Woodworker's Journal 1983-7-1, страница 14

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Workshop Income (Cont'd)

As a salaried employee Bill had received income in the form of cash, which was taxable, but he had also received income in the form of non-cash benefits, additions to income that were not taxed. The net total had become a given, something he counted on and took for granted. The total covered a lot of general living "overhead" that suddenly Bill had to identify and deal with when he became a full-time businessman.

Bill had to add in the cost of shop space, for example, and he had to decide whether he would rent a separate location or work at home and charge a share of home upkeep and depreciation to his new business. As the operator of a part-time, hobby-related business at home he had disregarded that item since, in general, housing expenses for a home business are legitimate Schedule C business expense only to the extent that they offset taxable profit from the business. They cannot be used to add to a Schedule C loss, which in turn offsets taxable income from other sources.

Furthermore, Bill realized, in most home-business situations it simply isn't wise in the long run to claim business-housing expenses, even if there is a profit. It complicates computation of the tax base of the property and increases tax liability when the property is sold, particularly if the part-time business has ceased to operate in the meantime.

With Bill in a full-time business situation, however, the costs of housing the business have to be taken into account. Now they are real costs that have to be covered some way unless the goal is to go broke. And, as Bill found out, the costs of housing the business are directly related to the volume of production, which in turn is directly related to the volume of sales that he has to reach in order to cover the added overhead and yield a living wage.

Added overhead that Bill had to consider as a full-time woodworker-businessman includes such things as medical insurance, social security, liability insurance, telephone, accounting and legal expense, licenses, business taxes, advertising, sales expense, and reserve for uncollectable accounts. On top of those are expenses related to having employees, such as workers compensation and unemployment insurance. Marketing considerations and the need to keep prices low required Bill to change his methods of production and to increase his volume in order to cover all costs. And in order to do that he found that he would likely have to have employees.

These were not factors when Bill was doing woodworking as only a sideline. The telephone was part of ordinary household expense, for example. Some of the other items were benefits provided by Bill's employer. Some simply didn't apply to a casual-sales situation. But now that Bill is his own employer and fully in business he has to cover all of those costs. They are real costs now. And to cover them he has to add them to the price he gets for step-chairs, or to the prices of other items he makes and sells.

Since these are fixed costs, that is, not directly related to the unit cost of each item made and sold, the amount to be allocated to each item depends upon how many items and what kinds of items are made and sold. And the kinds of items, the quantities of each, and the price that can be charged for each depends upon the market situation.

Suddenly Bill was confronted with a whole array of interrelated variables, figures that he had to quantify realistically if his new business was to be viable and profitable.

For simplification, for now let's pursue just three variables: the cost of manufacturing one item, step-chairs, the price that can be charged for each step-chair, and the extent of the market for that item. Bill had one local outlet for step-chairs, remember? That outlet will take all of them he can make in his spare time and pay him $100 for each. It takes five hours to make one chair.

Now, working full time, 40 hours a week. Bill figures that he can make 400 step-chairs a year, $40,000 worth. Wow!

(continued on page 16)