11 May 2017
In early March I received some shocking news from our accountant: My company’s tax payment for 2016 totaled nearly all of our current cash flow. Suddenly, hundreds of thousands of dollars we needed for manufacturing costs were being funneled into checks to the federal and state governments.
It sucked. Big time.
So last week I met with my accountant to see what we could do to avoid another surprise next year. I thought I’d share what I learned with you so you don’t make the same mistake I did.
Stonemaier LLC uses the accrual method of accounting to calculate our taxes. This means that for tax purposes, all expenses and revenue count in the year that we ship the product to customers.
You may recall that Stonemaier raised $1.8 million on Scythe’s Kickstarter in November 2015. We also spent a significant amount of money in 2015 to begin production of Scythe (we pay 50% of manufacturing costs up front and 50% upon delivery). But that revenue and expenses didn’t count towards our tax calculation in 2015 because we didn’t ship Scythe to backers until mid-2016.
Flash forward to the end of 2016. We had a good year, with various products being manufactured and shipped within the same year. In December, we began production on 30,000 copies of Scythe (the 6th print run). This was a significant investment, and while our cash flow took a hit from it, it was still pretty robust.
That’s when I heard the news from my accountant.
I can trace the issue back to a decision I made in early 2016. It was then that my accountant asked me how I wanted to estimate my quarterly earnings for tax estimates. There are two ways to do this: (1) use the previous year’s tax return or (b) use projections for the current year. I chose the former, opting to pay lower quarterly estimates so we’d have more liquid cash.
So really, I shouldn’t have been as surprised to owe so much when our total 2016 taxes were calculated. (I do our monthly bookkeeping based on cash flow, not the accrual method.)
However, I learned something from this mistake: You don’t have to calculate all 4 of your quarterly tax estimates at the beginning of the year. Rather, you (or, more likely, your accountant) can do this each quarter. So if you have high expenses or low sales in the first quarter, you don’t have to give up what little cash you have remaining to pay your quarterly estimate.
This method will be particularly helpful at the end of the year. If at that time we had a clearer picture of our 2016 outlook, we could have potentially made some purchases in December to decrease our net earnings. Of course, as my accountant said several times, “You usually don’t want to spend $1.00 to save $0.40.”
Overall, there isn’t much we could have done to reduce our 2016 tax burden. What I could have done, though, was better anticipate the upcoming tax payment and plan accordingly with other investments. For example, while I still would have proceeded with the big print run of Scythe, I may have asked distributors to pay at least part of their commitment up front instead of waiting until they received the product.
Did you learn anything from your 2016 taxes from which other creators may benefit?