials at that time. As of December 31st, you have more expenses than you can deduct against the income you earned and the extra loss does not help you on your taxes. You get paid for the saddle in the new tax year but have no expenses left to deduct from the income. You now pay taxes on the entire amount of the saddle which my artificially distort your taxable income in the new year. For some businesses, the Accrual method helps distribute expenses to the time when the income needs to be protected from the tax.

Ed's method is the easiest for most of us to use to account for retail sales. It is probably best for you too.

Lady J

[HorsehairBraider]

I agree with what Lady J said.

What I ended up doing (finally) was getting an accountant. He has given me so much good advice, and always reminds me of things that are part of the cost of doing business that I sometimes forget. I think it costs me $150 a year, and is well worth it. He also helped me out when I had made a mistake in reporting my state taxes. He explained to me how to do it correctly and the procedure to take to report my mistake. If they had caught it first I could have been in trouble, so I was pretty glad when he noticed!

[esantoro]

Hi Lady J,

Thanks for your response. It seems that what I am doing is the accrual method.

Every bag requires the same materials, same amount of thread, conditioner, edge coating, rivets, packing materials, etc. I just add or subtract for more expensive or less expensive leather. When I sell a bag I, I immediately have deductions for materials and have a tunning total of profit and loss.

If I'm understanding correctly, the cash method wouldn't allow me to deduct for, say, edge coating until I use up the bottle. It may take more than a year to use up a particular color of edge coating. I figure one 4 oz bottle can do eight bags, so for each bag, I add to my list of materials consumed 1/8 of the price of edge coating.

Does this sound correct, or am I missing something?

Ed

I don't mean to confuse you, but the difference in your approach and Ed's is the difference between a Cash accounting method and an Accrual accounting method. Either is acceptable but once you choose a method, you need to stay with it.

The cash method assumes that all materials purchased are an expense when you buy them (cost of goods) and all goods sold are income when you recieve the money for them. This method is generally used for most retail sales businesses and is probably your best choice. It is the method Ed is using.

You are describing the accrual method when you talk about recapturing your expenses from an item at the time you actually sell that item. For some of the saddlemakers in this group who have commissions for custom saddles that take longer than a year to complete, an accrual method might have some advantages. For example, you get an order for an expensive saddle in October in a slow year. You bought and paid for the materials at that time. As of December 31st, you have more expenses than you can deduct against the income you earned and the extra loss does not help you on your taxes. You get paid for the saddle in the new tax year but have no expenses left to deduct from the income. You now pay taxes on the entire amount of the saddle which my artificially distort your taxable income in the new year. For some businesses, the Accrual method helps distribute expenses to the time when the income needs to be protected from the tax.

Ed's method is the easiest for most of us to use to account for retail sales. It is probably best for you too.

Lady J

[David Genadek]

Hi Lady J,

Thanks for your response. It seems that what I am doing is the accrual method.

Every bag requires the same materials, same amount of thread, conditioner, edge coating, rivets, packing materials, etc. I just add or subtract for more expensive or less expensive leather. When I sell a bag I, I immediately have deductions for materials and have a tunning total of profit and loss.

If I'm understanding correctly, the cash method wouldn't allow me to deduct for, say, edge coating until I use up the bottle. It may take more than a year to use up a particular color of edge coating. I figure one 4 oz bottle can do eight bags, so for each bag, I add to my list of materials consumed 1/8 of the price of edge coating.

Does this sound correct, or am I missing something?

Ed

Ed,

It all depends on what you want to inventory. You can lump a bunch of things into a supplies catagory. Things like dye and glue is pretty hard to keep an accurate count on and really as a percentage of the COGS is pretty small so you can exspense that when you buy it. The leather on the other hand would be worth counting as inventory because it will give you a better idea of where your assets are. In the end you can do it however you want as long as your consistant so the real question becomes what information do you need to run your business? The IRS just wants to know how much money you made which boils down to how much did you bring in and what did it cost you to do it. They don't care how you slice that up but they want you to slice it the same way all the time.

David Genadek

[esantoro]

Ed,

It all depends on what you want to inventory. You can lump a bunch of things into a supplies catagory. Things like dye and glue is pretty hard to keep an accurate count on and really as a percentage of the COGS is pretty small so you can exspense that when you buy it. The leather on the other hand would be worth counting as inventory because it will give you a better idea of where your assets are. In the end you can do it however you want as long as your consistant so the real question becomes what information do you need to run your business? The IRS just wants to know how much money you made which boils down to how much did you bring in and what did it cost you to do it. They don't care how you slice that up but they want you to slice it the same way all the time.

David Genadek

Thanks, David.

I like to stock up on supplies when I find good prices. Lets say I buy five gallons of Tanners Bond because the price is right. I may not use all of that glue in the year I buy it. Can I still deduct the entire glue cost for that year. The same goes for Aussie wax, Bick 4, Dual 88, beeswax, rivets, etc.

Also, I don't want to report a loss for any year . but rather have any losses apply to the next year's deductions.

Thanks, again, for this help. I will soon be contacting an accountant.

Ed

Edited April 27, 2008 by esantoro

[David Genadek]

Thanks, David.

I like to stock up on supplies when I find good prices. Lets say I buy five gallons of Tanners Bond because the price is right. I may not use all of that glue in the year I buy it. Can I still deduct the entire glue cost for that year. The same goes for Aussie wax, Bick 4, Dual 88, beeswax, rivets, etc.

Also, I don't want to report a loss for any year . but rather have any losses apply to the next year's deductions.

Thanks, again, for this help. I will soon be contacting an attorney.

Ed

Can I still deduct the entire glue cost for that year? Yes but you have to do it that way all the time. I call those things supplies and I do supplies on a cash basis. Those things that I view as assets I treat as inventory but they have to be worthe enough for me to take the time to count them all the time. If it costs more to track than it is worthe, treat it on a cash basis. If not then treat it on an accrual basis. I am speaking from the stand point of a corperation so it may be different on a different bussiness structure. You really should talk to an accountant and have them set you up it is worthe the money but find some one you can trust. This is really an important step!

David Genadek

[esantoro]

I've purchased and downloaded a few Nolo press ebooks on tax deductions for small businesses. Very informative.

Thanks for helping to get the ball rolling.

Ed