Business 98 Magazine reported a certified public accountant (cpa) study showing that in 1997, America's small businesses overpaid on their income taxes by over 2 billion dollars.
According to Bernard Kamaroff, author of Small Time Operator and 422 Tax Deductions For Businesses & Self-Employed Individuals, "The overpayments were made because the businesses failed to take tax deductions they were legally entitled to take. Many of these businesses are still unaware of their errors. They overpaid their taxes, and don't even know it."
To monitor more closely the massage therapy profession, I asked two massage therapists in my area to meet with Robert Decker, a CPA in Tucson, Arizona, to prepare their taxes. He spent almost two hours with each therapist. He started out each session getting to know them: finding out how they run their businesses; discussing where their business and personal lifestyle (and expenses) cross over; and ascertaining their understanding of tax law. Throughout the actual tax preparation, he asked a lot of questions and took the time to educate them about the nuances relating to this and future tax returns.
Ann Wartchow has been a massage therapist since 1990. She purposely maintains a part-time practice to fit in her lifestyle as an outdoor enthusiast. The majority of her clients are athletes. This was her first experience working with an accountant, and she was a bit nervous at first.
Wartchow had always figured that doing her taxes was relatively easy; she didn't own real estate, and her expenses seemed straightforward. As it turns out, she wasn't declaring all of her deductions, the three biggest areas being automotive, home office deduction, and travel. She didn't include mileage for all of her out-call sessions or business-related errands, she didn't take the deduction for her office, and she didn't take the appropriate deductions for business travel because she didn't save all of her receipts and wasn't aware of the per diem option. By the end of the tax makeover, Decker saved her approximately $750.
The major changes that Ann is now implementing are opening a separate business account, posting records on the computer and keeping a mileage log. This session reinforced her writing off anything that is truly business related. She says, "I feel more official and professional having someone look at my stuff. I am also motivated to take my job more seriously and work more. This was definitely a worthwhile experience."
Angie Edge has been in full-time practice since 1998. She sees clients in her office and provides massage for a private insurance company. Angie was accompanied by her partner, Barry Young. Barry did Angie's taxes using TurboTax software, and had already submitted the tax return and a check for the amount he thought was due. They were both initially anxious; afterward Angie stated, "Robert was so cool and laid back. We appreciated it."
Decker saved her almost $2,000, and submitted an amended return for a refund. The biggest differences were in the home-office deduction and equipment depreciation. There were also several little things, such as not keeping track of laundry expenses (which does add up).
Angie and Barry were misinformed about the home-office deduction. According to the IRS, it needs to be the primary place of business. Last year she also did some work at a gym, so she didn't think she could write off her home-office expenses. When the numbers came in, she realized that the majority of her income was generated from her home office.
Working with the TurboTax software wasn't as easy as they thought it would be. It didn't forward through the second year depreciation on her massage table. (The cost of the table should have been written off fully in the first year anyway, but TurboTax doesn't make it clear that you can take the full deduction of equipment up to $20,000 without having to depreciate it over seven years.) Barry said, "I didn't always know what form I was putting the numbers on, and it was very confusing because there were a variety of income sources."
Basically, Angie kept good records. She uses Quicken and now is really glad that she does. She was hesitant at first because she thought it would be intimidating and difficult to use, but found it to be easy. The major changes she will be implementing are tracking the expenses where business and personal overlap (e.g., laundry) and having an accountant prepare her tax return.
However, keeping good records isn't enough for tax preparation. There are always areas that aren't clear, and the tax codes are constantly changing. Angie's tax return is a perfect example. "It was good to know that I was getting money back, and that I didn't owe more," she says.
The three primary methods for preparing tax returns are to do them manually, use a tax software program or go to an accountant. The two major problems with doing it yourself (either manually or with a software program) are it isn't as straightforward as it would seem (there are thousands of codes that frequently change and most are vague), and the tax returns list only a few standard deduction categories. You need to know what expenses are deductible, and they are not always obvious. For instance, there are options for declaring deductions for business-related food and lodging expenses. Currently, the standard per diem rate is $80 per day ($50 for lodging, and $30 for meals and incidental expenses). But the rates are higher for certain cities (refer to IRS Publication 1542). If you have receipts that are higher than the per diem, you can use those receipts (remember that you can only claim 50 percent of the total bill, including tip). The exciting part is that you can take the per diem rate even if it's higher than your actual expenses. Loopholes aren't just for the wealthy!
Keep in mind that a tax deduction is what you can deduct, not necessarily what you spent. Sometimes this works in your benefit, as in the above per diem example. The flip side of this is that there are legitimate business expenses that you can't deduct the full cost (e.g., 50 prercent of business entertainment meals) and others where there are limits (e.g., $25 per person ceiling on gifts).
The main problem with using tax software programs is that they really aren't designed to handle the complexities of a business. They are great for wage-earners who receive W2s. So if you are a massage therapist working solely as an employee, then a software program might work well.
I'm not saying that every therapist must utilize an accountant, but it's wise to meet with an accountant at least once to determine what deductions you may be overlooking, and to plan for ways to legitimately write off future expenditures. Consider the above case studies. Ann Wartchow has a part-time practice and saved $750. Angie Edge and Barry Young used a tax software program because it was cheaper than going to an accountant. Additionally, they didn't trust accountants; they had preconceived notions that all accountants are expensive and difficult to work with. Now they feel differently. "You may not get money back, but you don't appreciate how much they are saving you. It definitely makes more sense to use an accountant," states Angie.
A good accountant looks into ways to save clients money through tax savings, shifting how and where money is spent, increasing revenues and reducing overhead. The problematic areas in tax returns are depreciation and not properly deducting expenses. There are hundreds of legitimate tax deductions, and even the best accountant can't spend the time going through each one with you to make sure you are aware of them all.
I asked the accountant, Robert Decker, to offer his opinion about the biggest blunders a massage therapist (or any small business owner) could make. He replied, "The two most common mistakes that people make are doing their own taxes, and not setting aside money to pay for taxes." He suggests putting away 20 to 30 percent of the amount you pay yourself. For instance, every time you write yourself a check for $1,000, immediately write another check for at least $200, and deposit it into a savings account that you designate specifically for paying taxes.
Find an accountant who takes the time to work with you, not just someone to whom you hand your paperwork and she gives you a tax return to send to the IRS. You also need to feel comfortable with this person. Some accountants take an aggressive approach to tax return preparation while others are conservative. It's also crucial that the two of you can communicate clearly and easily. Your accountant can profoundly affect your business success, so choose wisely.