QUESTIONS?

A: Only if you are reporting your business income and expenses strictly on the Cash Method of accounting. The Cash Method isn’t really correct for you to be using, anyway, so here’s a good reason to straighten out this aspect of your accounting. Businesses in which the sale of inventory is a "material income producing factor" are supposed to be tracking the cost of their inventory and doing a Cost of Goods Sold calculation on the back of their Schedule C form.

AND if you’re doing that, you are really supposed to be doing at least that part of your reporting on an Accrual Method of accounting. This means that as of the close of your tax year (12/31) you will include in the year’s income the total selling price of everything which was sold and delivered in that year whether or not you’ve received full payment. You would also be counting as purchases everything that has been delivered to you, even if you still owe for some.

Therefore, using this accrual method, the deposit would NOT be included in your income since it does not represent a sale completed in the year. Record it in a Balance Sheet account called "Deposits Received" and be sure to add it into income the next year when you deliver your work.

A: Freight-in is the transportation cost of getting your raw materials to your studio. This cost needs to be included with your Purchases. When costing out your ending inventory each year, you should be including the freight-in costs properly allocable to the goods still on hand.

Freight-out is the cost of shipping finished goods out to your customers. Since it is associated with items already sold, you need to show this as an expense each year. Be careful not to confuse it with freight-in!

The freight-in associated with goods still in your inventory at year-end will not be included in your Cost of Goods Sold deduction (since it is still on hand) and you will not be having a deduction for it until the year the goods are sold. On the other hand, the freight-out will be deducted each year as it is paid (or accrued, if you are on the full accrual method).

If you used the mileage rate in the first year, however, and were just using the actual method and depreciating the car in later years, you certainly CAN switch back and forth from year to year. You are free to use the method that gives you the best deduction each year!

Because of this rule, I urge my clients to seriously consider starting with the standard mileage rate when they first claim business use on a car (even if it’s not the absolutely highest deduction amount). If you’re purchasing a vehicle soon and aren’t sure which method will ultimately be best, I suggest you complete the purchase shortly before year-end and put some business miles on it this year. You can then claim the mileage rate in 1996 and leave all your options open for future years. Any difference in this first year of minimal usage will be small.

A: Of course the basic rule is that since your clothing is personal then it would not be deductible as a business expense. There’s a wonderful landmark case about a woman who works in a high-fashion clothing boutique in Manhattan. She was expected to dress in a similar high style when she came to work. She claimed the cost of her clothing as employee business deductions because she felt the high cost was a requirement of her job and the clothing was not personal because she would never wear those clothes anywhere else. IRS and the courts denied her the deduction principally because the clothing COULD be worn elsewhere, whether or not she chose to wear them.

What does this leave us? UNIFORMS! The words they use are: "not adaptable for general wear". If you wear blue-jeans in your pottery studio, for instance, that wear out quickly due to abrasion with the clay, you will be able to deduct their cost if: 1) you wear them only for work and 2) they are identified as related to your business in such an obvious way that the courts would consider them "not adaptable for general wear". Generally, this merely means having the name of your business permanently attached (perhaps embroidered?) to the clothing.

Once you have uniforms, then the cost of laundering and maintaining the uniforms is also allowed as a business expense. Will you be able to separately launder your business jeans and T-shirts or work-shirts? Perhaps you will be able to estimate the laundry costs. Think about it!

I’ll mention also that special items you need for safety such as work boots, special gloves or goggles would also be deductible... even without the embroidered business name!