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alone) is costing the taxpaper $160
annually as surely as though an item
for that amount showed as an outlay
for the tax year reported.
Again, many dealers, particularly
owners of small shops, operate their
businesses in conjunction with their
homes. A dual purpose property
(home and shop) often confuses them
as to which is business and which is
residence. Such taxpapers, because
they are domiciled with the business,
are likely to think of such an estab-
lishment as a purely personal ar-
rangement. Unitl advent of high in-
come taxes there was no need for
segregating business from home.
Moreover, many taxpayers have long
since arrived at the pleasant conclu-
sion that, because the entire premises
represent an outlay equivalent to that
for a home alone that they, in effect,
are getting free rent for the business.
Now such thinking ceases to be a
harmless bookkeeping deception. Such
a belief results in higher income taxes.
Actually, the Treasury Department has
long recognized that part of such an
establishment is a business expense
and may be so considered in making
an income tax return.
If the property is rented, the busi-
ness may be charged with a pro rata
share of the rent, utilities and other
divisible expenses. This may be as
little as 25 per cent, or as much as
75 per cent, depending upon the divi-
sion of improvements as between
home and business.
Likewise, where the taxpayer owns
the property and uses it in large part
for business purposes, he frequently
fails to charge the business with any
of the expense. Here are just a few
of the items that he is undertaking to
bear, himself, instead bf entering
them as a business expense to deter-
mine his true net income: 1. annual
maintenance cost; 2. depreciation of
property; 3. utilities; 4. insurance.
Interest on mortgage and real estate
taxes are deductible as a personal item
in any event.
Entertainment Expenses
Moreover, as a sole owner, the tax-
payer is apt to bear the cost of busi-
ness entertainment out of his personal
pocket on the unsound theory that
whether it is charged to the business
or not does not materially affect him.
Even dealers having modest incomes
not infrequently may spend several
hundred dollars a year in small sums
at a time treating their more favored
customers and soliciting desirable
prospective ones. This may involve
lunches, liquid refreshments, cigars
or any other outlay of a similar char-
acter. It is recognized by the Treas-
ury Department as a deductible item
of business expense.
To illustrate the importance of a
careful scrutiny of these expenses as
they bear upon the real cost of doing
business, let us take the case of a
typical taxpayer.
Let us assume that he owns his
own dual purpose property which, ex-
elusive of land value, was worth
$7,500 at time of acquisition. This
is a two-story semi-business structure,
with office and shops downstairs and
living quarters upstairs. In addition,
some equipment and cars are stored
in an additional building on the rear
of the lot. A fair division shows that
two-thirds of the improvements are
used for business and one-third is
personal.
Other Possible Deductions
The taxpayer has a light service
car acquired in 1942 for $500 and
a truck acquired in 1941 for $1,500;
a passenger car purchased in 1941
cost him $900 and he uses this car
,1
c .i
r
i •
j
three-fourths for business and one-
fourth for personal convenience and
pleasure. Other equipment repre-
sents an initial outlay three years ago
of $2,500. Office furniture and fix-
tures cost him $500, also three years
a t b r o
' .
^^ .
During 1945 he paid a $60 insur-
ance premium on the buildings. Re-
, , . , , .
/ 11
pairs to the building (all necessary
maintenance as distinguished from
capital improvements) cost him $450.
In addition he finds that he has
spent $150 during the year in enter-
taining preferred customers.
Now this taxpayer, ignoring the
cost-of-doing business items just enu-
merated, finds that he has a net in-
come of $5,000 in 1944. He has
deductions for charitable contribu-
tions, property taxes, medical expens-
es, etc., of $250. Besides his wife,
he has three dependent children. His
net income subject to normal tax is
$4,250 and income subject to surtax
is $2,250. His normal and surtax is
$577.70 and, for all the author knows
to the contrary, such a hypothetical
taxpayer could feel pretty good about
it. After all, according to his fig-
ures, the government has left him
with over $4,400 after paying taxes
—or so he thinks!
O r I s t h e Situation Well in Hand?
If, however, he had taken full ad-
vantage of depreciation and other
legitimate business expenses he would
have found that his seemingly hand-
SO me income of $5,000 was, in real-
i ty? o n l y $3,375. Like a hibernating
bear, the other $1,625 was his own
f a t that he had been living on and,
m o r e important, paying tax on, to
boot! So, viewed in this light, after
paying $577.50 income tax he would
have a real net after taxes of only
$2,800 instead of $4,400!
Here, if he really wants to get a
true picture of his net income, are
s o m e of the additional business ex-
penses he would report in his income
tax return. These are the items which,
jf n o t reported, boost his NET income
and result in his paying a tax on cap-
i t a l assets and on hidden current ex-
penses.
Jtems
T h a t C a u g e Trouble
2 0 ? e r c e n t depr eciation on ser-
vice car
$100.00
20 per cent depreciation on truck 300.00
V
Tr £_ fourths
oi 2 0 per cent de-
preciation on passenger car,
W M
*
T j f S d s ' of Y p e r cent deprel
ciation on buildings ($300) .. 200.00
Tv
^ J j r d s insurance P remium
^ M
Two-thirds building mainten-
ance ($450)
300.00
One-half utilities on one meter
($200)
100.00
10 P?r cent depreciation on
equipment
250.00
10 per cent depreciation on office
fixtures
50.00
Total
$1,625.00
Now let us look at this taxpayer's
revised income tax return. His in-
come subject to the normal tax has
been reduced from $4,250 to $2,625
and income subject to surtax has
dropped from $2,250 to $625.
His income tax now figures
$203.75 instead of $577.50, or a sav-
ing of $373.75 because his real net
income has been demonstrably de-
creased by $1,625. Instead of hav-
THE MUSIC TRADE REVIEW, JANUARY, 1946