Another Crappy Year Is Over

2017 was one of the worst years ever on so many levels. I've already said that Curio City had its worst December by a large margin: I only booked $1,690, compared to LY's previous record low of $4,637. For perspective, December 2008, when I was at the top of my game, brought in $16,163 -- 10 times what I made this year. 

Remember that the following numbers include Blue Hills, and the payroll line includes a couple of checks that went to my wife. I won't have "clean" Curio City numbers again until February.

December

Total income: -64.1%
Payroll: +37.6%

Marketing: -62.8%
Net Income (Profit) vs LY: -206.3% (-$1,585)

Actual Profit/Loss: -$816

2017 (Almost) Final

Total income: +41.9%
Total COGS: +2.3%
Payroll: +218.9%

Marketing: -44.2%
Net Income (Profit) vs LY: +258.4% (+$4,784)

Actual Profit/Loss: +$2,934

Annual sales were down by 5% from last year; that's my sixth consecutive decline. 

Profit is a bad thing at tax time, so I'm glad that fell from last month. Technically, Kraken owes me that bottom-line number, which is going to add roughly $735 in federal and state taxes to my personal 1040. In reality, Kraken can't really afford to pay even the anticipated taxes. I insist that it do so anyway...so I just transferred $800 from the company to myself a few moments ago in the guise of a "shareholder loan repayment", which is somehow preferable to a "shareholder distribution". I don't know why. Kraken still owes me $12,625 of the roughly $21,000 that I put into it in 2005.  

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Speaking of taxes (again)...I still don't know if Kraken Enterprises is, legally speaking, a pass-through entity in the eyes of the IRS. Logically, of course it is; each year's profit or loss goes onto my personal 1040. But tax policy is only ever accidentally logical. This story only sowed more doubt: 

The new pass-through provision is designed chiefly to aid capital-intensive companies, like a factory or a bakery, while excluding certain service industries such as accounting and medicine. But for some kinds of solo workers it could mean savings of hundreds or thousands of dollars, if they incorporate as a pass-through business. 

Details of exactly who might be able to claim these lower rates are still a bit unclear, even to specialists, and probably will be hashed out over the coming months as tax advisers and their clients test the limits of what qualifies as business income. 

Curio City could arguably be considered capital-intensive, since 80% of its revenue covers costs. Blue Hills, OTOH, is a service business with very little overhead. I might have to keep Curio City alive indefinitely just so that Blue Hills can qualify for the pass-through rules. But who knows? Not the experts, apparently. I'm sure I'll get a memo.

Massachusetts considers me a pass-through, but I'm exempt from withholding because all of my stockholders (me) are Massholes. I'm supposed to issue myself a form stating that that's true every January. Anarchist that I am, I don't.

I had wanted to file my tax returns early, but I spent most of this week fighting my dying laptop. Its performance started degrading a couple of weeks ago, and by yesterday it was all but unusable. All I'll say about that is that CHKDSK may be >30 years old, but it still saved my bacon. I had really feared that I would have to rebuild Kraken Enterprises from the ground up on a new machine, but now I'm tentatively confident that I can keep this three-year-old Dell going for another year.

(For some reason, I can't upload any images to Imgur via any method today and I've wasted way too much time trying. Today's hotlinked pic might not work.

Only the Little People Pay Taxes

The last time I looked into the tax bill that Republicans were still jury-rigging through Congress, I was among those whose taxes will probably go up because we are losing the home office deduction. For years, that has sheltered most of my wife's teaching income. I  learned a few days ago that we can't deduct the interest on the home equity line of credit that replaced our mortgage several years ago, either, so that's another big hit. Between those two things, we almost surely can't itemize anymore. (If that's true, I'll save a few hundred bucks by buying TurboTax instead of hiring a CPA, so...silver lining?)  

Now that the corporate bonanza is almost law, I'm sure you're wondering how it affects Kraken Enterprises, so I ran some numbers to see if being a corporation and a small business owner might offset those losses. As an S corporation, Kraken's profit or loss goes on our personal 1040 as non-wage income. For the past several years Kraken delivered a nice, fat loss that gave us a nice, fat deduction, but this year it's going to show a  profit. I think that passing its profit through to its only shareholder makes Kraken a pass-through entity, although I'm still a little hazy on that definition. Massachusetts has a special tax form for pass-throughs that I determined a few years ago doesn't apply to me, although I can't remember why. If Kraken is a pass-through, then 20% of the profit should be excluded from taxation. 

The first draft of this post was dense with numbers working through different scenarios. Mercifully for you, I just deleted two pages of that and skipped to the conclusion: Kraken doesn't make enough money for the new rates to have much effect. Kraken's profit this year (actually Blue Hills' profit tempered by Curio City's loss, but the IRS only sees Kraken, not its operating companies) is going to be around $5,000. That means $1,000 of that should be non-taxable. A $1,000 exclusion is nowhere near what the home office and HELOC deductions were worth.

If I reduce my Blue Hills paychecks from 90% of income to 75% next year, thereby exchanging some salary for profit, I will pay less payroll tax throughout the year and get a bigger K-1 payout at year's end (and hence a larger exclusion). But Kraken would need to make at least 10 times as much money as it does, or cut payroll to a tiny fraction of income, to come anywhere near offsetting the deductions that we're losing...and I can't realistically survive on smaller paychecks while I wait for that year-end payout.  


In other words, the new tax regime was written to benefit bigger businesses and richer people. Surprise! But accountants and lawyers are just beginning to find new loopholes, so it might ultimately be a matter of just learning some new gimmicks. For example, if we could somehow change my wife's W-2 teaching income into 1099 income, and funnel that through Blue Hills, we'd be golden. I can't imagine the universities who employ her going along with that, but over the next few years we'll surely learn all kinds of new legal fictions to game the system. Maybe the corporation can pay some of the expenses, such as a percentage of our utility bills, that used to go into the home office deduction. 

With a little political luck maybe this train wreck will be cleared before it forces us all to change tracks.   

Taxing Circumstances

Seven orders awaited my ministrations on Tuesday morning. Seven would be fine and dandy if they were $100 orders, or even $50 orders. It's considerably less dandy when they're all $10-15 orders, and that pattern held up all week. When last I checked*, this week stood at 32 orders (fair) worth just $375 (awful). Small orders usually indicate that people are done with their Christmas shopping and down to filling in gaps. It seems early for that, but I don't celebrate holidays myself and I don't know much about how ordinary people do. Television leads me to believe that they're furiously buying up smartphones, cars, and prescription drugs.

As I merrily marked down most of my old stock, I forgot a lesson that I'd learned years ago: bargain hunters are also bottom feeders. They won't load up big boxes of low-priced goods; they're just going to buy one thing, and they're probably going to complain about it. Now that almost everything I sell has been reduced to $15 or less, the tiny average order should not surprise me.

*I said "when last I checked" because I couldn't update that this morning. My website is down. Remember how I downgraded my IP address from dedicated to shared? Turns out that my Sunshop license is keyed to my IP -- Turnkey has to update that to get me back online. Ticket opened; waiting for response....

My IP address changed on 12/2 and my license renewed on 11/29, so I have no idea why it waited until 12/8 to fail. It's always something.

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The constant stream of bad news out of Washington probably isn't affecting sales; the tax debacle won't take effect until next year, it's mostly benign in the beginning, and nobody really understands it yet anyway. From what I can tell, the initial damage will hit home businesses, 1099 income, and the working poor.

We're going to lose our home office deduction and a lot of related Schedule C expenses related to my wife's teaching jobs. Curio City and Blue Hills should be okay because they're under Kraken Enterprises. As I understand it, corporations can still deduct most of the costs of doing business -- only individual small businesses are getting reamed. I don't understand the "pass-through entities" provisions yet. As an S corporation, Kraken's profit goes onto our personal 1040 and gets taxed as ordinary income (albeit without payroll taxes), so I guess that makes me a pass-through. That might turn out to be a reason to keep Kraken going even if I kill Curio. But my understanding is that the new tax system was written primarily to benefit C corps, so I honestly have no idea. 

I do know that losing the deductions for state income tax, charitable contributions, medical expenses, tax preparation, and especially Anne's home business expenses is going to hurt us, and probably everybody else who runs a home business. I'm tentatively expecting a modest tax increase next year. Buying TurboTax instead of hiring a CPA to do our personal returns will save a few hundred bucks, so maybe that will neutralize the tax hike for the first year or two.   

The damage to the economy stemming from middle-class tax increases should be two to three years out -- I think I read that the tax hikes snowball in 2021, conveniently after the next presidential election -- so it shouldn't be depressing sales this Christmas except insofar as uncertainty is always bad for business. In fact, holiday sales will probably be robust as people mistake the stock market's performance for the economy.

The middle class has been stagnant or shrinking since the Reagan administration; the Republicans are merely accelerating a decline that they set in motion in the 1980s.

It's definitely a good time to get out of retail, though. Retail depends on middle-class spending. Billionaires aren't going to use their newfound millions to buy more of my stuff. 

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Minor milestone: I passed order number 115000. That means that 15,000 transactions have gone through Sunshop over the past 12 years. Some of those were tests and some were canceled orders, so the number of actual sales is something lower (QuickBooks is on order 14,685, and even that number isn't entirely accurate).

Taxing Decisions

Anne's lifetime of credentials and contacts landed another Blue Hills job in my lap: Editing a 60,000-word young-adult novel. The flat rate that we're charging is lower than I would have liked because Anne works a lot faster than I do. She figured it would have taken her 35 hours; it looks closer to 60 to me. But it will still work out to around $18/hour even at my pokey pace, and that's 10 times what I make working for Curio City. The client is a home-based publisher, so there could be more jobs ahead. Editing fiction is an interesting challenge. English clearly isn't the author's first language, so I'm struggling to correct her grammar without unduly Anglicizing and changing her voice, or introducing words too advanced for youngsters. I hope that she'll be satisfied with the result. She's going to get back a better book. Turning it into a good book would require at least twice as much of my time and the result would barely be recognizable...so she's not getting that.

Curio City is mostly a distraction nowadays. It won't even provide most of my income this year, and it's way too needy. I still need it, too, and thinking about the process of shutting down saddens me. But I begrudge it my time. I have even started thinking of orders as an imposition.     

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Without getting too specific, each new Blue Hills assignment has tax implications. You are required to issue a 1099 to any individual, partnership, or LLC to whom you pay $600 or more in a year; the internet tells me that payments to corporations don't carry this requirement (which might be a good argument for keeping Kraken around after Curio City closes). A check made out to Kraken Enterprises or Blue Hills Editorial goes through QuickBooks and my Blue Hills bank account and comes out as payroll, so the IRS gets its share. If that same client writes the check to me or to Anne personally, I could gamble that s/he will not ask for a W-9 or issue a 1099-MISC, making the unreported money unofficially tax-free. In that case it won't show up as Blue Hills income or contribute to my Blue Hills salary, and that offends my bookkeeping sensibilities. Worse: If the client realizes his/her accounting obligation and requests a W-9 at the end of the year, that income is suddenly official and taxable, and since I didn't withhold and submit the appropriate taxes in the quarter received I risk interest and penalties for late payment (assuming that I can even scrape together the amount due next April). Escrowing the tax portion off the books would cover that contingency, but that's both messy and shady. 

Will an individual or corporation be paying me? Will they pay me more than $600 a year? Will they make a single payment, or several small ones? Will they ask for a W-9? Will they mail a check, use PayPal, or transfer bank-to-bank by ACH? Will they issue a 1099-MISC to Blue Hills (i.e., report it to the IRS), even though Kraken Enterprises is a corporation? Should I ask that their check be made to myself (or my wife), to Blue Hills, or to Kraken? And, finally, will they follow those instructions properly or not? 

Untaxed income is, of course, worth 15 to 25 percent more than taxed income, and that could add up. The odds that little low-profile Kraken Enterprises will ever be audited by the overworked and underfunded IRS are comfortably close to zero, so the risks are low. But because I'm an honest and risk-averse person, I intend to stay clean unless I'm very confident that the client won't hit the $600 trigger and/or won't report the payment. I'm also more inclined to keep the income under the table if the client was undercharged.

Incidentally, I did NOT just admit to tax fraud. Philosophically, I believe that taxes are the price we pay for civilization, and (being fond of civilization) I always pay my fair share. Corporations and wealthy Americans are chronically undertaxed for the level of services we demand. So far all of my clients have been companies whose paperwork is in order. Sooner or later, though, a handwritten check with my name on it is going to be tempting.  

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Speaking of escrow: The bank problem that I wrote about in my last post week turned out to be more complicated than I had thought. I ended up having to phone CapitalOne after they sent an email to the wrong address. Long story short...they needed to officially locate Kraken Enterprises at my home address because the stupid PATRIOT Act won't allow a business to locate at a drop box. Apparently I could be laundering terrorist money, or something. It took me a couple of hours to figure out and supply exactly what they needed. Then it took another week for them to officially open the account, and another several days for me to link it to the proper checking account. But I think it's finally up and running, FWIW.

Meet the New Code, Same As the Old Code

Microsoft AdCenter, a.k.a. Bing Ads (formerly Yahoo), is identical to Google AdWords in every way except cost and effectiveness. Bing's keywords are slightly cheaper because there's less bidding competition, but since I get fewer conversions each one costs a little more than a Google conversion. Consequently I only turn on my Bing ads when search traffic is abnormally high, as before a major holiday, and then I turn them off again when the holiday passes. They have been dormant since Christmas.

A Bing representative told me in a phone consultation a few weeks ago that they had changed their tracking code. If the old code had stopped working while my ads were running last December I might have missed some conversions that would have improved Bing's performance statistics. The new script is harder to implement than the old one and I didn't get the help that I needed from Turnkey's forums until this week, but it's finally in place and I didn't break anything. I turned my Switchables ads back on in hopes of getting a conversion or two to verify that it's really working. (Switchables are the only thing that's selling right now.) But after racking up $12 worth of clicks with no reported conversions, I decided that the test was getting too expensive and pulled the plug again. I'll take Microsoft's word that the code is working.

Now I can explore some of the other things we talked about.  Their new "shopping campaign" is so identical to Google Shopping that it accepts the same product feed; since that's my most profitable section of Google, it's worth trying on Bing. I'm going to try to set that up this afternoon. I'm not sure what "native ads" might be but I wrote that down twice, so I need to find out why. I probably won't do "remarketing" at all because it's just too creepy. "Remarketing" makes a company's ads follow you around the Internet and re-display whenever you go to a related website. It's said to be very effective, but it's too much like stalking so I won't do it. I don't need more ways to spend money anyway. As you know if you've been following along, buying more advertising is the last thing I want to do unless it's more cost-effective than it used to be...and it's going to cost me some money to find out.

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I finally paid my CPA and cleared the tax hurdle for another year. I hate to say it, because he's been my accountant from the beginning and he does fine work...but I don't think I can afford him anymore. His fee has gradually crept up even as my revenue has crept slowly downward over the years. Much as I'd rather not, I'm going to have to shop around next year. I strongly suspect that I could find someone to prepare the return for my little nanobusiness for half of what I'm paying now and the savings would go directly to my bottom line. 

Now I can start whittling down debt. I don't expect to claw my way back up to zero until July. 

March 2015 was the third-best March in my 10-year history, and this week was the high point of that strong month. This year March is running on the weak side of average and this week was weak. Adding this week's expected shortfall to last week's sets me back by $1,000 versus LY in just two weeks. And the week after next sets another high bar. It will take an Easter miracle to keep March's numbers from bleeding copious red ink...and miracles only happen in fairy tales.   

Google Ate My Profit (with Bonus February Revision)

My tax return officially closed 2015 with a nice $2,465 loss (versus the $3,227 loss in the raw numbers). What's nice about a loss? Since S Corporations really are people, my friend, it gets deducted from income on my personal 1040. Profit/loss is mostly an accounting technicality -- functionally speaking, it's all about cash flow -- and at tax time I'd rather get a fat deduction than a fictional boost to income with no corresponding payout, as happened last year. 
 
What good are profits, apart from being a capitalist fetish? A business that consistently loses money year after year can't eke out a positive cash flow and will eventually starve to death -- unless it's a chain that can grow cash by opening new locations. Chains need to be profitable by the time they run out of expansion potential, but that's a secondary concern while they're growing aggressively. And, like losses, profits belong to the shareholders (me). If the company has enough cash to distribute its profit then I get a fat check at the end of the year and a correspondingly higher tax bill. If the payout is big enough to cover the taxes due, I break even. If Kraken Enterprises can actually give me more than enough to cover the tax, that's...well, profitable. But it's been several years since that happened. If it can't afford to pay me the profit, I much prefer the deduction.

Every year Kraken Enterprises owes $456 to the Mass. DOR and $109 to the Secretary of State, regardless of profit or loss. The tax return mainly determines Curio City's impact on our personal taxes.

So where did I lose $2,465 this year? That's easy. Sales were down by $1,200 and Cost of Goods Sold was up by $1,812, of which $1,764 was advertising. I can't blame Google for the sales decrease, but they snarfed down nearly every dollar of the COGS increase.

That's what makes this year's goal so simple: Maintain sales at last year's level (halt the slide) and restore profitability (cut advertising).
  
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The last day and a half of February were unexpectedly strong. After last week's public hand-wringing, I figured I should show the revised monthly numbers. Beating LY by $11.80 is consistent with my goal for the year.  

February

Total income: +0.5%
Total COGS: +0.9%
Payroll: -21.2%

Marketing: -4.8%
Net Income (Profit) vs LY: +14.5% (+$13)

Actual Profit/Loss: -$74

Advertising was down, sales were up. That's a win. It's going to be much harder to do that in March. To stay on track, I needed week one to be a little better than average and week two to be much better than average. Barring another unexpectedly strong finish, week one will be on the low side of average, so now week two has to be downright stellar...and I'm not going to crank my advertising back into high gear.