RIPON, Wis. — While the tax rebates for individuals are getting plenty of media coverage, the economic stimulus package also includes tax relief for small-business owners. There are a couple of provisions that will help commercial laundry owners increase cash flow and lower life-cycle costs.
Todd Rice, director of financial services at Alliance Laundry Systems, recently addressed the state of our economy and its impact on the coin laundry industry, as well as beneficial aspects of the economic stimulus package.
Q: How has the current state of the economy impacted the vended laundry business?
A: While the economy certainly continues to be volatile, I don’t think it’s had much of an impact on this business. This is due in large part to a strong business model. Laundries are virtually recession-proof. Laundry is something we all need to do, and necessities don’t go away even in uncertain economic times.
Q: Are you seeing the volume of new-store development being impacted?
A: Alliance Laundry Systems' financing has seen new-store development hold steady. But I expect we could see an upward swing not only in new stores, but store retools. I think in a declining real estate market and uncertain stock market, investors begin to explore alternative options.
Q: Doesn’t this counter what one would expect in our current economy?
A: Normally I would agree, but the Economic Stimulus Act of 2008 that was signed into law in February offers some outstanding incentives for new-store development and replacement of laundry equipment that many owners or potential investors may not be aware of. Simply, if you have a dated store with inefficient equipment or are pondering a second location, this may be one of the best opportunities in recent years to address your situation.
Q: What specifically in the stimulus package helps those in our business?
A: While the tax rebate checks for individuals have been stressed, the stimulus package also includes tax relief for small-business owners. There are a couple of provisions that will help commercial laundry owners increase cash flow and lower life-cycle costs.
Q: What do we need to know about these provisions?
A: First, the federal government is allowing a 50% bonus depreciation for new capital expenditures such as commercial laundry equipment placed into service during 2008. The second component is an increase in how much small businesses can write off for new and used equipment purchases in 2008.
Q: How do these provisions benefit me as an owner or investor opening a store in 2008?
A: Look at the 50% bonus depreciation. Under the old law, new laundry equipment costing $100,000 could only provide a 2008 depreciation deduction of 20% (assumes MACRS depreciation method), or $20,000. Under the new law, first-year depreciation can be $60,000 — arrived at by taking the 50% off the top of the $100,000 plus an additional 20% of the remaining $50,000, which is $10,000. That’s more than 40% more in tax deductions for 2008 equipment purchases. Of course, you do need to have taxable income to take this additional deduction.
Q: What about the small-business write-off for new equipment purchases?
A: There are a few benefits to discuss under the revised Section 179 expensing for small businesses. First, the government has nearly doubled the amount that small businesses can write off for new and used equipment purchases in 2008. Also, the new law increases the amount of equipment that can be purchased during the year and still receive the full benefits of the Section 179 expensing option. The cap rises from $510,000 to $800,000. If a business purchases more than $800,000 of equipment in 2008, the deduction can be limited. If the equipment purchase is more than $1,050,000, no Section 179 deduction can be taken. These additional benefits under Section 179 are for 2008 only and will revert back to the old law in 2009. This is ideal for businesses with high taxable income and the need to replace equipment or expand operations. The 50% bonus depreciation will be eliminated after 2008.
Q: Would this Section 179 portion be applicable to all owners?
A: While the 50% bonus depreciation would benefit all business owners, Section 179 deductions do have limitations based on the amount of equipment or basis purchased and placed into service. As the laundry business is quite fragmented, all storeowners who purchase and place new equipment into service in 2008 can benefit from the 50% bonus depreciation. With that said, the increase in Section 179 deductions and limitations could offer the multi-storeowner or the new investor who has in excess of $250,000 in taxable income in 2008 some new strategies for retooling stores, developing a store or acquiring a store.
Q: How do owners planning to purchase new equipment take advantage of these tax incentives?
A: Owners just simply need to purchase new equipment and make sure it is put into service in 2008 to qualify for the 50% bonus depreciation. Under Section 179, owners can acquire new or used equipment to qualify.
Q: Has the government ever offered these types of incentives in the past?
A: There were similar tax incentives written into law post 9/11 related to the 50% bonus depreciation.
Q: Will these incentives be extended into 2009?
A: The bill passed was quite specific that incentives are only for 2008. I think it’s highly unlikely, given the amount of business owners who could take advantage of the incentives. Savvy owners and new investors in our business stand to benefit tremendously from the incentives combined with other positive factors.
Q: You mention other positive factors. What else makes you think this could be a growth opportunity for coin laundries?
A: You’ve got the government offering several tax breaks. Interest rates are at their lowest point since 2003. And financing firms are offering longer maturity terms that translate into lower monthly payments and overall better cash flow for storeowners. In my 13 years in this industry, I have never seen benefits all lined up like this. In addition, I think laundry owners may be in a favorable position in negotiating lease rates.
Q: What is happening in the real estate market to benefit storeowners?
A: We are noticing flat to declining lease rates in many markets and there may be further decreases over the next 12 months. We continue to see retailers struggle with many closing locations to cut expenditures. That could mean an increase in available commercial spaces and greater leverage for storeowners. Laundries are good, stable, long-term renters; certainly attractive to developers looking to fill spaces with a high-traffic business. Because of market conditions, owners may be perfectly positioned to negotiate better lease terms with their landlords.
Q: What advice would you offer?
A: Owners must meet with their tax advisor to determine how they can benefit from these economic stimulus initiatives. There are a number of variables at work and storeowners and new investors will want to make sure there are no surprises come tax time. They will also want to stress to their equipment distributor the need to have machines put into service in 2008.