For an easier time, here are five things your CPA wants you to know—and two they may not tell you.
With so many moving parts to a dance studio, tax preparation can seem overwhelming. Although you likely meet with your financial advisor quarterly, make estimated tax payments and have been planning for the next fiscal year, tax deadlines can still creep up on you. Now that they’re just around the corner, here are some steps you can take before you meet with your CPA, simplifying their job so you can save time and money. Even if it means hiring a little extra bookkeeping help, it will be worth it.
1. Finish your year-end bookkeeping. “You’re legally required to have books and ledgers, a summary of business transactions,” says Jessica Scheitler of Financial Groove, a financial consulting and bookkeeping firm for the arts, based in Las Vegas, Nevada. “A bank statement and pile of receipts aren’t enough.” Bring a trial balance, profit-and-loss statement, balance sheet, details about any purchased assets and a copy of your general ledger, preferably in a digital form compatible with your accountant’s software.
Reconcile all bank accounts by checking that your bank statements match your general ledger. Account for all income, loans in or out and all purchases, and record and categorize your receipts. Cory Ouellette, CPA with accounting firm Elliott Davis in Greenville, South Carolina, recommends doing this every month so you’re not scrambling at the last minute, “but at least do it before you visit your accountant,” he says. “It takes more time—and will cost more—to prepare your return if the accountant is also doing bookkeeping.”
• Don’t forget: Keep business cards, date books and any marketing materials handy, especially if your books show consistent losses. “As artists, we’re battling the ‘hobby loss’ rules,” says Scheitler, a former dancer and choreographer. Though some losses may generally increase your refund, the IRS could deem your business a hobby if you’re not generating a profit three out of five years. If that happens, any losses you’ve declared—since day one—will be disallowed, and you’ll owe taxes on an adjusted amount, plus interest and penalties. “If you’re audited, you will need to prove that you’re trying to increase business. Save everything,” she says.
• Going forward: Track income from cash, check and credit cards, especially if you received a form 1099-K this year from your credit card company. “On your return, you declare the amount of income specifically from credit cards or PayPal,” says Scheitler. The IRS compares that figure with the information from credit card companies. “If they don’t match, you’ll hear from the IRS. So set up your studio software to separate income that comes in via credit cards.”
2. Know the deductions you’re entitled to. Purchases made to operate your business are deductions. This includes dance shoes, website expenses, music, union dues and much more—check with your accountant.
• Don’t forget about mileage. If you travel to competitions or from one of your studio locations to another, track the mileage and dates. “You don’t get a deduction for commuting [from your house to the studio],” says Ouellette. “But once you’re on the job and travel, you can even deduct looking for a new studio location.” And remember: “Gas receipts are useless without mileage logs,” says Scheitler.
• Going forward: Make tracking mileage easy with apps like Expensify and Track My Mileage. And get into the habit of organizing all receipts right away. “It’s better for me to say we can’t use a receipt, rather than miss something we can’t bring back,” she says.
3. File your 1099s and W-2s. The deadline to send all employees and contractors form W-2 or 1099 was January 31, but make sure you file the forms with the IRS before February 28 to avoid late penalties.
• Don’t forget: You must file 1099s for independent contractors if you paid them more than $600. “People often neglect reporting 1099s, especially for family members or friends,” says Ouellette. “Get in touch with contractors if you don’t have their current addresses and social security numbers or EINs.”
• Going forward: Check with your financial advisor to make sure your independent contractors aren’t actually employees. There’s a hefty penalty if you’re filing 1099s incorrectly. Lilia Wood, one of Scheitler’s clients, was hesitant to file W-2s for her two original teachers when she opened Ballroom in Boston studio in 2010. “I was reluctant to spend money I didn’t have,” she says. “But I learned that it’s not much more expensive because there are other write-offs that I would be missing.”
4. Don’t be surprised if you owe money. It’s easy to forget sometimes that you can only get money back that you’ve paid in. “If you’re not on a payroll and haven’t made estimated tax payments, you may end up owing money,” says Scheitler.
• Don’t forget: Make estimated payments throughout the year. A good rule of thumb is to set aside roughly 30–35 percent of earnings to cover federal, state and payroll taxes, says Ouellette.
• Going forward: Meet with an accountant regularly. “Most decisions have to be made by December 31. If you come in April and this is the first time I’ve talked to you since last year, we can’t go back and make changes to the prior year,” he says.
5. Talk to us about your business. In 2012, Tina McMurray, of The Dance Studio, Inc., in Le Mars and Sheldon, Iowa, changed how she ordered costumes. “I used an ordering service, which affected my income,” she says. “Before, I’d collect deposits in December and the rest in January, but this year none of the money went through me. It was about a $16,000 difference in the books that I will have to discuss.”
• Don’t forget: Don’t limit your discussion with your CPA to taxes, says Ouellette. “Conversations can lead to opportunities. For example, if we had known you were hiring, you would have qualified for an adjusted tax credit. Or if you’ve started covering employees’ health insurance, there’s a health tax credit.”
• Going forward: Work with your accountant to create an appropriate plan and budget for your business. “Have a dream for your studio and discuss it,” says Wood. “Take advantage of their expertise so you can make those dreams a financial reality.” DT
What Your CPA May Not Tell You
“You’re too late.” “Even if you come to us on April 10, we’ll probably be able to get your return in on time,” says Cory Ouellette, CPA. “But if you’re that last-minute, we won’t have enough time to do tax planning that could save you money.” Work with someone year-round so you can ask any questions that you may have as they come up.
“I may not be right for you.” When Lilia Wood of Ballroom in Boston first opened her business, the accountant she used wasn’t a specialist in the arts. “She was a great accountant, but not for my business,” says Wood. “She missed many write-offs, and because I was inexperienced, I didn’t know the questions to ask.”
Tina McMurray, of The Dance Studio, Inc., in Iowa, left her original CPA “because she was too enabling for me. She’d say, ‘You’re doing fine,’ but I knew I wasn’t,” says McMurray. “I needed someone to hold me accountable for my spending. My new accountant has helped me get on track.”
Seen & Heard At the Dance Teacher Summit
After studying dance in college, with minors in arts administration and math, Jessica Scheitler founded Financial Groove, dedicated to helping dance studios and entertainers with their bookkeeping. She spoke to studio owners about taxes at the 2012 Dance Teacher Summit.
Dance Teacher: What made you decide to go into this line of work?
Jessica Scheitler: As an independent choreographer after college, I did a lot of research for myself on bookkeeping, because when I got my tax return done I found I had to make a major case for myself. It became obvious to me that studio owners, artists and entertainers need an advocate. They seemed to be skipped over, because accountants weren’t speaking their language. I had the background in math and experience bookkeeping, so I decided to help people out. Since I was able to speak both languages, it all fell into place.
DT: When you spoke at the DT Summit, you mentioned that it works to a studio owner’s advantage to do things by the book—for instance, to bite the bullet and define a teacher as an employee, rather than an independent contractor, if there is any doubt about the status. Why?
JS: The general consensus among small-business owners is that they want to fly under the radar whenever possible. They think if they’re paying cash under the table they’re helping their business, but really that strategy is working against them.
People tend to be afraid of payroll because they have to pay employment taxes. And it’s a bit of a headache, of course. There’s more paperwork, there’s an extra 12 percent, approximately—depending on your state—that’s coming out of your pocket, and that feels like a burden. Ultimately, however, by defining a teacher as an employee (if she really is an employee and not an independent contractor), you can claim her earnings as a business expense. That will often help you out more. Also, the word is that this issue is something the IRS is going to start cracking down on soon.
DT: What is the number-one thing studio owners can do to improve their tax preparation practices?
JS: It starts with the bookkeeping. Many studio owners are not keeping complete books. I encourage them to be as detailed as possible when bookkeeping, to really go through their day and keep track of everything they do for their business so they don’t miss out on deductions.
They should also do a reality check now and then. People forget that something they justify as a tax write-off is still money being spent. So link reality to what you see in the numbers. Then it will all make more sense once you get to tax time. Things will fall into place much more easily if all the information is there.
Photo courtesy of Financial Groove