Are You Paying Too Much in Taxes?

Many shop owners are doing far more these days than what their job description outlines.

Depending on the size of the shop, an owner or manager can often be found managing finances, handling front-of-shop responsibilities, and even working on repairs themselves in addition to actually running their business.

Wearing multiple hats can sometimes be looked at as a point of pride, but oftentimes it results in being stretched too thin and missing a lot of key details, which can cost your shop thousands of dollars.

Nick Papakyrikos, a Boston-based CPA who works with automotive businesses nationwide, says far too often he’s seen shop owners try this strategy with their taxes, electing to do it themselves instead of hiring someone.

“A lot of times, they don’t know what they’re looking at with business taxes. They don’t know what to do,” Papakyrikos says. “That’s like me trying to do all of the maintenance on my own vehicle instead of bringing it to a professional.”

Running an auto repair shop is hard enough without worrying about whether you’re paying too much in taxes. So how do you determine if you’re overpaying? And if you are, what can you do about it? Here are three key strategies every shop owner should consider.

Understand What You Should be Paying

Diving into your shop’s taxes and financials can feel daunting, but the math itself is usually straightforward.

Hunt Demarest, a CPA and owner of Paar, Melis & Associates, which provides accounting and tax services to automotive repair shops, says most tax software is fairly simple to use if the numbers you feed it are accurate.

But that’s where most people run into problems.

“Many shop owners don’t realize their underlying financials are wrong,” Demarest says. “If you want a general rule of thumb, you should be paying around 25% of whatever your net income is. If you’re paying significantly more than that, something’s off.”

That “something” is often inaccurate data. Maybe your inventory is overstated. Maybe you’re paying tax on accounts receivable that customers will never pay. These errors inflate your taxable income, and the IRS happily accepts the extra money.

Imagine this scenario: Your shop had a rough year and actually lost $100,000. But because of bad bookkeeping, your tax return shows $200,000 in net income. You’re now paying taxes on money you never earned. Demarest has seen cases like this push shops to the brink of closure.

To avoid errors, Demarest says you should always review your financial statements before filing and, if you have an accountant, ask them to explain how your taxable income is being calculated.

Fix Inaccurate Financials and Capture Missed Deductions

Although the biggest culprit behind overpayment is incorrect data, you could still be missing out on major tax breaks even if your numbers are accurate.

Beyond fixing errors, here are five areas where shop owners often leave money on the table:

1. State Pass-Through Entity Tax
   
   When federal tax law capped state and local tax deductions at $10,000, many states introduced a workaround: the pass-through entity tax. This allows your business to pay state tax directly and claim a federal deduction.
   
   There are about 36 states that have this rule,” Papakyrikos says. “If you’re in the highest tax bracket and have $10,000 in state tax, you could save $3,700 or more. But you need to know your state’s deadlines. Some require election by mid-year.”
   
   
2. Bonus Depreciation
   
   Thinking about buying a new lift or loaner car? Timing matters. Thanks to 100% bonus depreciation, you can write off the entire cost in the year of purchase, even if it creates a loss.
   
   “If you spend some money on equipment such as lifts or loaner cars, make sure you understand bonus depreciation and talk to your accountant about it,” Papakyrikos says. “It can make a huge difference.”
   
   Demarest agrees, adding that timing purchases correctly can save thousands.
   
   “I used to think buying equipment was just about the shop floor,” he says. “Now I see it’s also a tax strategy.”
   
   
3.  Qualified Business Income Deduction
   
   This deduction lets you write off up to 20% of your business income. But it’s often missed due to simple errors like failing to check a box in tax software.
   
   “That’s one that a lot of people miss if they’re not terribly experienced with business tax returns,” Papakyrikos says. “But it can lead to a pretty big savings.”
   
   
4. Put Your Kids on Payroll
   
   If your children legitimately work in the business—sweeping floors, helping with marketing, even appearing in ads—you can pay them up to $15,000 tax-free. That’s $30,000 for two kids, fully deductible for the business and tax-free for them.
   
   “There are some specific rules that apply in certain cases,” Papakyrikos says. “But often, if that’s their only work and they’re just helping out the family business, it makes sense to put them on the payroll.”
   
   
5. Max Out Retirement Contributions
   
   A simple IRA or similar plan lets you contribute up to $16,500 tax deferred.
   
   “If you have extra cash, this is a smart move,” Papakyrikos says. “It reduces your taxable income and forces you to save for retirement.”

Be Proactive

Waiting until tax season is too late. Real savings happen through year-round conversations and planning.

“If you’re getting this right when filing your taxes, it’s too late,” Demarest says. “We look at financials monthly so owners can guide their business, not just once a year.”

Most tax-saving moves such as equipment purchases or retirement contributions need to happen before Dec. 31. Amending returns is possible within three years, but Papakyrikos says it raises audit risk and doesn’t solve the bigger problem: missed opportunities.

“Business tax laws change more than anything else,” Papakyrikos says. “It’s specialized knowledge. You don’t know what you don’t know.”

Regular financial reviews prevent costly surprises and give you time to act. If you want to save money next spring, you need to be having year-round.

The Bottom Line

Understanding the strategy of taxes is essential in helping ensure every dollar you make is used most effectively.

Though shop owners can learn to successfully manage their own finances, Papakyrikos says hiring a proactive CPA that understands the automotive industry can give you a significant leg up and make sure that you’re getting the most out of your return.

Papakyrikos lays out a scenario: you can pay someone $100 to file your taxes, or you can pay a CPA $1,000. You’ll save $900 initially, but he says chances are you’ll pay significantly more in income taxes.

“You’re never going to know that you paid more than you should, and the federal government doesn’t really care that you’re paying more than you should,” he says. “If you have a good CPA, they’ll point out where they’re saving you money, and they can usually do that in an initial review. Good tax advice will almost always pay for itself.”

Demarest adds that even if you do hire someone, it’s crucial to have a basic understanding of your shop’s financials and take on the responsibility of reviewing everything.

“The shop owners who understand their numbers make more money and pay less in taxes,” Demarest says. “Those are your numbers, and this is your business. You can delegate this stuff, but it does not absolve you of all responsibility.”