"Making the Moves to Minimize your Taxes" with Jessica Scheitler of Financial Groove

Transcription

1 "Making the Moves to Minimize your Taxes" with Jessica Scheitler of Financial Groove Suzanne Gerety: This is Suzanne Gerety from DanceStudioOwner.com. This is our member only teleseminar with Jessica Scheitler of Financial Groove. I m so glad you re here with us. If you want to just tell us a little bit about your background and get started on the topic today, which is really great, called make the moves to minimize your taxes. Jessica Scheitler: Yeah, absolutely. Thank you so much for having me today. I really appreciate it. I m looking forward to interacting and talking with everyone. As Suzanne said, I own the business Financial Groove. My background, I actually started out in dance studios, dancing in competitions and all of that until I was 18 and I went to college and majored in dance, worked as a modern dancer for awhile. Basically, because of injury and totally by chance, I started in the accounting business. I discovered that there was really a need for the entertainment industry, the arts industry to basically get a better look at accounting and business because everyone is so well rounded in their art, and not necessarily on the business end. I started Financial Groove to bridge the gap between creativity and business basically. That s pretty much what I have dedicated my time and energy to ever since then. My heart is definitely in the local dance studios, the artists, and all of that. I definitely am here to help advance the arts in any way I can by aiding on the business end. That s pretty much by background. What I wanted to talk about today was ultimately the timing here in December with the holiday season upon us means we re only a month away from the end of our tax year. Now is really the ultimate time, the perfect time to create a strategic plan and make the necessary changes that you need to make before the year ends. Basically, by preparing your records now, you ll be able to effectively minimize your taxes, not to mention gain insight into your dance studio business. Obviously, it s a very busy time of year, it being holidays, attending lots of parties, and doing Christmas recitals, and things like that. If you can carve out some time to really take a look at your books before December 31 st comes, then you can do some things before the tax year ends so that your taxes are basically in a better place. 1

2 I m sure there are several situations out there. There are studios that have profits spilling out of the bank, and they need to find places to minimize those profits where the tax man is concerned. Then there are other people that have maybe had more of a rough year but they still have moves to make so they can make the most of those taxes. Particularly when you ve had a rough year and you don t have the same type of profits, it may seem like, Oh, I m good for this year. I ll just throw it together and scrape by, but if you treat it as though you have a large profit and minimize it in the same way, then that can carry forward for you if you have a large loss into future tax years to help you for when you do have a profit to minimize those taxes. Every little thing you can do can benefit you in the long run or the short run, just depending on what you re doing. First of all, I always suggest catching up on the books. Usually, some people have kept the books up but haven t gotten really into the details of it. I always suggest that you need all the data possible so you can make wise decisions. The second thing with catching up the books is I encourage everyone to report all of their income. The tendency is, Oh, we need to report the income that we deposited in the bank but we have these under the table things going on. Ultimately, properly claiming the under the table stuff actually will work to your advantage in the tax world even though it may seem like it won t. What it does is when you re claiming that cash income properly, it basically gives you a foundation for claiming the deductions that are associated with that cash whereas if you re not claiming that under the table, you re not able to claim those deductions or the write-offs in the same way. At the same time, it gives you a truly honest picture of your business so that you can really see where the money is coming in and going out rather than looking at a report and in the back of your mind, being like, Oh yeah, plus that $100 I gave to Martha, and whatever the case may be. One of the challenges that so many dance studio owners face, we re there too. We ve been there. We just did another studio renovation. When you go to try to apply for maybe a business line of credit or a loan, in many ways, I went for something. We just did another big renovation to our studio. Some of these banks require a minimum of $150,000 in gross income before they ll even consider you for something like that. Like you said, the urge is to either have your income coming in on the lower side because you don t get hit with so many taxes but like you said, there are some times where you can t even get consideration for lending now, which has been so challenging for people. I think I would back up and say too, the system that everybody uses varies. We had for many years been using a database that wasn t online registration. We still use a QuickBooks system but I would say now the time to either get everything together, even if it is a box of receipts. I think one of the things my own personal bookkeeper told me was don t apologize for a box of receipts. At least you re starting somewhere. Sometimes, it s the time you take to say, This is the year I m going to step it up in terms of my system. I ll let you keep going. Those are some things I was thinking of. 2

3 That s great. Ultimately, when you decide this is the year, or whatever the case may be, it s really a great place to start rather than putting it off until the New Year, which people have a tendency to be like, I ll start fresh in Then things go quickly. Really, this end of the year time is a great time to look at this entire past year, and not only put yourself in a good place for tax deductions and taxes but also so that you have a detailed and accurate picture so that you can see what trends are happening. From that, create your financial goals, similar to what you re talking about with needing to get loans from the bank, lines of credit, and things like that. Actually, I always ask my tax clients when they come in what their goals are in that avenue because it s oftentimes beneficial for you not to be so aggressive on the tax end because you are about to buy a home or because you're trying to get into space, or whatever the case may be. That s a great point that you brought up. I also think that it s important to look at the season trends, particularly in a dance studio. If you look at your numbers and compare them side by side, month by month, then you can see even visually, in graph style. Like, We make the most money here in August. Then it evens out. Then in the summer, it s real low. In July, we have no income whatsoever. It s really important to establish that in your mind. I think it s important to look at that each year and see how that grows and changes. It s important now when you re going into the spring season to basically set yourself up with those goals so you can use the funds that are coming in for the first three, four months of the year to parlay the recital excitement, different types of summer income, and then of course, new student interest in the fall. Particularly, with the funds available in these first four months, you don t want to then get to the summer. Obviously, we all have trouble in the summer getting by and making sure bills are paid but if we make the proper marketing investment in the first four, five months, then we don t have to worry about this lack of funds to make those marketing investments in the summer when you realize you need it. It s all a matter of planning in that way. With the bookkeeping, I always, always suggest getting as detailed as possible with your categories that you track things in. Some people I m sure do it themselves and some people do it through a bookkeeper and whatever the case may be. When you re using your dance studio software on the income side, you have all this information of ballet from 5:30 to 6:30, and combination two and combination one. You have all these little tiny individual classes to think about. Then when it goes into your books, a lot of times it s dumped into one big fat thing of tuition. I have seen so many great things happen when people start getting more detailed once it spills into their books. In other words, instead of dumping it all into tuition which is all you need to do for a tax return, you then put subcategories to that tuition so ballet, tap, jazz, or whatever the case may be. Then later, you can then match your expenses to those income streams. 3

4 I actually have had people matching particular teacher s payrolls to the classes that they re teaching. I think what a lot of times happens is the studio is doing well and you have new students waiting on waiting lists. When you re in the studio, everything is awesome, but you can t figure out why. Where is the money going? I m not taking very much home at the end of the day or I m having trouble making payroll at the end of the month. A lot of times, that comes from just little things where within the small things, things aren t profitable. You re losing money on ballet two because you have to pay a really big transportation piece for that particular teacher, or there are lots of cases. I think it s important to get into those details so that we can find the problem areas and fine tune them. I ve found that to be a really amazing tool. That spills over into taxes. It all goes hand in hand. Definitely. That s one of the things that when I talk to you, first when we got to meet, that I m very passionate about helping studio owners understand is that sometimes, there s the bread and butter classes. Then people would say, I don t know what this class would bring in. Sometimes, you have a class that may not look profitable on paper but you have to have it there in order to sustain the retention of students. There are a lot of things to consider, which leads me to the question you may be getting to this at some point, but it also popped into my head. What are some of the overlooked deductions that you find studio owners forgetting to take or things that they re not seeing that they could be claiming or using as a deduction? I think the biggest thing that s overlooked is actually how people are finding their deductions. What I often see is receipts are great. I had a client who saved what she thought was every receipt she ever had for an entire year, personal, pet, supplies, whatever the case may be. She saved everything. We went through every receipt and we found deductions, or things that were personal and nondeductible, etc. What then happened the following year is we started putting everything into books. We made sure that every single cash receipt that she spent was put into the books. Then everything from her bank statement was put into the books. Everything from every credit card, they put into the books. Then, when you re doing the bookkeeping, you do a process that s reconciliation. You re making sure that you don t miss anything. The difference on her tax return was astounding. In the year of the receipts, she owed about $2,000. In the year of putting everything through the books, she got a refund of $3,000. Wow. I ve found that people who are tracking absolutely everything you can possibly track end up with a much better return because they re finding deductions that they forgot. They forgot they even spent the money on those things. 4

5 It s a good thing definitely to look for certain deductions like, You should expand more in meals and entertainment, or, You really need to make sure you re deducting the makeup that all the company members are wearing, or whatever the case may be. There are definitely things like that. It boils down to you have to look at everything. That s where the difference is made. Sure. Maybe you can clarify this because this is a question that comes up a lot for us when we talk to dance studio owners who may be on the fence, or this is the year they re going to say, Yes, we re going to go to either using QuickBooks or we re going to find someone to help us with this, or we re going to set up some systems. They often get nervous around the idea of taking tuition, online registration, or auto billing with the merchant account fees because they re so high. It s my understanding that that s a business deduction as an operating expense, is it not? Yes, absolutely it is. I actually have a quote straight from the IRS that might be good for this question. It s one of those things that I think people say, I don t want the cost of automating, auto billing, or letting people pay with credit cards because they take money out for the merchant account fees. My answer to that is typically that online registration system is our employee that doesn t take a nap. It works for us 24 hours a day. Those profits that we gain from having that, granted, that is money that has to go through your bank account. It s not like invisible money but it is a deduction for running your business. Yes, if you have something on that, I think it would be really helpful for our members to understand. I was going to say that the IRS actually does not have a specific list of deductible expenses for businesses. For people who are itemizing deductions on their personal return, there s a list of what s deductible when you re doing that but for a business, ultimately the only thing that is stopping you from deducting something is that the IRS says that you have to have ordinary and necessary expenses. If you re running a studio, pretty much anything that you re using for the purpose of running that studio is deductible. If you re running merchant accounts, yes, that s an expense but it s definitely deductible. I would say if you are justifying something as helping to run the business or helping to grow the business, it is absolutely a deductible expense. I ve actually given a seminar about this one subject in particular in the past where people are afraid to take their deductions. One of the best things you can do to avoid an audit is to claim all of the income and claim all of your deductions because if the IRS finds something that you could have deducted, they re going to say, Oh my gosh, something is weird here, and they re going to look into the return further and probably call for an audit. 5

6 It s actually to your advantage to claim all the deductions you can possibly claim. Again, you want to give yourself an honest picture. It s like, Well, that might be a stretch but I went out to dinner with the studio across the street. I m afraid to deduct that. Ultimately, you did that for your business. You need to think about it when you re making your financial plan for yourself that you did spend that money and it was for a business purpose. That s why you did it, and on a tax front as well. Absolutely, that s a great point. I ll let you keep going. I didn t know if you had some more notes to move along on your presentation but I thought it was a little off track on what some of those things that people think of. Keep going. Actually, I do have a worksheet on my Web site of deductible expenses for dance studios. My Web site is FinancialGroove.com. That worksheet is located on the music, arts, and entertainment page. If people would like to check that out, it s a PDF. You can download it and use it as much or as little as you would like. Great. I ll make sure that everyone listening back will get a link to that. That s really helpful. When I m sitting at the year end, same thing, we look at our monthly profit and loss sheet. I shared this in an that I sent to members. I break out in hives when I see an Excel file. I ve never properly learned how to balance a checkbook how to speak. I m not a numbers person but I know how important it has been to us growing our business and also understanding. Where I have compassion for dance studio owners, dance teachers, and artists, as you do is that it s okay to not completely understand it. You re not a bookkeeper. If you're a dance teacher or dance studio owner, you re in the business of doing what you do best. It s okay to say, Here, over here, I really need some help understanding this. Starting right from the get go, I had to have my bookkeeper from years back show me this profit and loss sheet. What does this mean? Admitting you need help is my feeling. That s okay. That s where you need to be. I tell my clients a lot of time that I want you to tell me what s going on the studio because you re in it. You can tell me what you re seeing on a day-to-day basis. You can see that Susie s mom is upset about the new costumes, so there s some weirdness going on, and whatever the case may be. When you tell me that, then I can see what s happening in the numbers because I m coming from a numbers point of view. I like to say that your bookkeeper, your accountant can interpret what s going on with Susie s mom in those numbers if you re open book and having conversations frequently. The other thing is your accounting or your books are your books. If your accountant decided to call a category something that s really confusing to you, and you re like, Hey, what is this? and the accountant says, Actually, that s where I ve decided to put your merchant account fees, or whatever the case may be. You can say, Can we actually change the name? The accounts are net set in stone. They re for you to use for the benefit of your business. Have a good conversation about what s really 6

7 going on in your business with your bookkeeper, your accountant, not on the numbers side but what you re seeing happening because they can interpret that through the numbers. You want to make sure that you re on the same page so you can basically understand those reports and everything. That s my suggestion for that. Definitely. On your Web site again, Jessica, when you go to the music, arts, entertainment tab, where do they find that form? It should be at the bottom there but I will send you an exact link. I apologize. I did not have that one on my little list but I know it s on there. Good. We ll make sure we get that. Then I wanted to say if there s anybody on the call now, I un-muted it if you have a question for Jessica that you took time to be here today, I did just un-mute the line. A lot of people sometimes just like to listen in. If you re there and have a question, you re more than welcome to ask. The other question I had for you, Jessica, because again, we learn something new everyday at our dance studio. When it comes to taxes, what is the best financial business structure in your opinion for a dance studio to be in so they are in a place to minimize their taxes? A lot of dance studio owners are operating as DBAs, some are LLCs. Our studio is a C Corp. It varies from state to state but in your opinion, what is the best tax structure for a dance studio? I would say the number one thing is don t be a sole proprietor. Don t sit in sole proprietor land. That s the biggest thing I can say. Take the time, take the energy. It s less than any effort to go ahead and set up your corporate structure. An LLC, an S Corp, or a C Corp are all going to be very beneficial for you. If you are a studio in a place where it has grown and you are consistently showing profits, then you want to go toward the S Corp and the C Corp structure simply because then you can pay yourself payroll as the owner. You re not able to do that in an LLC. That opens up awesome doors for reducing taxes and for you not having a big tax bill on your personal tax return, which is what often happens. That would be my main suggestion. I did want to get in real quick as far as developing your tax plan, because I don t think we really talked about that a whole lot. The biggest bullet points of developing a tax plan right here at the end of the here is finding ways to reduce your income as far as on the taxes. If that means that you re about to bill for costumes at the end of the year and you could technically bill in January, that would be beneficial to you because that income would then go on the New Year instead of at the end of this year. You want to try to line up that income line with when you re actually expensing those costumes, when you re purchasing those costumes for recital. You also can do this with setting up retirement accounts. Studio owners actually have a lot of options for setting up retirement accounts. I would definitely suggest looking into the different plans that exist for that. 7

8 Like a SEP IRA? Yes, a SEP IRA, a ROTH. You can set up your own 401K for just one person. There s a simple plan. There are quite a few options. I actually am not technically licensed to discuss retirement plans but I always suggest that my clients speak to a financial advisor for that. It s also the time to increase your deductions. At this point in time, do you need a new printer? Maybe it s time to buy that new printer now instead of waiting until January so you can put more expenses on this side of the year. Gifts for charity are great deductions. It s a great time of year for it. It can be cleaning out the studio storage room and doing that or donating money directly, or splitting a portion of your recital holiday show with a charity so all that income isn t staying in your pocket and you re paying it forward. That increases deductions as well. You want to look for any credit that you can qualify for such as child care expenses, college expenses. That s much more on the personal side. There aren t a whole lot of credits for studios on the business side. Definitely talk to your tax advisor because your personal tax return is very much affected by your business tax returns. Those walk hand in hand. It s somewhat complex so you want to talk to your tax advisor about how that ebb and flow works for you. Now is also the time to make any adjustments to your withholdings. If you are on payroll and it s looking like you re going to owe some money, then you want to adjust your withholding, the amount of taxes that are taken out of your paycheck so they increase the amount of taxes taken from your paycheck to pay that forward. Then if you are in a situation where you pay estimated taxes, this would be the time to calculate that. You re paying a little more for this last bit of estimated taxes so you get a running start on it so you aren t subject to any penalties. Those are the four main tax plan ideas. I m totally rushing through the intricacies. Actually, you bring up a good point that I also ask representing many of the studio owners that I talk to as well. The burden of a quarterly tax payment is very stressful for all of us. I live it daily. Because we have such an inconsistent cash flow, how can a studio, again, our studio is a little different. We have evolved through the process from sole proprietorship through the ranks up to C Corp. We have 25 teachers on payroll that are employees. People get a little confused by that because no one is on salary at our studio. They re paid an hourly rate but they are employees and we withhold taxes, and do all that. It s a little different. How does our very representative population of dance studio owners get more consistent about tax payments that isn t such a huge chunk of money, and then there s never any extra money to pay towards that? What s some advice you have for that? 8

9 The IRS has a great Web site that s ESTPS. I don t even remember what that acronym means anymore. Basically, it allows you to pay your taxes online. I m sure some of your accountants and bookkeepers are using that. Some may be not. The cool thing about that is when you enter in your tax payment, you tell it what tax period you re paying for. If you know, I have a big estimated tax payment due in the summer, or shortly thereafter, you can make small payments toward that estimated tax payment earlier on and just tag it to that tax period. In that way, ultimately, it s all about planning. I suggest to people setting things aside in a savings account but when those three months roll around, it s like, Oh gosh, I forgot to do that. A lot of times, I suggest each time payroll is run or each time tuition comes in to divide out what your bill is going to be at the end of that three months and put money away each week or each month so you know it s going to be there. With the ESTPS, you can pay it in right away. It s kind of six of one, half dozen the other if you want to pay it in right away or if you want to set it aside in a savings. It really is just planning for it. People have found great success in just setting little increments aside so it doesn t hurt quite so badly to pay that $7000 check at the end of three months. Right. In your experience, everybody prefers to do it differently. People file extensions. I would say the government set this up to help people. What is your advice regarding filing extensions or paperwork if a studio was in a bind or needed that extra time, what do you suggest? Extensions are great things. This is actually something that a lot of people don t know about. That is that the IRS charges interest in penalties whether you file an extension or not. Even if you filed the extension, they re going to charge you interest on the amount of money that you owe for those six months that you are on extension. That s something that people don t quite realize. The other part of that is if you decide to file your tax return say on March 15 th and you don t pay a payment in, the IRS is going to charge you interest at 0.5% for the time that you have not made the payment but you have filed your tax return. But if you wait to file your tax return and make the payment at the same time, since you have not yet filed your return at all, the IRS charges 5% so you re actually better off if your tax return is done to just file the return and pay it later than you are to wait to file the return and make the payment when you can make it. That s good advice. You learn something new everyday. Most people fear, I can t file the return until I can pay what I owe. You re better off. Exactly. It s the difference of 5% interest versus 0.5% interest, which is very interesting that that s not more widely known. 9

10 That s good to know. Everything is electronic now but I think it s fairly common that a lot of people file extensions. We take advantage of the extensions when necessary. It s too stressful in the spring for us with the studio and a lot of things going on. Sometimes, it just can t be done but that s good advice. We have some people listening in. What I love about our teleseminars is they often bring up great questions after people have been listening. Because we re artists and very creative, taxes are sometimes, Oh, I don t want to think about it. I think just taking that one step, is there anything else you want to share before we wrap up that would either give people hope or inspiration about moving forward with their studio s health and finances? I think I touched on this throughout the teleseminar. My biggest thing is being detailed. I think it s absolutely acceptable to be as aggressive as possible without cheating. It s going to help you on your taxes. I know that s icky and you don t want to deal with it but when you start establishing some time slots to sit down and talk to your bookkeeper or look at your numbers monthly, or whatever the case may be, and put it toward goals, it s really going to make a huge difference for you and the growth of your studio. If you want to move into the new building down the street, making that goal linked to what s happening with your income and your expenses is really going to open up the doors to success for you when you re able to see what s really going on by tracking everything as detailed as possible. Great. You are obviously quite an incredible resource for people over at Financial Groove. We re thrilled to have you as one of our contributors. I m sure that the more we can help dance studio owners have success in their business where they can bring dance to people s lives. I would leave it with this. Maybe this has nothing to do with taxes but that whole idea of looking ahead to We have, in the dance world, two new years. We have our new year in the fall, or at least some of our members who are in Australia, this is their year end and their school year end, two new years. I think it s a real gift because we an reset on what we want 2012 to be. Maybe this is the time to plan ahead for an increase in tuition or looking at your registration fee to cover those expenses. All those things that maybe you don t want to wait until it s too late to think about. It s a good thing to take a few moments to plan. Thank you so much for your time. This has been a teleseminar. We look forward to you having success into the New Year. Thanks, Jessica. 10