Business/Financial question asked differently

Ok guys, thanks for the replies to my last post but the answers I got were exactly what I wasn't looking for so let me ask the question again a little differently. Let me reword the question so hopefully what I am trying to find will be a little clearer this time, and give a little background so you'll know what I am looking for also.

Long story short, been dealing with a deadbeat dad that doesn't like to pay support,typically works alone, and for cash, and likes 'play the numbers' when he does show money coming in to make it appear he is broke. He is in the construction industry and does carpentry, siding, handyman type work, etc.

Last year he showed an income $33,000 plus. In his taxes he made the usual business deductions, truck expenses, cell phone, etc. to the tune of around $4000. That is all well and good and those are all legitimate deductions. Here is the kicker, on top of those he also claims nearly $19,000 in deductions for other "supplies" needed for his business. With all these deductions his net profit was in the neighborhood of $7800 for the year.

In other words by his calculations he was spending over $1500 a month just in "supplies", plus other business related expenses, to turn a net profit of around $653 a month. Now we all know this is pure BS and if you were looking at the actual tax papers, along with a seperate income affidavit showing different, lower, net income numbers like I am, it would be even clearer to you just how big of a pile he has built up for himself.

With all that said, and now that you have a better understanding of the situation, what I was trying to ask before was this, and forget percentages as I think that is where I screwed up asking that instead of asking for a round figure. Over the course of a year what would you say you spend in expenses that would be written off as 'supplies' and aren't passed on to the customer???

In my case I try to pass on every dime I possibly can for the items I use working on a particular customers equipment. Granted you aren't going to catch every penny and there are things that can't be readily passed on and you have to eat and therefore are valid business expenses and are therefore tax deductable. In my case shop "supplies", that I can't really pass the cost of on, aren't anywhere near $19,000 a year and even on a good year might only reach $1000 to $1500.

What it all works out to is that it just doesn't make sense to claim you are spending over $1500 a month in suppies that you can't pass on to the customer (especially in the construction field)to turn a profit of less than $700 a month. Granted when doing business the more you can legitimately write off the better and if you can run a successful business and show very little to no net profit at the end of the year by using legitimate deductions that's all well and good. But to claim "supply" costs like this guy is doing is riduculous to say the least. I know in my business there is no way I could stay in business if I was doing like this guy claims and more or less paying to work.......

On second thought maybe asking a bunch of farmers a question like this isn't such a good idea as I know just from reading some of the posts on here that is pretty much what the farming business is like anyway. At the end of the day you are all but paying just to be in business. Still, there are enough non-farmers on here that I thought maybe I could get some legitimate, best estimates from different fields and different geographic areas.

For those that answered the first post, thanks again for the replies and the input. Maybe this time I can get some numbers like I was looking for with the question asked a little different and more info. Thanks.

(reply to post at 11:04:23 05/11/11)

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Screw it. Let the FOC handle this. There isn't any way to "win" at this. You will be better off not getting into it. And if he is only grossing 33K per year, there really isn't much to get. Most contractor's like that around here are basically the working poor. The guy doesn't have crap, probably never will. And if his ex won't go to the court to sort this out, you have a problem there. The foc will get the $$$ or he will go to jail. I worked with one guy who swore that his ex wasn't going to get a dime. He got arrestted on a Friday, spent the weekend in the Wayne County jail, got introduced to Bubba. He was at the bank Monday AM, paying off his back child support. Never would talk about that weekend. Believe me, we asked, but he wasn't telling!!!! I think Bubba missed him!!!!

As far as business expenses, I don't know your situation, but when I have services that need to be done on my trucks, backhoe, tires, tools, etc. sometimes my expenses are 3-4k a month. So why should the customer pay for those expenses? That is the cost of doing business! If I pass that cost off on my customers, I'm out of business and behind on child support also. As far as the child support deal you have offices that can handle that and if the IRS is providing those numbers for his income, there is nothing you can do, but catch him in default/fraud. On the other hand, instead of spending so much time worrying about what, how, who the ex is doing or getting their income, maybe more time spent towards getting a better job to support themselves would be the better avenue.

Maybe someone should be a little more selective about who they have children with.

Grossing $33,000 self employed - there won't be much to get.

Saw blades, saws, tools, and so forth can add up. Depends I guess if he has been at this forever, or just building into a handyman business - the startup costs would be more than one grosses for several years, as you lay in the tools needed. Did a concrete machine or bigger saw take a dump on him & had to buy a new one..

In farming it's common to have a catch-all 'supplies' section that can get pretty big. You are saying that would be odd in the contracting business, as one would charge these things to the customer?

One of three things:

1. Not running the business well, not charging enough to cover the overhead of supplies & breakdowns.

2. Tryig to launder a couple grand through the 'supplies' area.

3. Trying to build the business, and buying a lot of needed tools that should last a decade or more. He's 'rapidly' deducting these to keep taxes (and other bills?) lower.

Pick which of the above you like.

I hear enough stories of deadbeat moms or dads or kids that one almost gets immune to wanting to bother take sides any more. Sadly.

--->Paul

I think Spook has given you the right advice.

The deadbeat dad hasn't got anything left to try and collect. Those supplies he is deducting are probably materials, hand tools, and gas for the truck. There may be some beer and cigarettes in there too but there isn't anything left at the end of the day/week/month/year. I have done that kind of work myself.

If he doesn't have a CPA doing his book, there is a good chance the IRS will call him in for an audit. If you had proof he is a tax cheat, turn him yourself. However, If you don't have proof, then call it like it is: a personal matter and sour grapes.

I know many self employed people who were tax cheats, cash under the table, and they get their just due when it comes time to start collecting social security. I know a person who is 65 and only gets $218/mo.

He's a bum. He'll always be a bum. Your wife figured that out, and that's why they aren't together anymore. He is emotionally invested in cheating on his child support, and will expend an inordinate amount of effort in continuing to do so.

What he's probably doing is claiming most supplies as expenses, without showing as income the money he "sells" those supplies to his customers for. As far as "rules of thumb", most contractors charge the customer for everything they buy specifically for that customer, often with 10% or so added on. But things like nails, glue, small tools, etc. that are used for all jobs are written off as "overhead", which must be covered by his billing rate.

Either take him on (back to court to make him produce his records), or forget it. I'd forget it, because he'll cook his invoices to cover his tracks if you force his back to the wall.

As far as a court listening to a "rule of thumb" for such things, forget it. They deal in facts only. If you can't prove it, it didn't happen.

I do agree with the other guys, that there is not much to get, and the IRS probably doesn't have time for the small pickins.

But here is my perspective as to the numbers. I have had both a small business (Schedule C) and a farm (Schedule F). My small business was a sole propritorship (sp?) in the home maintenance and subcontracting business. Well, of course the cost of materials is a "supply" item. If the check for the job is for the complete job, then that is for his labor and materials plus his insurance and other business expenses. Often a job will be somewhere in the 50% supplies and 50% labor. Many jobs exceed this ratio for the cost of materials. Example: Replace a sliding glass door: door, frame and tracking ~$500. New interior trim, caulking, special sealants for the sill, maybe ~$100. Install time less than one day (8 hours) which might be billed out anywhere from $10/hr to $25/hr. But for a small guy in this economy, the $10/hr is more likely. So he has $600 in supplies and $80 to maybe $100 in labor. At the $100 labor charge, his part of the total bill is 14%, and the materials (supplies) are 86%.

You might think the guy is a schmuck, but he sure isn't getting rich. I've walked many miles in those shoes, and was very good at my craft. But then the customer has an "emergency" (needs to take the kids to Disneyland) and can't pay the bill, until "maybe next fall". My son had some female type give him this exact excuse. She paid a year later, while his kids needed groceries and clothes and he had done a quality job. I have a ton of other stories about non-paying customers.

So you go to work every day, and do your best for every customer, take your licks and fill out the 1040 every April, and it doesn't look very good. But does that mean the sole prop should just sit home and try to collect some govt check instead of working??? Many of these guys are too proud for that, and so get up every morning, hoping the phone rings a couple of times per week, and that the customer will pay when the job is complete.

Sir, I think you have been spoiled by having a good business, or formerly having a business in a good economy.

Enough!

Paul in MN

Agreed. His "material" costs could easily be double what he's charging for labor. The plans for a $20 million water treatment plant have the labor estimated at $6 million and material north of $14 million. The guy might get $100-$120 for installing a $500 front door, his material and supply costs could easily be double his labor.

Even if he was twice as high on his costs as he should be how much do think he's got left with only $33k in gross revenue and paying 15% of the net in taxes?

I would imagine his actual gross revenue is considerably higher than the $33K he is claiming- but proving it is tough.

I'd say the bills are spot on. Whats missing is the cash income. Figure his gross is probably a third more to double what hes claiming. But, you cant make a case for that. Courts deal in facts, provable, documentable facts. Most people I know right now who are self employed in construction trades would be tickled pink to be getting 500 a month clear.

I think you're looking at it wrong, you're not going to prove how much he's pocketing. You need to make sure all charges are filed for deadbeats. The courts don't care what he lives on just what he needs to pay. Two people in a divorce in KY with no jobs, the court figured their child support on minimun wage and are taking the payee to court for non payment charges.
They pasted a lot of laws on child support.
Collecting Support
A parent can be required to pay child support by income withholding. Nationally, over 69 percent of child support is paid in this manner. Overdue child support can be collected from:

•Federal and state income tax refunds
•liens placed on property
•sale of property.
When past-due child support is owed, the following may occur:

•Unpaid child support can be reported automatically to credit reporting bureaus.
•Drivers, professional, occupational and recreational licenses can be suspended if the obligated parent is not paying required support.
•The U.S. State Department will deny a passport to someone who owes more than $2,500 in back child support.
•Child support agencies have agreements with financial institutions to freeze and seize accounts of those identified as owing back child support.
•In certain states and under certain circumstances, criminal actions can be taken against chronic delinquent parents who owe large sums of child support.

Why do you care?

You are now the supporter (lover) (boyfriend) now and that other guy is a creep. He will go at great lengths to not pay......So that is what you now have to deal with......A loser. I hope this woman is worth all the headache.

One of my wives friends has 2 kids, loser dad that was into drugs and died 3 weeks ago....They divorced 3 years ago. he died of a drug overdose.
She will now at least get money from a small life ins. policy that the court made him keep. Also the Soc. Security system will pay her child support now till the youngest one is 18. Lots of baggage.

"I hope this woman is worth all the headache."

GREAT post, GURU!

And GOOD advise for those that think of straying (myself included), or getting messed up with one who has, 'cause, as I've seen too often with friends, you get the excess baggage as part of the deal! I simply COULDN'T tolerate it!

A good friend of mine got hooked up with a similar situation and it NEVER ends with her "ex" and the kids.

Yes many guys will go to the end for a woman that "puts out" and I know I am little rude with my comments but.....Thats what it all comes down too....If your wife/girlfriend didnt put out would you stay with her........No Fricken Way!!!!

An old friend of mine told me right after his divorce.........Hey, If you arent getting it at least once a week then there is a problem and you need to move on. He divorced 3 years ago. He now gets "X" from a super hot woman often. Lucky guy.

Regarding the guy Spook referred to, I think I would wait until Bubba got out of jail and have a chat with him under more advantageous circumstances.

Not that this will help any, but at barbershop today I saw a multipage paper with pictures of the county's most wanted. One guy was wanted for being behind $34,000 in child support. He didn't look like Bubba would worry him.

KEH

You will sleep better if you don"t get agitated over this.

From the numbers you give, he could be fudging the numbers to maximize his Earned Income Tax Credit. $7800 would be about right to max it out if he did/could not claim the child as a dependent. As a single filer that would give him a credit of ~$430.

As tlak says go after a judgement for something you can get like the tax refunds (if any) and pretty much don"t expect anything else.

YMMV,

Kirk

There's ALWAYS a bigger Bubba. Or 10 of them.

I could never figure why our retirement program started paying for child support?
Which Pres/Congress voted that in?

It does t make any difference what he makes, if he owes support the court should take it all till he is paid up. Here at the very least he would loose his drivers lic and contractor lic.

Always heard it refrred to as ,"...going to the prom with Big Jim."

What is real sad is that the SSI system is so broke that it was raided by the US federal gov. and paid back with IOUs in the form of US treas. bonds. Makes you puke huh?

I guess the only real good thing about child support payments is if I died right now and I have worked for 25 years and my son would get money for food/clothes and I am dead so my heir would get a small portion of what I paid into the system. I dont really agree with it, but it is better then giving it out in the form of Welfare and Food stamps to losers.

I pass on everything and probably a bit more just to be sure... but don't overcharge the labor end... but to answer your question... I don't know if there's any one pattern method of doing this. I would suspect that it would boil down to how the individual chooses to account for things.
Mabey is't sdifferent for you... but we take all the income on one side and all of the various expenses on the other and whatever is left is left. Doesn't particularly matter how the expenses were incurred other than capital....
A good accountant can spin them out just about any way you want to show whatever they want and it's pretty hard to challenge otherwise...


Rod

IF you married the mother then YOU are now the provider for the children of the union. Might not be how the "law" looks at it but it is how the good book talks about it. Think of it as if you married a widow. That way if you get anything it is more than you planned on.

I have seen many people waste way too much time wanting to make the "ex" pay. You have no control over whether he pays or not. It is his choice. He is not making much anyway. So the decision is whether you are going on with life and using the energy to better your/wife/kids or wasting time/effort/aggravation on the ex-husband/boyfriend.

I have provided for kids/grand kids/adopted kids/foster kids. The money really used for everyday care of kids is not that much. I am not rich by no means but never had any problem.

I would forget he is even alive. Move on with yours/hers/kids life.

I'm missing your point. You say he's a "deadbeat dad". I assume that means he doesn't make his court-ordered child support payments. WHY ISN'T HE IN JAIL?

Now, if he's actually making his child support payments but you think he's under-reporting his income, that's another problem. But that's a matter for the IRS; your wife will have a hard time convincing the court that he is making more than his reported income. But the way the IRS finds tax cheats is NOT by questioning their accounting methods. They look at how much money they are SPENDING versus what the SAY is coming in. For example, if the guy is making 7800 a year, but his rent is 800 bucks a month and he has a 400 dollar car payment, clearly he is cheating on his taxes. That's the sort of information you can pass on to the IRS. It is futile to questioning his accounting methods, unless already have other evidence he's hiding income.

My wife's ex was always behind on his child support. Several times she had him thrown in jail, which didn't improve his payments much but at least gave her some satisfaction.