I was cleaning up my digital files one morning, getting everything in order for another tax season, when she walked in.
Why Mrs. Davis, what an unexpected, er¡ pleasure.
Sorry not to call first, but you know the hair salon game. I had a cancellation, and I thought to myself, Holly, today is the day to get those taxes done. So, here I am. Did I ask you how I looked?
Just as¡ Vibrant as ever? Are you still working over at Hair Dreams?
Oh no. See, I finally got custody of my 10-?©\year old-?©\-?©\Kristina, so I opened up a little shop of my own in the house, so I¡¯d home when she gets home from school.
Excuse me, Mrs. Davis. Let me just pull up your records from last year. And open a new file for this year.
Take your time.
So, what is the name of your new business?
Hair Heaven. obÌåÓý perfect is that?
With your own business now, you must file a Schedule C. obÌåÓý much did you make last year?
Twelve thousand dollars.
And did you bring your records with you?
Records? Um¡ I don¡¯t know what you mean.
Well, for taxes, and to claim the EITC, you must show how much you took in in income, like salon fees and tips.
I have to count my tips? Look, that¡¯s not income, that¡¯s a gra-?©\tuity for good service and my winning personality.
It counts¡ as income. I¡¯ll also need all of your allowable expenses for equipment, supplies, etc. If you didn¡¯t keep careful records, you must reconstruct them to the best of your ability. Otherwise, as an ethical preparer, I cannot do your taxes.
Well, I¡¯m good at construction. Tell me what to do. May I?
Um¡ Sure.
Do you have an appointment book that shows what clients you had each day?
Oh, yes.
Do you give receipts to your customers and keep copies?
Oh yeah.
Good. Do you give receipts to your customers and keep copies?
Well, no. But I put down in my appointment book what they paid in my appointment book. Tips, too.
Good. Do you provide hair color, spray, shampoo, conditioner, etc.
Oh yes, it¡¯s a full-service salon.
Well, these are all allowable expenses. Do you have receipts for purchasing them?
Well, I didn¡¯t save them, no. But Judy down at the beauty supply store, I¡¯m sure she¡¯ll remember what I bought and when. She stores everything on her computer, just like you.
Great. Well, you¡¯ll need to get a complete list. Don¡¯t forget equipment, too. Hairdryers, combs, curling irons, etc.
I used my credit card for everything. Does that count as a record?
Yes, please pull all of your statements for last year. Now tell me, do you have an area in your home set aside just for the salon?
No, I just use the kitchen sink for shampoos and color. Then I style ¡®em up while they have a cup of coffee.
And do you ever go to clients¡¯ homes?
Oh no. They come to me. They like the ambience.
Mrs. Davis, I cannot continue this discussion if you don¡¯t stop¡
All done!
So, when you come back, Mrs. Davis, you¡¯ll need to bring complete records as we¡¯ve discussed today. Be sure to total all of your income, including tips. All of your expenses. Bring all of your credit card statements, or a complete record of purchases from the beauty supply store.
This is gonna take some time.
Yes, so it¡¯s good you¡¯re starting early. Once we get this year squared away, I¡¯ll show you how to keep proper records from now on.
Mrs. Davis? You look so¡
Organized. It¡¯s my new thing. I went through every page of my appointment book and totaled up all my fees and tips. I also calculated how much hair color and other supplies I used based on the number of appointments and types of service I did.
Excellent.
Then I cross referenced my credit card receipts for supplies with the printout the supply store gave me, just to make sure my estimates from the book were accurate.
This looks very thorough. And nice summary sheets.
Why, thank you. So, will I get the EITC? obÌåÓý much will it be?
Well, according to these figures¡. you made $10,500 from services and tips last year¡. with expenses¡of¡$1,900.
That¡¯s a net income of $8,600. And yes, you do qualify for the EITC. Although not as much as last year¡¯s.
I was hoping for more money.
But this is what you rightfully should get based on actual records. Records that you can back up in case the IRS ever audits your return.
You know, this organizing thing is giving me ideas. I¡¯ll see you next year.