QUESTION ON PAYING RETAIL TAXES

Dear Larry,

I have a one chair salon in my home and I sold $3000.00 in retail last year. Last year I paid the taxes on the retail and backbar when I bought the products. My question is- Should I continue to buy my products this way or should I do the tax defered and pay it at the end of the year? I already have an id # I just haven't known which way I should pay it. I'm new at owning a salon so any advice would be greatly appreciated. Thank you for your time.

Janet

Janet, I received your note regarding retail. Although sales tax laws vary from state to state, and I’m not sure what state you are in, let me give you an overview.

The way I understand it, you are paying your distributor sales tax and then you are turning around and reselling those items. The problem you have is that you are paying sales tax on your costs but not on your sales price.

For example:

If your sales tax rate is 5% and you sold $3,000 worth of items, I would assume the cost of those items was $1,500. If that is the case, then you are probably paying $75 worth of sales tax. When you made the sale of those items for $3,000, you should have received and paid sales tax of $150. In my example, you are beating the state out of $75 of sales tax.

What you need to do is to discontinue paying sales tax on purchase of the retail products, and then charge sales tax on those products when you sell them. Based on the number of sales you have, I would presume that in your state you are not required to file sales tax reports monthly, but rather can file a report at the end of the year. This will save you a lot of paperwork.

The sales tax reports aren’t too difficult. If you need some help with the first sales tax report, you can contact Amanda Hansen from our office at ahansen@kopsaotte.com. She will direct you to the right person who will walk you through the first sales tax report. While I am always upfront about fees, there is a fee for this. The fee for us to do this is $50. Once we get you through the first report, you should be able to do them on your own.

On another item, so I don’t confuse you, you do need to pay sales tax on backbar items you purchase from your distributor. Normally, a distributor will give you two bills, one for backbar items, and one for retail items purchased for resale.

If you have any questions, please let me know.

Larry Kopsa CPA

P&G TO ACQUIRE FEKKAI HAIR CARE

I'm not sure if you knew this, but the Cincinnati-based Procter & Gamble Co. is acquiring the New York-based Frederic Fekkai & Co., which includes high-end hair care products and salons.

According to the Associated Press, the terms of the acquisition from private equity firm Catterton Partners weren't disclosed. The deal is part of P&G's focus on building its high-margin, fast-growing beauty business.

The purchase would add to P&G's line of upscale beauty products that includes SK-II skin care and Hugo Boss fragrances.

HERE IS THE ISSUE THAT I WISH THE PRESIDENTIAL CANIDATES WOULD ADDRESS

(CQ Today) -- The long-term financial outlook for Social Security and Medicare remained grim but essentially unchanged in 2007, trustees for the two huge entitlements said Tuesday. They warned again that Congress should act soon to shore up the programs, advice that lawmakers will probably ignore. The trustees, in their annual report on the two programs, issued a “Medicare funding warning” for the third year in a row, which will require the next president to propose legislation to cut the share of Medicare costs borne by the government. President Bush this year sent Congress the first such proposal, although Democrats who control both chambers are not expected to act on his legislation. The trustees said in their report that Social Security’s trust funds will become insolvent by 2041, while Medicare’s hospital insurance trust fund will hit that point in 2019. Both dates are the same as those predicted last year. When the Social Security trust funds exhaust their reserves, by law benefits would have to be cut to match annual program revenues. There is no such legal requirement for the the Medicare fund, so the government could react to its insolvency simply by borrowing from the treasury to cover shortfalls. Medicare Part A, which is funded by the hospital insurance trust fund, is projected to begin paying more in benefits than it collects from payroll taxes this year.

UNDERSTANDING SMALL BUSINESS TAX DEDUCTIONS

Shortcuts asked that I write the following article for their Evolve Newsletter. If you would like to subscribe to Shortcuts you may visit: www.shortcuts.net.

"Understanding Small Business Tax Deductions" is also accessible on our website at www.kopsaotte.com. Select the salon division and then click forms and publications; or click here for immediate access: Understanding Small Business Tax Deductions

BEWARE - A CLIENT WANTS TO STEAL FROM THE IRS

Lesson... always make your payroll deposits.

I just received a call from a client that told me that she was really short of cash and was not going to make her payroll deposit. I warned the owner that the penalties for not making timely deposits was really harsh. The penalty for even being a few days late is over 25%. On $18,000 not paid in, the penalty can easily be a whooping $4,500 even if it's just a few days late.

She said that this was not fair. I think the comment was, "the Soprano's don't even charge that much." Actually, in the eyes of the IRS, the payroll withholding is not really the owner's money but actually money that you have collected for the IRS; and you are in a "trust" position to give them what is theirs. In other words, it is like you stole their money.

Here is a case that shows what can happen. Click on the name of the case if you are interested in the details.

In other words... always deposit your payroll taxes timely.

Several people can owe a penalty for not depositing payroll taxes with IRS, a court says. A trucking company's CEO was personally liable for the undeposited taxes because he knew that the IRS wasn't being paid and the taxes were being used to pay creditors. The firms' treasurer was also held accountable because he wrote checks to other creditors using the withheld payroll taxes (Horovitz, D.C., Pa.). The IRS can collect the penalty from either person. The penalty is equal to the amount of tax not turned over to the Service. However, if someone who isn't primarily responsible for not depositing the tax pays a disproportionate amount of the penalty, that person can sue in federal court to recover from the other accountable party.

TAKE ADVANTAGE OF THE TAX LAWS

Do Tax Law Changes Drive You Up A Wall?

Are you aware of the latest changes in the constantly shifting tax laws? Do you know how they affect you? As April 15 approaches, do you feel you're paying more than your fair share of income tax? At Kopsa Otte CPA’s, we help clients just like you take advantage of the tax laws to pay the least tax today. And we can give you a plan to pay less tomorrow.

We've been preparing taxes for over 35 years, so we have the experience and knowledge to help you. You may think that taxes are a once-a-year chore. But at Kopsa Otte, we know the "secret" to paying less is a personalized, proactive year-round plan.

Call now to find out how to receive an analysis. We'll do more than just prepare your return. We'll find the mistakes and missed opportunities that may be costing you thousands, then give you a plan for eliminating them forever!

Kopsa Otte

800.975.4829

ahansen@kopsaotte.com

TEN SALON TAX DEDUCTIONS FOR 2008

I thought you might be interested in the following article that I wrote for Behind The Chair.com. Check out their website at http://www.behindthechair.com/, or link directly to the article at Ten Salon Tax Deductions for 2008.