REVENUES.  Revenue is any money coming into the system that is not
capital infusion.  It is not the same thing as PROFIT which is the money
left over after you have subtracted all your operating expenses from
that revenue.  Revenue is the same thing as GROSS SALES, or GROSS
REVENUES.  INCOME is the same as PROFIT.
     GROSS SALES.  This is the amount of money collected from customers
for products and services rendered including postage and sales tax.  It
does not include capital infused into or withdrawn from the system.
     COST OF GOODS SOLD.  This is the dollar amount spent to produce or
purchase the goods that were eventually resold to produce our gross
sales, such as videos, postcards, T-shirts etc.  It represents our cost
that we pay to the manufacturer to get the product to our house so that
we can resell it.
     For example, if you start the year with $10,000 of inventory and
then during the year you purchase $50,000 of new inventory that means
you had a total of $60,000 of inventory.  If at the end of the year you
still have $40,000 of inventory hanging around that means you only sold
$20,000 of inventory and that is your COST OF GOODS SOLD.  The remaining
$40,000 of inventory then is carried over to the next year as the
starting inventory for that year.
     Thus the number called COST OF GOODS SOLD can be a bit tricky
because only products actually sold are included in it, even though a
lot of money may have been spent to buy products that are still hanging
around in inventory.  This can cause problems at tax time because
profits spent on new inventory that is not then sold by the end of the
year can NOT be deducted as a valid expense against other income until
it is actually sold.  Thus you must pay taxes on such profits even
though they have already been spent on new (presumably expanded)
inventory.  This makes things doubly hard because your profit money is
now tied up in inventory and not available to pay taxes!
     GROSS INCOME.  This is the profit difference between what you sold
your product for to your customers and what you paid for your product to
your manufacturers.  It is out of gross income that all operating
expenses must come including living expenses of the owners.  For example
if we sell a video for $16.00 to a customer and we pay $8.00 to make the
video, then our gross income is $8.00.  A certain percentage of that
$8.00 goes to paying rent, telephone, sales taxes that were collected
from in state customers, and all other costs associated with running a
business, including food and clothing.  Income taxes are NOT paid on
GROSS INCOME because first you must deduct all valid business operating
expenses.  Thus although gross income is a form of 'profit' it is not
your final taxable profit which is called BEFORE TAX INCOME and is
covered below.
     INTEREST.  This is interest paid on loans made to us by banks or
private individuals.  In general Art Matrix uses credit cards to finance
its operations, and by law this interest is NOT deductible so is not
registered here but comes out of final profits after they have been
distributed to the owners.  If there is no profit to distribute it comes
out of available capital remaining in the system.
     TAXES.  This is New York Sales Tax which we must collect on all
customers in New York State.  This is NOT Federal Income Taxes or New
York State Income Taxes which are NOT valid business deductions and
which come out of final profits or available capital remaining in the
     REPAIRS.  These are CAPITAL EQUIPMENT REPAIRS such as the costs of
fixing graphics tubes, stereo equipment etc.
are allowed by law to recover the cost over time (5 years) of any money
spent on machinery such as computers, cars or other equipment used in
the business.  Just as you are allowed to deduct the cost of inventory
WHEN IT IS FINALLY SOLD, you are allowed to deduct the cost of your
equipment WHEN IT IS FINALLY USED UP which is usually considered to be
over a 5 year period.  Each year therefore you are allowed to deduct 20
percent of the total cost.
     For example if you purchase a personal computer for $10,000 in
1985, you are allowed to deduct (in general) $2000 in 1985, $2000 in
1986 etc until the full $10,000 is accounted for.  This allows you to
recover the cost of the equipment out of profits without having to pay
taxes on that amount.  This means that at the end of 5 years you will
have your $10,000 back again to buy a new personal computer when your
old one goes bad on schedule.
     If the company is not making enough profits to support the living
expenses of its owners (Art Matrix for example!) then this recovery
money is often removed from the system to buy food or other necessities
of life.  This acts as a removal of capital from the system, and means
that after 5 years you won't have the money to replace your personal
computer.  Thus although the owners were not starving to death during
those 5 years, they were eating up their capital equipment which means
the business will come to a sudden halt once the present equipment fails
     For example suppose the company had $6000 dollars in allowable
capital depreciation one year and after deducting this from their gross
income they had a taxable income of $8000 left.  They pay taxes on the
$8000 (around 30 percent) leaving $5600 in usable income.  Now no one
can live on $5600, so the partners eat up all of the $5600 PLUS they eat
up the $6000 that was supposed to be saved to rebuy that pc after 5
years.  It looks like they did ok that year, as they had $11,600 in
usable income, but they have eaten up any chance they might have had to
get a new computer when the old one failed.
     This is acceptable as long as your capital funds are your own and
you don't care about staying in business.  At worst you are eating up
Daddy's inheritance.  However if the capital is a debt you owe someone
or even worse came from a credit card, then you are eating up a debt
with no hope to repay!
     OTHER DEDUCTIONS.  This includes all valid business expenses that
are deductible from gross income before you pay taxes on the end amount.
They include, equipment leasing, subscriptions, supplies, electronic
supplies, envelopes, postage, advertising, mailing labels, advertising
printing, ad agencies, art work, telephones (3 of them!)  faxes, CPA's,
lawyers and attorneys, film and developing, hired work, bank expenses,
royalties, visa/mastercard percentages, finder's fees, FEDEX and UPS
costs, bank checks, color separations, slide sheets, shipping boxes (and
boxes and boxes...!), books, postcard racks, software, shareware
registration fees, refunds and whatever else.
     HOME OFFICE DEDUCTIONS.  The law allows you to deduct part of the
cost of your home if you use it in a business with certain restrictions.
The area of your home must be totally devoted to the business, and it
must be your primary place of business.  Our apartment has a living
room, a kitchen, and two bedrooms.  Bathrooms don't count.
     The living room is wall to wall equipment, 2 or 3 computer
terminals, one IBM personal computer and one MAC 512 along with their
associated printer, and one graphics tube for production and design.
Our ceiling has 9 or 10 wires leading from everything to everything else
via A/B boxes.  One wall has the music sound track stereo equipment and
another wall has an electronics work bench for fixing everything else.
     One of the bedrooms is used to store inventory and boxes, it also
has the table where we roll and package prints.  The walls are covered
with shelves holding our extensive slide collection and other material.
     The other bedroom (where we actually live) is half taken up with
all of the T-shirt inventory.
     Thus it can be claimed that at least 50 percent of our home is used
exclusively for business, and this then becomes the ratio by which we
can deduct 50 percent of our rent and utilities from our business
income.  Thus if rent is $9000 a year, then $4500 is deductible from
business income.  The same percentage deduction is taken for utility
costs and car costs as our car is used extensively in the running of the
business (probably more than 50 percent.)
     LOSS CARRY OVERS.  Home office deductions are only allowed up to
the point that you have no profit left.  In other words if your profit
is $3000 after all OTHER valid deductions have been removed, and your
home office deductions are $4000, you are allowed to deduct only $3000
of that $4000 giving you an final profit for that year of $0.  The
remaining $1000 of home office deductions must be carried over into the
next year and deducted then if there is income to absorb it.  If not, it
is carried over yet again.
     The amount shown on this line is the amount carried over from the
previous year.  For example in 1988 there is a suspended home office
loss carry over of $5239 which was created in 1987 and is ALSO shown at
the very bottom of the 1987 column.  The total loss in 1987 therefore
was really -$1282 + -$5239 or -$6521.
     BEFORE TAX INCOME.  This is your FINAL PROFIT and this is what is
distributed to the capital partners at the end of the year and acts as
income for them which they have to report on their Federal and New York
State income taxes.  This is the number on which they pay taxes.  Self
employment tax is 13.4 percent of this amount regardless of what it is.
THEN you have to pay Federal Income Taxes on this amount and also New
York State Income Taxes too!
     When it comes to paying Self Employment taxes, losses in one year
may NOT be carried over into the next year, (except for home office
deduction loss carryovers which may be carried over if you have the
income to cover it) however all other overall losses MAY be carried over
when computing Fed and New York State Income Taxes.
     For example, lets say in 1989 the company lost -$10,000 plus
another -$5,000 in home office deductions that it was not allowed to
deduct, and in 1990 it made $15,000.
     That means you would have a REPORTED loss of -$10,000 in 1989, and
a REPORTED gain of $10,000 in 1990.  You would pay no taxes at all in
1989, but in 1990 you would have to pay 13.4 percent of $10,000 in Self
Employment Taxes.  However the -$10,000 from 1989 cancels out the
$10,000 in 1990 so you would not have to pay any Federal or New York
State Income Taxes.
     Our losses in the first three years of operation pretty much cancel
out the gains in the next three years, so we have not had to pay Federal
or State Income Taxes, but we have had to pay Self Employment Taxes on
the years where we showed a positive BEFORE TAX INCOME.