The day of reckoning is nigh. Here’s what you need to know before filing your 2012 taxes—and channeling those refund dollars, too.
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With the fifteenth of April rapidly approaching, taxes are bound to be looming large in your mind. Buoy those (sometimes stressful) thoughts by boning up on all the tax breaks and incentives available to you as a spa owner. To help clue you in, DAYSPA grilled some finance whizzes on the best ways to come out on top this tax season.
Taxes 101
The first, and probably most important, point to keep in mind is that your tax situation should not be taken lightly. According to Chris Mann, owner of Woodhouse Day Spa in Cincinnati, keeping a person on staff who is devoted to taxes and bookkeeping is paramount to business success. “I’ve chosen to delegate these responsibilities to people who are as passionate about numbers as I am about the guest experience,” he shares.
Hiring a professional accountant is strongly advised in today’s business environment. After all, your guests seek you for spa and wellness expertise; therefore, you should focus on delivering the best spa experience possible, and turn to an accountant for tax expertise.
“I have a bookkeeper, and I meet with an accountant regularly. He handles our Quickbooks entries, as well as monthly, quarterly and year-end tax filings,” Mann says. “The added expense has been paid for many times over, as we now avoid mistakes and late filing. Besides, tax codes and filing dates are constantly being revised; keeping up with them is a full-time job.”
Monte Zwang, a principal with Wellness Capital Management, emphasizes that before even setting out to find a good accountant, it’s crucial to understand the implications of your business’ setup. Is it a sole proprietorship, S-corporation, LLC (limited liability company), or something else? This distinction will affect the “pass through” on your personal taxes. For example, the owner of a sole proprietorship will pay taxes on their individual tax return, but a corporation is responsible for separate taxes, and all of its paid employees also must pay taxes on their individual returns.
“We’re set up as an S-corporation, which requires a separate tax return and some additional record keeping,” says Mann. “But it allows me to classify some earnings as dividends, which are taxed at a lower rate than standard payroll tax.”
Zwang also recommends using tax-filing time to gain a handle on your profit margin. Look at your costs related to profits. “If all your costs—supplies, products, credit card charges and so forth—make up less than 50% of your margin, you should really evaluate the value you’re offering clients,” he says. “A good target to shoot for is a 30% gross profit margin. In any case, spa owners need to understand how much profitability they have, and use that in purchase decisions.”
Think Before Filing
Here’s a rundown of some other key aspects of your business to take into consideration when filing your 2012 taxes:
Equipment: The American Tax Relief Act of 2012 can be helpful, at least as far as your spa equipment is concerned. Section 179 allows for major deductions of equipment purchased in 2012. And since Congress hurdled past the “fiscal cliff” at the beginning of this year, you can now deduct up to $139,000—that figure used to be capped at $25,000. The limit on capital purchase deductions is $560,000, and you can also take a bonus depreciation of 50% if you bought brand-new, rather than used, equipment.
Keep in mind, operational costs on your equipment and physical space can save you money, too. Julie Knight, vice president of finance and operations with Coho Creative, a Cincinnati-based brand consulting firm, advises owners to “deduct the full expense of all repairs and maintenance expenditures your spa incurred in 2012.” Therefore, it’s important to maintain concise records throughout the year. Keep track of each expense, because even the minor ones can add up.
Leases: The physical space you occupy just might provide you with a tax break! Knight notes that tax savings are available to building owners who lease some space to another entity. “If you can set up a separate LLC for the building, and lease some space to yourself as a tenant and some to another business, you’ll save, because some of your income won’t be subject to some of the taxes associated with self-employment,” she says.
Salaries: Owners who have established their businesses as sole proprietorships pay taxes on their salaries via personal income taxes. But, unfortunately, they’re missing out on a business tax break. If they were set up as an LLC, they could count their own income as a business expense. “As an LLC,” says Knight, “you can allocate your payments to yourself as a salary rather than a draw, so you can expense that as a labor cost.”
A word of caution, however: Don’t forget that when you pay yourself, you’ll owe taxes on that salary. “Always make sure to consider how much you’re going to owe when you pay yourself, and plan ahead for that tax bill, come April,” Mann advises.
Automobile Expenses: Does your business own a vehicle? Do you use your own vehicle for business purposes (for purposes other than commuting to work)? In both cases, this is a deductible expense, and you can take one of two approaches in accounting for it. 1) You could simply tally up the actual expenses of using the vehicle: cost of the auto, insurance, repairs, maintenance, depreciation and so forth. Then, you could deduct those expenses on your tax forms. 2) You could keep track of mileage used for business purposes. (For 2012, the standard mileage rate is 55.5 cents per mile.) Just make sure you’re keeping accurate records if you use your auto for both personal and business trips—personal use of the vehicle is, of course, not tax-deductible.
If You’re a Rookie
If you launched your business in 2012, you’re in luck, as the IRS permits new owners to expense the cost of starting a business. After all, before you even opened your spa’s doors, you harbored costs involving utilities, furniture and office supplies, and marketing your business. Once your spa is up and operating, these are all considered, simply, expenses. But until then, they are capital expenses. Therefore, you can deduct up to $5,000 in your first year. And any costs greater than $5,000 can be spread out in equal amounts over a 15-year period.
Forget-Me-Nots
There are some costs of running your spa that many business owners forget about, come filing time. For example, entertainment and meals associated with your business can be deducted at 50% of their cost. If you purchased business books, or pay dues to a professional association, deduct the full expense of these. The same is true for legal or consultant fees. If your spa has been benefactor to a charity, you may deduct that gift. Incorporated businesses should claim the gift as a charitable contribution, while LLC, partnership, or S-corporation owners should claim such gifts on their individual tax returns.
Finally, if you have a cell phone that is used for your spa, that full cost can be deducted as an expense. See Commonly Overlooked Business Expenses, below, for a longer list of frequently forgotten deductions. And be sure to log some time combing through guidelines on the IRS website before sitting down to do your taxes.
Clearly, preparing your taxes is a complex endeavor. There are subtle and not-so-subtle nuances associated with IRS filings. Our advice? First, arm yourself with basic knowledge about tax preparation, but then enlist the help of a tax pro. Leave the nitty-gritty aspects to those whose focus and expertise lies in this particular area.?You’re already busy enough running your spa, developing new services, managing staff, marketing, and ensuring that your guests receive a spa experience like none other.
And, should you find yourself sitting on a pile of tax refunds at April’s end, our experts advise re-investing that boon in your spa guests. “I’ll buy them gifts, or issue loyal clients ‘thank-you’ gift cards,” Mann says. “It reduces our profit, but ensures repeat business for the next year. And frankly, it just feels good to thank those who are largely responsible for our success.”
Commonly Overlooked Business Expenses
Behold the many deductions that spa owners typically fail to recognize, come tax time. Whether you prepare your own taxes or outsource the task, use this as a checklist to ensure you garner each and every available deduction:
• Bank service charges
• Books, videos, and magazine subscriptions related to your business
• Business gifts
• Business travel (taxi, parking fees, tips,
shuttles, etc.)
• Cleaning supplies
• Clothing required for work purposes
• Consultants and trainers
• Food, drinks, and snacks provided for employee or guest use
• Insurance premiums
• Legal fees
• Office supplies
• Petty cash
• Postage
• Professional association dues
• Tax preparation fees
• Trade shows, conferences, and similar events
Steve Austin Stovall, Ph.D., is a professor of management at Wilmington College in Wilmington, Ohio. He is also a writer and consultant on management and marketing.
