Tax Time is Coming
Note: This article applies to residents and citizens of the United States.
The year-end is coming, so it's important to take stock of the year, get ready to wind down, and prepare for tax time. You can make tax time much easier just by being prepared.
Take some time to reconcile all your transactions and make sure that they make sense and tell the correct story of the year. You can also run an income statement (Profit and Loss) and drill down to see the detail of each line. Change whatever doesn’t make sense to you. If you need some help organizing your financial activity, you might look at a Schedule C for help naming the various categories you can use. And, if you’re not already using an accounting software, it’s never too late to start!
Your sales and various expenses don't tell the whole story, however. You also need to include an accounting of your inventory at the end of the year.
No time? One way to make sure you capture everything is to take some photos of your inventory. Then, when the holiday excitement dies down, you’ll have the photos of your year-end inventory and you'll be able to take your count.
To get cost of goods sold, you start with your beginning inventory (from the start of last year), add to that the amount of your purchases (the stuff you buy that ends up in your product and in your customers' hands), subtract from that whatever you pull out for personal use, samples, or spoilage, and finally, subtract your ending inventory. For items that you use as customer samples or that are damaged, you will expense those to supplies.
If you don't have a beginning inventory number, do your best to estimate it. Look at your current inventory and compare it as best you can to what you had at the beginning of the year. ("Now, I have 20 shelves filled with soaps and it seems like it's about twice what it was at the start of the year," for example.)
If you don't know how much you removed for personal use (if any), think in terms of an average loaf. So, if each loaf is 12 bars and you keep 1 bar from each loaf for personal use, that's about 8.3%. If you use the ends of each loaf for yourself, measure a couple of average end pieces, divide that into the total length of your soap mold, and get a percentage that way. A little creativity and some basic math will help get some insight into these numbers.
End of the Year
Once the ball drops in Times Square and the new year begins, you'll be almost all ready for your taxes. Just finish up reconciling all your bank and credit accounts and get your inventory count nailed down so you know your cost of goods sold, and you're all set.
Best practice is to be ready early in the year so you have a sense of how much tax you might owe, if any. That way, you have until April 15 to make your tax payments.
Filing Your Taxes
If you are a sole practitioner or you organized an LLC but did not elect corporate tax treatment, you file your business taxes on Schedule C on your individual income tax return, due each year in April (on or near the 15th). You'll pay both income tax and self-employment tax on your profit.
If you operate in partnership with another soaper (or other artist), or you have a multi-member LLC not taxed as a corporation, you'll file a partnership return, Form 1065, by March 15. That return will generate a Schedule K-1 that you incorporate into your personal tax return. As with a sole proprietorship, you'll pay both income tax and self-employment tax on your profits.
Finally, if you organize your business as an S-corporation, your Form 1120-S will be due March 15 and will also generate a K-1. Current tax law says you pay only income tax on this profit. A C-corporation files its Form 1120 by April 15 and has its own income tax. The owner pays ordinary income tax on any dividend distributions.
An Inconvenient Truth
The truth about taxes is that they are really pretty complex. If you don't feel like your time and skills are well suited to keeping track of everything for taxes, then you may want to get a professional to help. Whether you decide to go for it on your own or get some help, the more organized your books and records are, the better.
Dave Yoshida, EA is Chief Number Cruncher at Fortunate Fields, Inc. in San Diego, CA. Fortunate Fields brings clients peace of mind through a variety of income tax, bookkeeping, and business advisory services. Dave was a presenter at the 2018 HSCG Conference in Atlanta, GA. For further information, please call (619) 220-0375 or contact email@example.com.