Most likely, bookkeeping
and accounting are not the activities that triggered your
interest in becoming a retail shop owner. Yet your financial
records are a useful tool for tracking both the health and
profitability of your business, and for keeping tax payments
to the legal minimum.
The following information provides an overview of tax
deductions and considerations to take into account as you
prepare for April 15. Each business has its own
peculiarities, so make sure you check with your own tax
professional for specifics.
Inventory Arguably the largest "expense" of
running a fabric store is buying inventory; however,
inventory costs are not a deductible expense until the goods
are sold. The deduction is called "cost of goods
sold." Therefore, not all of your inventory purchases
can be deducted as current-year expenses. Only the cost of
goods actually sold is deductible.
Figuring cost of goods sold is a three-step calculation:
1. Start with current inventory at the beginning of the
fiscal year.
2. Add purchases made during the year.
3. Subtract inventory still on hand at yearend.
Valuing inventory at yearend is the key to determining cost
of goods sold. Slow-moving inventory may be "marked
down" to reflect a "lower cost or market"
valuation. Markdowns, however, must meet the requirements of
the IRS. The inventory cannot be marked down (for tax
deduction purposes) to an amount lower than the price at
which the inventory is offered for sale within 30 days of
the tax-year end. In other words, markdowns (for tax
deduction purposes) must have been made within 30 days of
the tax-year end.
Depreciation
When you "depreciate" an asset, you spread out its
tax deduction over several years rather than deducting the
entire cost the year you purchase it. A portion of the cost
is deducted each year.
You can claim a depreciation deduction for business
equipment such as computers, point-of-sale software,
quilting machines, and vehicles as long as the equipment was
put to business use before the last day of the calendar or
fiscal year. Useful life is determined by MACRS (Modified
Accelerated Cost Recovery System) as set forth in the
Internal Revenue Code. Supplies or inexpensive items thought
to be "used up" in a year cannot be depreciated,
nor can equipment or other assets that are part of your
inventory, including sewing machines that you sell. Most
equipment is considered to be a five-or seven-year property.
You may elect a longer equipment life if you don't need the
larger deduction in the first year.
For most depreciable assets, depreciation is an option, not
a requirement. During the year of purchase, up to $19,000 of
depreciable assets can be deducted outright, rather than
depreciated under the "first year write-off
option." Any assets in excess of the $19,000 maximum
($20,000 in the year 2000) must be depreciated rather than
deducted. Note: Depreciation and first year write-off on a
vehicle is limited if the vehicle costs more than a certain
amount.
Despite the ease of a simple deduction compared to multiyear
depreciation, new businesses with little or no profit the
first year or two might be better off spreading the tax
deduction over future years when the tax savings from the
depreciation expense would be welcome.
Computers, cellular phones, cameras, video-recording
equipment, or other property with combined business/personal
use must be used more than 50 percent for business for an
accelerated deduction to be allowed.
Equipment Leases
You may use the lease payments as an expense deduction for
the year if you do not intend to purchase the equipment at
the end of the lease. An equipment lease that contains an
option permitting the lessee to buy the property, could be
construed as a sale, so the entire purchase price would then
be depreciated. Whether the lease is considered a sale
depends on the intent of the parties involved.
Leasehold Improvements
If you relocate your store and the leasehold improvements in
the space you vacate have not been fully depreciated, you
can write off the remaining balance the year of termination.
Vehicle Expense
All expenses operating a vehicle for business are deductible
except regular commuting expenses between your home and your
store. The IRS considers this item personal and not
deductible. Driving trips that would "count" might
include picking up store supplies or inventory, and driving
to trade shows.
You can figure the expense for business use of your vehicle
in one of two ways: 1) Keep track of miles traveled for
business use and calculate the standard mileage rate, for 2)
keep includes depreciation and all vehicle expenses,
including gasoline, lube and oil, maintenance and repairs,
insurance, licenses, tires and registration fees. In
addition to the mileage allowance, parking, tolls, interest,
and state and local taxes are also deductible.
In past years, the standard mileage rate was not allowed for
leased vehicles. This year however, it is available for both
owned and leased vehicles. The rate for the first quarter of
1999 is 32.5 cents per mile. The rate for the remainder of
the year is down to 31 cents per mile.
To deduct actual expenses rather than the mileage rate, keep
track of expenditures in the categories listed above. Note,
however, that once you elect to use this method on a
vehicle, you cannot change to the mileage rate in a
subsequent year.
Travel
You are allowed deductions for travel expenses only if you
are away from home overnight, with "home" defined
as your place of business, not where you live. Local
business travel is limited to transportation expenses only,
which would be included in your vehicle expense.
Buy yourself an expense journal and keep detailed records to
document your expenditures as you travel to conventions,
trade shows, and seminars. Don't forget to include items
such as laundry and dry cleaning, fax machine charges, taxi
fares, tips, and other incidentals.
Meals and Entertainment
You can deduct 50 percent of all meal costs while you're
away on business travel. In your home territory you can take
this 50 percent deduction only if the meal is related to
entertainment of prospective or existing customers. (Travel
to and from the restaurant, plus parking, are 100 percent
deductible as vehicle expenses.)
Document the business purpose of meals by detailing with
whom you had the meal, what was discussed, and how it
related to your business. You can record this information on
the reverse side of a restaurant receipt to corroborate the
expenditure.
Education
You can deduct fees for courses, seminars, books,
subscriptions, and professional dues related to the business
you are conducting. As a quilt shop owner, for example, you
could deduct the cost of classes about new quilting
techniques, as well as courses on retail management. For
documentation, keep a copy of the seminar program and any
certificate you might receive. Costs for travel to classes
and business programs would be included in travel or vehicle
expenses.
Interest
You may deduct interest you pay on loans for business
vehicles and equipment; on business credit card purchases;
and on mortgages for buildings you own and use for business
purposes. Interest on a personal loan is deductible as a
business expense if the loan was used for your business. Be
sure to keep good records showing that the money was
actually put into your business. Using a separate credit
card for business purposes is recommended for simplifying
your
record keeping.
Casualty Losses
Business losses from fire, storm or other casualty, theft,
shoplifting, or vandalism, are fully deductible to the
extent they are not covered by insurance. If the property is
a business asset you have been depreciating, it can be
deducted as a casualty loss only to the extent of the
balance not yet depreciated. The portion you previously
depreciated has already been deducted as a depreciation
expense and cannot be deducted a second time. Therefore, if
you wrote off the entire asset in the first year, you have
no deductible casualty loss.
Talking to your own accountant is advice that applies to
every tax deduction in this article. Tax laws change
constantly. Verify what you read here with a current IRS
publication or with a competent tax professional
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