Welcome to Curious Business
Every Friday, I post a small insight into running Curio City and/or Blue Hills Editorial Services. My most recent posts are directly below. You can also start with the first post, or use the subject labels to the right to home in on particular topics. Feel free to comment on anything that interests you.
Friday, July 03, 2015
Profits of Doom
At the end of last year, Quickbooks showed Kraken Enterprises sitting on a nice, genteel $800 loss. That meant no bonus for me and, more importantly, no corporate income to tax on our personal return.* But some accounting hocus-pocus changed that ending balance into a massive $1,762 profit. As nearly as I can figure out -- even a picayune little business like Kraken Enterprises has Byzantine tax returns -- my inventory ended the year $2,500 higher than it started out. Or maybe I sold $2,500 worth of stuff before I paid for it. I don't know. For some actuarially sound yet impenetrable reason, an accounting adjustment reduced my COGS and thereby increased my income by $2,500 without the benefit of having 2,500 more dollars.
By that reckoning, Curio City should have paid me $264 to cover the tax bill (15% of $1,762), plus a $1,123 performance bonus (75% of the remaining profit). But that accounting technicality didn't conjure 1,387 actual dollars out of thin air. Imagine how much louder I'd be bitching about cash flow if I'd given myself a huge payout last year.
Anyway, my store was technically profitable last year. That's supposed to be a good thing, right? Capitalism fetishizes profits.** I paid my CPA's fee and still managed to squeak out last month's Mastercard bill. To cover those two huge outlays, I had to postpone last Monday's payday for what I thought would be a day or two; unfortunately, another damnable holiday lull is turning this into the second-worst week of the year. I'm only short by $150, but with sales averaging just $45 per day I might have to forgo this paycheck entirely.
Neither of my bulk golf ball customers came through, obviously. I never expect those inquiries to pan out, but I always hope that they might.
I won't go into how we got reamed on our personal tax returns because Kraken's unexpected profit was only a fraction of the problem. I had to mail Uncle Sam nearly $3,000 (that's real money, not company money) on June 15 and he expects $2,100 more by the end of the year; I had only budgeted $1,600 for our property taxes. I should get most of those federal outlays back next year since Anne's not earning 1099 income anymore...but I was already stretching to cover the two vacations and house painting that we're locked into. $5,100 in taxes and $800 in emergency dental work...well, I don't know where that's going to come from. The home equity line, if worse comes to worst.
On the plus side, I'm optimistic that Curio City will lose money this year and deliver the healthy tax deduction that was snatched away last year. I need either that or a significant profit payout, and the latter sure doesn't look likely.
* S corporations don't pay income taxes. Instead they pass their results through to their shareholders. A profit creates K-1 income that's taxed at the recipient's normal rate (without any employment taxes). A loss gives the shareholders a nice little deduction. So a profit is only welcome if it comes with more than enough money to pay the tax.
** Did you know that Amazon has never had an operating profit? True story. You don't need to actually make money while your cash flow grows fast enough to pay everybody -- the same classic pyramid scheme that Barnes & Noble used to destroy the independent bookstore industry. Only when the expansion stops do your stores need to pay their own way. Unlike B&N, Amazon can theoretically keep growing forever.