The Change in Your Changepurse February 10, 2009

That time of year-a
Tax time is here-a
Many lira
Disappear-a

The above is perhaps my favorite all-time tax rhyme.  It’s from a song by Adam Sandler’s “Opera Man,” sung during SNL’s Weekend Update segment.  Even without paying taxes, many of us have recently seen our money begin to evaporate, in the form of slower sales, exhorbitant gas prices and drops in property value.  Some of these issues have been somewhat mitigated by the IRS’s 2008 Tax Changes for Businesses, while others have been made worse.  You can take higher per-mile deductions for your car, for example, but the maximum amount of earnings subject to the Self-Employment (Social Security) tax has increased.  If you’re using current tax preparation software, these changes should all be included, but if you’re filing manually, make sure you take these new rules into account.

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Served October 17, 2008

I’m sitting in Room 307 of the San Francisco Superior Court.  When I got here, I was the only person in this bank of five seats, but as usual, my presence has managed to act as an asshole magnet.  To my immediate right are two women who have not stopped talking for literally one second since they got here.  Two seats to my left is a man providing running commentary on what he is listening to on his mp3 player.  “Not the day for Slayer!” he announces, a little too loudly.

I get called for jury service every year, but this is the first time I’ve made it as far as the oath-in-the-courtroom.  Jury duty never bothered me before, because as a teacher, I was always paid for the days I spent twiddling my thumbs in windowless rooms.  As a Biz Miss, however, being selected for a jury could do some serious harm to my business.  Never mind the hours of work I might lose right off the bat–I could be out of contact with customers and vendors for days, if not weeks.

So what’s a Biz Miss to do when she gets called for jury service?  What are the rules regarding compensation, or getting excused?  To begin with, you should know that according to the Superior Court web site, your employer does not have to pay you during your jury service, they just have to give you the time off.  If you give them “sufficient” notice of your impending jury service (which remains undefined), they can’t fire you, but you could potentially lose months worth of pay if you get assigned to a long trial.  If this is the case, or if you are self-employed, you can ask for an excuse based on “severe hardship.”  You write on your summons form exactly what sort of impact jury service will have on your financial situation, and then hope for the best.  In hindsight, I sort of wish I had done this, but it seemed dishonest to claim “severe financial hardship” given my ability to run most of my business outside of court hours.  The judge for our case made sure to emphasize that “serious inconvenience” does not equal “severe hardship,” and while having no free time for two weeks is definitely a serious inconvenience, it wouldn’t keep me from being able to pay the rent.

If you end up having to spend more than one day at jury duty you are entitled to compensation.  In San Francisco, if you are a government employee you can only claim a $2.50 “mileage fee” for any days you appear at the courthouse after the first.  If you are not a government employee you can also claim an additional $15 per day “jury fee” from the second day forward.  It’s not much, but at least it covers lunch and public transportation.

What about tax deductions?  Can you deduct meals and travel during jury service?  Sadly, no.  The only jury-related tax deduction I could find occurs if your employer forces you to hand over your jury fees to help them compensate for your lost time.  In that case, you can deduct the total of your jury fees from your gross income.  Otherwise, no dice.

In short, jury duty almost always sucks, but at least there are a few saving graces.  Firstly, we get three breaks a day, including a 90-minute lunch, during which I can both eat and conduct a little business.  Secondly, the courthouse has free wireless, which works with even my ancient 7-year-old laptop.  And finally, there is a lot of downtime during jury duty, in which I can write blog posts, do my bookkeeping, or knit Christmas presents.  Just don’t try to bring a pair of three-inch sewing snips into the courthouse.  They will tell you to “put them outside somewhere,” which actually means “try to hide them in a bush when none of the bums are looking.”

U.S. Customs, or, How to Get Screwed and Pay for the Privilege April 24, 2008

Thinking about having goods made overseas? You may want to consider the cost of shipping and customs before you set price points for your merchandise. I budgeted my costs based on a quote from my customs agent, and still came up about $500 short. Here’s a basic list of what you’ll need:

Freight: getting your cargo where it needs to go. If you have small or perishable items, you can use air freight. For bigger stuff, like a whole container’s worth of meat-shaped plush toys, you can use ocean or rail freight, depending on whether the country you’re importing from is connected to you by land or sea.

A customs broker: this guy gets your stuff off the dock and onto a truck. Unfortunately, many of these folks operate like bad movers–they claim zero responsibility for what happens to your stuff and sometimes hold it for ransom. The Dept. of Homeland Security requirement that a customs broker be “of good moral character” is clearly not enforced. Finding a trustworthy customs broker is like finding the holy grail. If you’re in the market for one of these guys, here are some charges to get in a quote:

• “Door-to-door” freight: this is really dock-to-door freight, since most manufacturers will charge F.O.B. (freight on board) prices for your products, meaning that what you pay for manufacturing includes what it costs to box up your merchandise and get it onto a boat/plane/etc. I was quoted $1,717 for ocean freight from Hong Kong to Oakland, with door delivery in San Francisco. This was for a full 20 ft. container. Transporting less than a container load (LCL) was quoted at $125/cubic meter of cargo. This is because there is a lot more labor involved in separating, moving and accounting for your merchandise when it is mixed up with other people’s stuff. A full container load (FCL) doesn’t need to be opened at all between the overseas factory and your warehouse in the States. When my warehouse turned out to be in Fairfield rather than San Francisco (an extra 30 minutes away from the dock, but in another “zone”), my delivery cost went up $200. If gas prices rise between your quotation and shipment, expect to pay for that as well (an additional $50 in my case).
• Customer Power of Attorney: allows your broker to conduct Customs business on your behalf (i.e. pay for your inspections to move your cargo through quicker, take your container off the dock, etc. I was quoted $0.35-$0.55 per $100 of merchandise value for this.
• Insurance: this was included in my freight quote, but you NEED to make sure you have it. Containers fall off those barges on choppy seas all the time, and the last thing you want is to have your entire business end up at the bottom of the ocean.

Money for U.S. Customs fees: here’s the list:

• Merchandise Processing Fee: 0.21% of Commercial Invoice., Min. USD25 and Max. USD485. $25 for me.
• Harbor Maintenance Fee: 0.125% of Commercial Invoice. $8.85 for me.
• Single Transaction Bond: a one-time $50 fee per import. If you import more than 10 times a year, you can use a $500/year bond instead.
• Customs Clearance: $115.
• C-TPAT security fee: protects the docks against terrorists. $7.50 per shipment.
• Document turn-over fee: $55
• Inspection: this is my personal favorite. Not all containers get inspected, but if you’re a new importer, yours will be. If they inspect by x-ray, you pay an additional $160. If they decide to do a FULL inspection, however, in which they open and rifle through every single box, they will charge you for the labor, which is more like $400-$500.

In the end, just getting my merchandise to the Fairfield warehouse cost almost a third of what it cost to manufacture it. That means I had to figure in a 33% mark-up in my prices, not including the cost of warehousing. If I could have had my plush toys made in the U.S., I would have, and it makes me seriously re-consider what my next product line will be.

**Tip: if you arrange for your freight early enough, you can sometimes “lock in” a rate for local delivery from the dock to your warehouse that won’t go up when your cargo arrives. Get this in writing.

US Customs FAQ on Duty Rates

Image courtesy of the Fail Blog at http://failblog.wordpress.com/2008/01/29/shipments-in

Do I Need an Accountant? March 29, 2008

Maybe TurboTax isn’t as easy as it looked.  Maybe you’re seduced by H&R Block’s claims that they save the average tax payer $1800.  Maybe you just don’t know how categorize that shoebox of receipts you keep under your desk, but chances are, you’ve wondered whether you should hire professional help.

This tax season I bit the bullet and hired an accountant.  I hired a guy who is both an accountant and a lawyer, and I figured that he would know enough loopholes and secret deductions to more than make up for his $375 price tag (for comparison purposes, H&R Block charges about $300 in San Francisco).  That did not turn out to be the case, but I’m still glad I hired him.

It turns out, partially due to the research I’ve done for this blog, that I would have paid the right amount of taxes had I filed them myself.  This meant, however, that I did not have a lot to explain to my accountant during our one-hour session and got to spend most of my time asking questions and receiving advice.  Here are some of the things I learned:

• Unless you run a business that is really open to litigation, you may want to think twice before changing your sole proprietorship to an LLC.  LLCs require a lot of paperwork and things like officers and meetings.  Also, in California, the annual filing fee is $800, which is a lot more than your typical liability insurance premiums, so you’re better off just getting insured.
• Watch your inventory.  You can only deduct the cost of inventory you sold last year, not all the inventory you bought.
• Always look out for standard deductions (like 48.5 cents/mile for car costs) and compare them to your itemized deductions.  Very often one will be much higher than the other.
• If you use bookkeeping software like QuickBooks (which works great with TurboTax), file your taxes according to cash accounting reports, not accrual accounting reports.
• Gifts under $12,000 are always tax free for the recipient, so that birthday check from Grandma is not taxable income.
• You can’t deduct your home office if your self-employment income does not exceed your expenses, but the deductions keep carrying over from year to year until you post a profit, so keep track of them as they pile up.

In the end, the knowledge I gained from my meeting was well worth the expense.  I am new to self-employment, and I liked having the peace of mind that I had prepared things correctly. Since next year will be my first year of inventory, I will probably hire my accountant one more time.  In my third year of business, however, I am aiming to strike out on my own and file my taxes by myself.

Dear Diary, Today I Went to Starbucks March 27, 2008

If you are self-employed and either eat out or drive on the job, chances are you’ll want to deduct what you spend on those things. But meals and car expenses are two of the most likely things on your tax return to get scrutinized by the IRS, and who wants to organize hundreds of receipts for small dollar amounts? An easy alternative is to keep a spending diary–or two or three. A spending diary eliminates the need for you to keep tons of receipts for tiny amounts and is also one of the only spending records the IRS will accept as legitimate.

I have two spending diaries: a small notebook that I keep in my purse for meals/entertainment/public transportation, etc., and a pad taped to the dashboard of my car for mileage and car expenses. I recommend a separate diary for your car because it will be organized slightly differently than a regular diary. Some people like to use a digital or cassette recorder in lieu of paper (Blackberry/iPhone users, I’m looking at you) but either method is fine as long as it contains the proper information.

Like all documentation prepared for the IRS, a spending diary must follow a series of somewhat complicated rules in order to be admissible. Here’s how to set up an iron-clad meals and entertainment diary, for example:

• Include only entertainment and meals you ate out (not groceries!) that totaled $75 or less. You will need to keep a receipt for any meal or entertainment expense over $75 (no matter how many people you paid for).
• Create the following set of columns for your diary:
  • The date
  • The amount you spent
  • Where you spent it (establishment and city)
  • The names and business relationships of anyone you entertained
  • The business you were doing or discussing
• Fill out the information the day you spend the money

For your car diary, just follow the format from this IRS example:

Source: http://www.irs.gov/publications/p463/11081l08.html

Tip: record the entries from your diaries into a spreadsheet every week when you do the rest of your bookkeeping. This will help you to budget future spending and will save you time when you need to prepare your taxes.

Steady at the Wheel: Car Deductions March 19, 2008

One of the areas of your tax return at which the IRS looks most closely is the section covering car deductions. There’s a reason for this: it’s a difficult set of tax laws to navigate and many people over-deduct or use sloppy estimates, resulting in more money for the government when they catch you. You don’t need receipts for everything, since it’s difficult to get receipts for things like mileage, but you do need detailed records of everything.

Car deductions are easy if you have a company car. In this case, you can just deduct the whole shebang. What’s more complicated is if you use your personal vehicle for business purposes. If you fall into this latter category and need to itemize your deductions, here are the basic steps:

1. Keep a mileage diary in your car at all times. Write down the date, the starting and ending mileage, tolls, and one of the following purposes for any business-related trip you make:
   • Overnight travel away from home
   • Shopping for your business (not shopping for yourself, even if you use the purchase at your business, like a suit)
   • Travel to a professional development event such as a seminar or conference
   • Sales calls
   • Deliveries
   • Travel for marketing or promotional purposes
   • Travel to a job site or meeting as an independent contractor–NOTE** if the job site you are traveling to has you on the books as an employee rather than as an independent contractor, you are now technically commuting, which is not deductible.
   • Travel between job sites
   • Any other qualifying travel during your business day.
2. Keep all receipts and statements for tolls, maintenance and repairs, gas, auto registration, inspections, etc.
3. At the end of the year, total up your business mileage and divide it by your total mileage for the year. This will give you the percentage of your car that was used for business. Also, look up the amount by which the value of your car has depreciated (must be $2,660 or less if your car was bought new that year or was worth more than $12,800 at the beginning of the year).
4. Total up your car-related receipts and depreciation for the year and multiply the total by the percentage you just came up with.
5. Multiply just your business mileage by $0.31. This is the standard automobile deduction, calculated by mile.
6. Compare the results of steps four and five. You will use the higher of these two numbers to get your deduction.
7. If you are 100% self-employed, stop here. Your costs are fully deductible.
8. If you are on the books at anyone else’s business as even a temporary and/or part-time employee, your car costs are subject to the “2% floor.” In this case, total up your Adjusted Income for the year (income minus expenses) and multiply it by .02. Subtract that amount from the business-related car expenses you came up with in step 6. This is the total amount you may deduct. If you come up with a negative number, you may not claim a deduction.

See? It’s complicated. I didn’t even mention things like specific deductions for hybrid vehicles or certain trucks, driving for charitable purposes and deductions for interest on leased vehicles. For all the nitty gritty stuff, start with this page directly from the IRS.