I vigorously read all The Hunger Games books and saw the movie twice. I saw it once with my wife and then a second time with my 15 year old son. I could not help to think how much Suzanne Collins post apocalyptic novel reminded me of income tax planning. Actually, to tell the truth just about everything reminds me of business and tax planning. I could not help to think that we taxpayers are just like Katniss and her family, way out here in district 12, controlled by the evil capital… the IRS.
Just like in the book, every year citizens get picked to compete in the tribute except in our case, if we are making any money at all, everybody is forced to compete by going through the gruesome task of preparing a form 1040. Like Katniss, taxpayers need a mentor like Haymitch Abernathy to teach them. That would be me, except I am not a drunken mentor. You are the definitely the “stylists” like Cinta whose job to make the tributes look their best. My job is to teach you so that you survive the tax game.
As your trainer, here are the lessons I would train you before you enter the arena. Pay close attention! You must know these rules and be able to act before the stroke of midnight on December 31st or you will not survive. Remember… big brother can see your every move.
Good records. As your trainer, I would first want you to understand the importance of good records. Without documentation you will miss legal deductions; and if Game Makers (the IRS) come to check you out, you will lose.
Don’t cheat. If you cheat and get caught, the Game Makers can force the end to you. You might think you can get away with cheating, but the Game Makers have ways of finding out. In the world of the IRS you are guilty until you prove yourselves innocent. Miscalculate or make a reasonable error and you get penalized. Cheat and you have committed a felony and could end up in jail.
Post it on time. As you get close to year-end, don’t forget to mail your checks for deductible items before the end of 2012 to insure the write off. You can claim the deduction in the year that the check is dropped in the mail. The check does not have to clear the bank in order for it to be deductible.
Understand the game. You can use credit and debit cards to pay bills, but make sure you understand the rules. Credit cards are deductible at the time that you actually charge the item where as a debit card is not deductible until the bill has cleared the bank.
Plan bonuses intentionally. Many times, the end of the year is the time to do bonuses to staff. If you do the bonuses in 2012, they are deductible this year. If you wait until after the first of the year, you do not get to take the deduction until 2013.
Know equipment rules. If you have equipment needs, in 2012 you can write off up to $139,000 of equipment in the year of purchase and placement in service. This amount is scheduled to drop to $25,000 in 2013. Either way, if you do have equipment needs, this a great way to slash your taxes. Remember, the equipment not only has to be purchased but also has to be placed in service.
Plan accordingly. Rates are scheduled to go up in 2013. It is important to do pretax planning to make sure that you have income in the proper year. If your income is going to be higher in 2013 it might be wise to save some expenses until 2013 so that they are deducted at a higher rate.
Here are some additonal routine deductions that many salon owners miss. Keep your eye out for them:
audio tapes and video tapes related to business skills
bank service charges
bank association dues
business-related magazines and books
casual labor and tips
coffee and beverage
office in the home
online computer services related to business
shoes recommended by doctor
parking and meters
petty cash funds
promotion and publicity
seminars and trade shows
taxis and bus fare
telephone calls away from business
Assuming that you win the Tribute and return to Site 12 safely, it is important to remember to start planning again for next year. Just like The Hunger Games you will find yourself going into battle again next year so start training right now.
Larry Kopsa is a partner with Kopsa Otte CPAs and Advisors, an accounting firm that has specialized in the areas of salons, spas and distributors for more than 20 years. For more information visit kopsaotte.com or call 402-362-6636. Catch Larry Kopsa’s blog at kopsaottesalon.blogspot.com.