The weather's getting colder — a sure sign that it's time
to prepare your company for the close of the financial year.
Ideally, you've been keeping up with at least some of the
paperwork this involves all along — but if not, there's
Too many contractors put off thinking about taxes until April,
only to find they made an accounting mistake and don't have the
funds they need to pay the government. You can avoid this
situation by taking certain steps before the year is out.
Haven't kept up with your paperwork?
There's still time.
Fix Your Financial
If you're like most contractors, creating and reviewing
financial statements is low on your list of priorities. But the
IRS requires this information; you'll have to produce it sooner
or later. If you prepare it soon enough, you can use it to
manage your finances and, quite possibly, legally defer tax
payments to a later year.
It all boils down to knowing whether or not you're making a
profit, and if you are, how much. So you should begin by
updating your financial statements and making sure that
everything is correct.
Checking accounts. I had a client who
accidentally entered the same $15,000 deposit twice in his
check ledger. Since he reconciled his checking account only
once or twice a year, it was some time before he caught the
error. As a result, his income statement showed $15,000 too
He was in a 35 percent tax bracket, so he ended up paying
$5,250 in taxes on income that didn't exist. He eventually got
this money back — but until then, the government had it,
Accounts receivable. If you keep your books on an
accrual basis, it's important to review your accounts
receivable and make sure those amounts are actually
If you are not going to get paid for an invoice, write it off.
That way, at least you won't have to pay taxes on money you'll
Accounts payable. I've seen many A/P
lists with lots of old bills on them. Frequently the money is
no longer due, because either the amount was accidentally
entered twice or the bill was already paid (though not properly
If you have old bills in A/P, clear them out so that you can
correct your income statement. Just be aware that if you write
off an old accounts-payable bill, you will have fewer expenses
and more net profit — and therefore more taxes to
Meet With Your CPA or Tax
Be sure to meet with your accountant or tax preparer no later
than the middle of December. Together you should forecast your
costs and income for the rest of the year and estimate your net
income or taxable profit for the entire year. At that point you
can ask your tax preparer what you can do to minimize your tax
liability or defer all or part of it to a later year.
The taxes you defer will eventually have to be paid, but for
most contractors it's better to have the money now to use in
the business than it is to give it to the government any sooner
Depreciation. Most contractors don't track
depreciation throughout the year, even though the current
year's depreciation can affect the amount of taxes they have to
Ask your tax preparer to estimate how much depreciation you can
write off this year, because it will be a factor in projecting
your net taxable profit.
Time Your Purchases Correctly
You shouldn't buy things just to get deductions, but if there
is something you really do need to buy, there may be some tax
advantage in timing its purchase.
If your tax preparer knows what your income is likely to be, he
or she will be able to tell you whether it makes more financial
sense to make purchases before or after the end of the
This applies to all kinds of purchases. Perhaps you need to
replace your truck or the office computers. Or maybe your
trucks and equipment are due for an overhaul or major repairs.
You might be running low on office supplies, or custom-printed
forms and letterhead. Or, if you have the cash, you might want
to prepay licenses, dues, or legal and accounting fees.
Keep in mind that the timing depends on whether you prepare
your taxes on a cash or accrual basis.
For example, if you prepare them on a cash basis, you could
reduce this year's taxes by paying January's rent in December.
If you do them on an accrual basis, you could purchase
something this year, pay for it next year, and still be able to
deduct or depreciate it on this year's tax return.
Credit cards. Credit cards are a way
for a cash-basis taxpayer to buy something and legally deduct
it now, but pay for it next year. The IRS treats credit-card
purchases as loans that can be deducted in the year they occur.
(This applies only to third-party cards like Visa and
MasterCard, not to the second-party store cards issued by
As with any tax deduction, don't take it without first talking
to your tax preparer and finding out what kind of documentation
you're required to provide.
Cash flow. In some cases, cash flow
will be the deciding factor in your year-end planning. One
client of mine used to have a hard time pursuing year-end
tax-saving strategies because he was always scrambling to come
up with enough cash to make a down payment on his liability
insurance. Finally, to avoid this problem, he purchased a
six-month policy on January 1 and then switched back to a
full-year policy on July 1.
Prepare Those 1099s Now
If you paid more than $600 to a subcontractor this year, you
are required by law to send him a 1099 form by January 31st of
Too many contractors wait until the last minute and then find
that they neglected to get the sub's tax ID number. You are
supposed to get this number in advance (before you pay the
sub), but that doesn't always happen.
If you can't track down the sub and have to file 1099s without
tax ID numbers, you could be subjected to substantial
Consider Taking Money Out of the
Bonuses, dividends, profit-sharing plans, and 401(k)s are all
ways to take money out of the company in such a way as to
reduce or defer taxes. The amounts and methods of distribution
depend on the type of company you are: sole proprietorship,
partnership, subchapter S-corp, C-corp, or LLC.
However, you should never take money out of your company until
you've laid the proper groundwork.
First, your income statement and balance sheet must be accurate
and up-to-date; otherwise, you won't even know if you made a
Second, you should be able to accurately project your cash
flow, because you don't want to disburse money if it's going to
put your company in a bind later on.
And finally, since the tax laws are very specific about how and
when you can take money out, you should talk to your tax
preparer before cutting yourself or anyone else a check.
I've seen contractors set up and fund profit-sharing plans only
to discover that they'd done it all incorrectly. With better
planning, the resulting paperwork and penalties could have been
Make Sure You're Getting Good
If your CPA or tax preparer talks to you only once a year,
waits for you to send in your financial statements in February
or March, or does your taxes without asking any questions, then
you may not be dealing with the right person.
A good CPA or tax preparer should be helping you all year long,
should want to see your financial statements in the middle of
the year, and should be interested in helping you plan for the
end of the year.
Leslie Shiner has worked as a financial and management
consultant for more than 25 years. Her office is in Mill
Get Paid Faster With Credit Cardsby Norm St. Onge
As a small-job contractor, I do everything from home repairs
and seasonal maintenance to larger projects like decks and
kitchen updates. A fair number of my customers are
vacation-home owners whose primary residence is several hours
The traditional challenges of working with nonresident
customers — material choices, status reports, and
documentation — have largely been overcome with e-mail,
faxes, and digital photos.
The only other major obstacle is getting deposits and payments
in a timely fashion.
Typically, my vacation-home clients are around only on the
weekends, so I'll generally stop by on a Saturday morning to
discuss their project. Then I'll put together a tight proposal
during my office time the following week and send a contract
via e-mail or fax.
Unless there's some sort of crisis, I might not see the
homeowners again for several months, so in addition to getting
a signature on the contract, I get their credit-card
My contract has an addendum page where the customers provide
the pertinent credit-card info; the page also contains a
signature line authorizing me to charge their credit card for
the work specified (see example).
I decided early on to accept credit cards simply because I
wanted to make it as easy as possible for my customers to pay
Mail is slow — and seems that much slower if you're
waiting for a check to arrive — and cash is impractical
for large jobs. Depending on my schedule and where I'm working,
I might have checks and cash in my briefcase for days before
getting to the bank.
Once deposited, checks that don't bounce take several business
days to clear. Before I started accepting credit cards, I
generally had to wait 10 to 14 days after receiving a check for
the money to be available in my account — longer if there
was a problem with the check.
Floating several jobs with this scenario was nerve-racking, to
say the least. That's why I now prefer credit-card transactions
(though I still accept checks and cash). It's the fastest way
to get paid — especially when the homeowner lives
While the ease of payment is certainly a big benefit for me,
that's not necessarily what I emphasize when I discuss
credit-card payments with the customers. Often, I describe
using credit cards as a form of protection.
These people live hours away. They've just met me for the first
time, and 15 minutes into the conversation I'm informing them
that I need a sizable deposit to purchase materials and reserve
time in my schedule. I can see the hesitation on their faces:
They know that they're unlikely to have any recourse if I
disappear once the check is cashed.
But if they pay by credit card, all it takes is one call to
Visa or MasterCard to put the brakes on.
Repeat customers are more willing to give me a check, but I
still encourage credit cards. I explain to them that for a
small one-man shop like mine, cash flow is paramount; prompt
payment keeps me in business.
How It Works
My credit-card process is fairly low-tech, but for the few
transactions I do per month, it works perfectly — without
running up the extra fees associated with card-swipe terminals,
cellphone readers, and custom-printed signature slips.
If necessary, instead of the contract addendum I can use the
old-school carbonless form; the customers' credit-card info can
be written in by hand or I can make an imprint of the card
using the trusty "knuckle-buster."
Both the card imprinter and the forms are provided to me free
of charge by my service provider.
To process a charge, I call an 800 number and an automated
voice guides me through the sequence, which involves entering
the credit-card number, expiration date, and charge amount via
the phone keypad. Within seconds I have an approval number
— or, on the rare occasion, a "decline."
The beauty of this process is that it can be done from the
customers' driveway via cellphone, if needed.
Payment is generally credited to my bank account within 24 to
48 business hours.
So all this must be expensive, right? Wrong. There are many
payment processing firms and their fee structures vary
The basic service fee that I pay to accept both MasterCard and
Visa is $10 per month (regardless of the number of
transactions) plus a discount rate of approximately 2 percent
(that is, $2 on a $100 charge is retained by the service
Discount rates can also be called transaction fees or
interchange rates, depending on the service provider.
I also accept American Express, which charges $15 per month and
a 3 percent transaction fee.
Transaction fees change periodically; typically, the more
transactions you process, the lower the fee.
Other variables that may affect your transaction fee are your
type of business or industry and how a cardholder's information
is taken. An Internet-based mail-order business often pays a
higher rate than someone conducting face-to-face
Altogether, I process six or fewer transactions per month, and
all of these fees are factored into my overhead — so I'm
certainly not losing money in order to accept credit
I keep copies of work-in-process contracts in my briefcase so
that specific information about jobs is at my fingertips.
However, I keep the contract addendum with the credit-card
number and signature locked in my office file. The last thing I
want to do is explain to my customers how their credit-card
info was stolen from my truck.
Also, I don't treat the customers' credit card as a blank
If additional materials are required or a payment draw is
scheduled, I always call or e-mail the homeowners before I make
charges on their card. This provides them with a measure of
control and gives those who use their credit cards extensively
an opportunity to switch credit cards to avoid overcharges or
to accumulate airline miles.
While I believe it's always wise to have the customer sign off
on the original scope of work, change orders, and so on, this
precaution takes on added importance when dealing with
As mentioned earlier, one "dispute call" to Visa or MasterCard
and the disputed charge is frozen. It's imperative that the
lines of communication between me and the customers stay open
and clear, and that my work is fully documented in case there
is a dispute — I'll need all of the information at hand
to present my case to the credit-card company.
I have never had a disputed charge, but I always have
sufficient documentation just in case.
If you find yourself intrigued by the benefits of accepting
credit-card payments, but you're unable to decide whether it's
right for your company, look at your business and ask yourself
the following questions:
• Do you spend more time than you would like chasing
customers for payment?
• Do you have a higher-than-usual rate of bounced
• Do you think you can tap into a new market or an
enhanced demographic by accepting credit cards?
• Or do you just think that since even the fast-food
joints are taking credit cards now, maybe you should,
If you answered "yes" to any of the first three questions,
perhaps you should consider pursuing a low-tech, low-fee
approach to accepting credit cards — as I have —
just to see how the process works for you.
Your first step should be to talk to your bank. Chances are
it's already working with a number of credit-card-processing
companies and can point you in the right direction.
One word of caution: The number of optional services these
companies offer can be dizzying. Just remember that optional
services come at a price and can quickly add up to $100 a month
if you're not careful.
Norm St. Ongeowns St. Onge Renovations
and BackYard Tractor Works in North Bennington,