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February 26, 2013
Over the Fiscal Cliff for Tax Savings (Part 1)

ARDMORE, Pa. — Package renews more than 50 temporary tax breaks through 2013

ARDMORE, Pa. — The so-called “fiscal cliff” tax package recently signed into law renewed more than 50 temporary tax breaks through 2013, saving individuals and businesses an estimated $76 billion. For the owners and operators of small- and medium-sized laundry businesses, there is good news and bad news contained in the fiscal cliff tax laws.

First, the good news: greater certainty in taxes. The owners and operators of laundry businesses have grown used to many longstanding tax breaks but they also have had to get used to the uncertainty of whether they will be renewed each year.

On the downside, in addition to a 3.8% Net Investment Income (NII) tax and a 0.9% Additional Medicare tax that, thanks to the Health Care and Education Reconciliation Act of 2010, began in 2013, many laundry owners discovered they are subject to new taxes. Single individuals with incomes above the $400,000 level and married couples with income higher than $450,000 will pay more in taxes in 2013.

EQUIPMENT WRITE-OFFS FOR PROFITABLE OPERATIONS

The American Taxpayer Relief Act extended through 2013 the Tax Code’s Section 179 first-year expensing write-off for equipment and business property purchases. Now, the higher expensing limits in effect in 2011 have been reinstated for 2012 and extended for expenditures made before Dec. 31, 2013. Thus, a laundry business can expense or immediately deduct up to $500,000 of expenditures in 2012 and 2013, subject to a phase-out if total capital expenditures exceed $2 million.

The tax break that allows profitable laundry businesses to write off large capital expenditures immediately—rather than over time—has long been used as an economic stimulus by our lawmakers. While 100% “bonus” depreciation expired at the end of 2011, today the new law allows 50% bonus depreciation for property placed in service through 2013.

Some transportation and longer-lived property are even eligible for bonus depreciation through 2014. If bonus depreciation had not been extended, the 2012 tax year would have been the final year in which substantial first-year write-offs for buyers of business automobiles and light trucks were available.

To be eligible for bonus depreciation, property must be depreciable under the standard MACRS (Modified Accelerated Cost Recovery System) and have a recovery period of less than 20 years. Section 179 first-year expensing remains a viable alternative, especially for small businesses. Property qualifying for the Section 179 write-off may be either used or new, in contrast to the bonus depreciation requirement that the taxpayer be the “first to use.”

Leasehold improvements and building improvements generally must be depreciated over 39 years. The tax law provides a special 15-year, straight-line depreciation break for qualified leasehold improvements, restaurant property, and retail improvements. Naturally, there are quite a few restrictions, such as the lease must between unrelated parties.

Qualified leasehold improvements also qualify for the 50% bonus depreciation. In fact, qualified leasehold improvements, restaurant property, and retail improvements up to $250,000 may qualify for Section 179 expensing. And, best of all, these provisions have been extended for property placed in service before Jan. 1, 2014.

MORE, MORE AND MORE

The Work Opportunity Tax Credit (WOTC), which rewards employers that hire individuals from certain target groups, has extended to Dec. 31, 2013, and applies to individuals who begin work for the employer after Dec. 31, 2011. Under the revised WOTC, laundry businesses hiring an individual from within a target group are eligible for a credit generally equal to 40% of first-year wages up to $6,000.

An S corporation is a pass-through entity and not usually subject to income taxes. It is, however, liable for the tax imposed on built-in gains or capital gains. The tax on built-in gains is a corporate-level tax on S corporations that dispose of assets that appreciated in value during the years when the operation was a regular C corporation.

The new law extends a relaxed version of the provision limiting the “recognition period” to five years, but only for “built-in gains” recognized in 2012 and 2013. Thus, if a laundry business elected S corporation status beginning Jan. 1, 2007, it will be able to sell appreciated assets it held on that date without begin subject to a hefty tax bill.

Check back Thursday for the conclusion!

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult a financial adviser for advice regarding your particular situation.

June 20, 2012
Changes in Repair/Replace Tax Rules (Part 2 of 2)

ARDMORE, Pa. — Are certain expenditures currently deductible or must they be capitalized

ARDMORE, Pa. — In an effort to resolve the controversy over whether certain expenditures made by a laundry business are currently deductible as repair expenses, or whether they must be capitalized and deducted over the life of the underlying business asset, the Internal Revenue Service has finally released new regulations.

The IRS’s long-awaited expanded regulations for determining whether an expense must be capitalized because it betters or improves tangible business property or equipment, restores it, or adapts it to a new and different use, will have a significant impact on every laundry business that acquires, produces, or improves its tangible property. 

In addition to clarifying and expanding the current rules, the new regulations create “bright-line” tests for applying the repair-or-capitalize standards, provides guidance for accounting for—and disposing of—repaired property, as well as clarifying other aspects of the repair/capitalize dilemma.

The new regulations specify how repairs made simultaneously with improvements are to be treated, and provide a “safe harbor” for routine maintenance expenses such as materials and supplies. The new rules are also must reading for landlords and tenants that must capitalize expenses related to leased buildings. And, because the new rules were issued in “temporary” form, every plant owner and operator will feel the impact immediately.

CHANGES, WE HAVE CHANGES

The new regulations are the IRS’ third attempt to provide comprehensive guidance under the repair-or-capitalize rules. They attempt to answer such questions as how to treat environmental remediation expenses and how to treat rotatable spare parts used in repairs. One significant rule change allows a laundry owner or operator to deduct retirement losses for building components.

If, for example, the laundry operation replaces the roof on a building and disposes of the old roof, it now has the option of taking a retirement loss for the old roof. Of course, the replacement must be capitalized, but at least a retirement loss can be claimed.

Another change involves the “de minimis” expensing rule, a rule that allows a laundry business to expense or write off the acquisition cost of property on his books for financial reporting purposes. This immediate write-off is available to a laundry business with a written policy in place to do that, but only up to a threshold or ceiling. The new regulations also include many types of materials and supplies among those eligible for the de minimis expensing rule. Under earlier rules they were not eligible, or only some categories were.

MATERIAL AND SUPPLIES

As mentioned, under the new rules the costs of buying or producing materials and supplies remain deductible maintenance expenses in the year they are used or consumed. The cost of incidental materials and supplies, for which no record of consumption is kept, are generally deductible in the tax year in which they are paid.

However, while the timing rules for materials and supplies remain the same, the new rules provide a new definition. Materials and supplies may now be currently deducted as an expense if they are acquired to maintain, repair or improve business property owned, leased, or serviced by the laundry business, consist of fuel, lubricants, water and similar items that are reasonably expected to be consumed within 12 months, with an economic useful life of less than 12 months or costing less than $100.

Under an elective “de minimis” rule, amounts (other than inventory or land), along with amounts paid for any materials and supplies are not required to be capitalized. That is, the amounts do not have to be capitalized if the laundry operation has an applicable financial statement (such as one required by the Securities and Exchange Commission), a certified audited financial statement, written accounting procedures in place for treating the amounts as expenses on its AFS, and if the amounts paid and not capitalized are less than (1) 0.1% of gross receipts or (2) 2% of the total depreciation expense as determined in its AFS.

ACCOUNTING FOR REPAIRS AND REPLACEMENTS

Every laundry business should have some way of tracking the equipment and other assets used in the business and their repair costs on a unit-by-unit basis. It’s unlikely that those repair costs can be tracked mentally. Increasing repair costs can be a strong indication that equipment is coming to the end of its useful life, or that the operation has a “lemon” that will continue to suck cash.

Generally, it is useful to maintain a spreadsheet listing the purchase date, identifying the equipment and then listing repair or maintenance costs, along with a brief description of the work performed. It becomes easy to then determine which units or models are racking up the costs.

Thanks to the new rules, the owners and operators of many laundry businesses may discover that they will have to modify how they account for expenditures, as well as collecting information necessary to determine whether these expenditures are capital or alternatively currently deductible in the year that they are incurred.

Typically, if a repair cost were not deductible in the year incurred, it would be capitalized and depreciated. If, for example, a plant owner or operator had equipment or a machine and performed a “capitalizable” repair on it, that additional repair cost would be capitalized and depreciated over the appropriate recovery period for tax purposes. If it were a deductible repair cost, obviously the laundry operation would benefit from a deduction up front in the tax year incurred.

While awaiting the IRS’ guidelines for implementing the new regulations, it is already obvious that many plant owners and operators will need to implement the changes for the 2012 tax year. Whether the IRS will treat the changes required under the new regulations as automatic accounting method changes, and whether affected laundry businesses will be required to obtain approval for a change in accounting methods, are, as yet, unknown.

The sheer volume of the new rules on deduction vs. capitalization of tangible property costs will obviously require professional assistance. Now is a good time to seek such help. While it’s not urgent, now might be a good time to begin looking at repair and maintenance costs for 2012.

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult a tax adviser for advice regarding your particular situation.

June 19, 2012
Changes in Repair/Replace Tax Rules (Part 1 of 2)

ARDMORE, Pa. — Are certain expenditures currently deductible or must they be capitalized

ARDMORE, Pa. — In an effort to resolve the controversy over whether certain expenditures made by a laundry business are currently deductible as repair expenses, or whether they must be capitalized and deducted over the life of the underlying business asset, the Internal Revenue Service has finally released new regulations.

The IRS’s long-awaited expanded regulations for determining whether an expense must be capitalized because it betters or improves tangible business property or equipment, restores it, or adapts it to a new and different use, will have a significant impact on every laundry business that acquires, produces, or improves its tangible property. 

In addition to clarifying and expanding the current rules, the new regulations create “bright-line” tests for applying the repair-or-capitalize standards, provides guidance for accounting for—and disposing of—repaired property, as well as clarifying other aspects of the repair/capitalize dilemma.

The new regulations specify how repairs made simultaneously with improvements are to be treated, and provide a “safe harbor” for routine maintenance expenses such as materials and supplies. The new rules are also must reading for landlords and tenants that must capitalize expenses related to leased buildings. And, because the new rules were issued in “temporary” form, every plant owner and operator will feel the impact immediately.

CAPITALIZE-OR-REPAIR EXPENSE

Since the Reconstruction Era Income Tax Act of 1870, taxpayers have been prohibited from deducting amounts paid for new buildings, permanent improvements, or betterments made to increase the value of property. While this concept has been recognized as part of tax law almost from its inception, exactly what must be capitalized and what may be currently deducted as an expense has been at issue ever since.

According to the IRS, expenditures are currently deductible as a repair expense if they are incidental in nature and neither materially add to the value of the property nor appreciably prolong its useful life. Expenditures are also currently deductible if they are for materials and supplies consumed during the year.

On the other hand, expenses must be capitalized and written off over a number of years if they are for permanent improvements or betterments that increase the value of the property, restore its value or use, substantially prolong its useful life, or adapt it to a new or different use.

Unfortunately, the current rules don’t clearly address even the core issue of whether expenditures should be deducted currently (e.g., as repairs or as materials and supplies) or capitalized by the plant owner or operator.

REPAIR/REPLACE BASICS

Under the rules, the cost of work performed to return property to a former condition without extending its useful life is currently deductible as a repair expense, unlike capital improvements that extend its life or increase its usefulness or productivity and which must be depreciated.

Similarly, the cost of incidental repairs is typically deductible. The regulations state that the cost of incidental repairs that neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient condition, may be deducted as an expense.

Quite frequently, new additions are made to existing property. These additions are not replacement components nor are they repairs to property, but are instead newly installed components. These additions are required to be capitalized.

At other times, replacement parts or components are added. For example, a car’s engine is worn out and replaced. This replacement returns the car to its condition prior to the deterioration of the part. It would be logical to consider this replacement as an increase in the car’s value requiring capitalization. Conversely, it would also make sense to say that by returning the car to its prior condition, it had been repaired. Under this theory, all repairs would be deductible, no matter how substantial they might be.

The above interpretation renders meaningless any distinction between a deductible business expense and a capital expenditure. Thus, it is oftentimes insufficient to merely look at increased value as the determining factor for characterizing the replacement of a part or component. An increase in value is only one of many factors that must be considered to determine deductibility or capitalization.

Check back Wednesday for Part 2: Changes, We Have Changes

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult a tax adviser for advice regarding your particular situation.

January 3, 2012
Make This Tax Season Work for Your Benefit

PEMBROKE, Mass. — Tax time is here again. You know the drill. You gather up all your paperwork, ledgers, computer reports, and the like, and drop them off at your accountant. A few weeks later, he calls, telling you to make checks out for so much in federal taxes and so much in state taxes. You’re finished for another year.

How about trying a different approach this year? Become proactive about your taxes; don’t just let the accountant do them. Try to learn from the process. In fact, suggest possible deductions. Your accountant might be a longtime family friend who has stuck by you through thick and thin, but no one cares as much as you do.

Here are a few suggestions for tax time:

File your taxes in a timely fashion. Be honest and above board. Call all inflows revenue and all expenses outflows. To do this accurately means keeping up with paperwork and maintaining the company books in a systematic fashion.

Get the payroll taxes filed, keep up with quarterlies, and turn in your personal tax return by April 15.

Pay estimates in a timely fashion. Estimates are due on April 15, June 15, Sept. 15 and Jan. 15. Estimate your annual tax liability, and pay estimates in four equal sums, both federal and state. If you don’t pay estimates on time to cover your annual profits, you will be assessed a penalty.

But the penalty is only the beginning of your problems. With this tendency to be late, you’ll probably struggle to comply with your obligation. For instance, the end of the year is coming, and you’re in a tough cash-flow squeeze, so you don’t put in the last estimates. This begins a vicious cycle of always trying to catch up. Don’t fall into that bottomless hole.

Include all mileage driven in connection with work. That includes visits to other Laundromats, trips to vendors, explorations of other markets, and even rental car costs in distant places if it is used to parse the Laundromat situation there.

Volunteer miles driven become business miles. For instance, say you conduct a free cleaning for a charity drive. All related activities are fully deductible. Pickups and drop-offs count as business miles instead of volunteer miles, because the activity helps your company’s image.

Professional subscriptions and association dues are legitimate deductions. For example, if you take several fellow association members out to dinner and you discuss your companies, you could take that expense. If you host an association party, all related costs are deductible.

Expense books purchased that help with work. For example, if you buy business or psychology books to understand employees, these are legit expenses.

Count the cost of any experiment to improve or try new processes. This might include cost of chemicals and equipment for testing out new cleaning agents.

Deduct total expenses of conventions and workshops. All charges related to your attendance at an event—flight, hotel, car rental, meals—are included. If your wife attends, her individual expenses cannot be included. But the charges common to both of you, such as lodging, can be.

If you use the Internet for research, take a portion of the monthly fee.

The costs of all education programs and workshops are real expenses.

Any payment made to your young children for working in your laundry is a deduction. Now you can employ your young children and expense their incomes. While it’s a deduction for you, they will probably not pay any taxes because their incomes fall under $3,700, the individual exemption amount.

The cost of gifts given to individuals who helped you with your business is a marketing expense. For instance, if someone gave you a lead, and it results in a new client, any giving to that individual is a valid deduction.

If you buy art and rotate it periodically in the laundry, you are entitled to expense the purchase.

If you have a space where you do administrative work regularly and exclusively at home, you can take a home office deduction. You can deduct a portion of your mortgage interest, property taxes, house insurance, maintenance, repairs, and depreciation. The portion is that square foot percentage that you use for the office plus any space you store material versus the total square footage of your home.

By regular and exclusive, you don’t have to do the work there all the time, but when you do the activity, you do it there, and you don’t do anything else there. In other words, that space is set aside for you to work at home. You might have an office in your store, but that doesn’t negate the possibility of taking a home office expense.

Many “Laundromateurs” stay clear of home offices. They don’t like the sound of the phrase, perhaps harkening back to the days when a home office would send up a red flag. But those days are long gone. With more and more people working from home, the practice has become an accepted part of the business landscape. Additionally, a home office is often a significant expense, particularly if the business owner has a sizeable house and a large mortgage. A home office could easily become a $2,000 or $3,000 deduction.

Use the time with your accountant to learn something. Examine your tax return and come back with questions before filing. Some changes might benefit you.

  • Why do we have so much depreciation?
  • What do the figures represent?
  • What is special depreciation?
  • Why did my cost of utilities go from 23% to 26%?
  • Is my wash, dry and fold business profitable?
  • Am I paying out too much to settle customer complaints?
  • Which machines need replacing?
  • Were my marketing efforts effective?
  • If I made X profits, where is it?
  • How could I make more money next year?

Make your accountant a business partner. After all, he or she is involved in many ventures as an accountant, and might be an investor or business owner. He or she could give you good advice, much like a consultant can.

Make the next tax season really count for you.

October 13, 2011
Time Running Out to Take Advantage of Tax Relief Act

RIPON, Wis. — Self-service laundry owners have approximately two months left to take advantage of 2010 Tax Relief Act incentives, according to Alliance Laundry Systems, a manufacturer of commercial laundry equipment.

The tax incentive allows laundry store owners to get 100% bonus depreciation when they purchase new equipment and place it into service in 2011. Bonus depreciation is not limited to taxable income; it can create a net operating loss that can be carried back two years to offset taxable income in those years and result in an immediate tax refund, Alliance says.

There is no cap on the amount of equipment that can be depreciated under this provision.

The Section 179 Deduction limit has been raised to $500,000. A business with total equipment purchases—both new and used—that don’t exceed $2 million can expense the first $500,000 (subject to certain limitations) of those purchases for the 2010 and 2011 tax years.

Store owners can combine 100% bonus depreciation with the Section 179 Deduction for purchases incorporating both new and used equipment. Additionally, for the first time, certain leasehold improvements, such as updating or refurbishing a laundry, will qualify for bonus depreciation, Alliance says.

These tax incentives dramatically accelerate cash flow and reduce the time it takes to pay back the investment on new equipment, the company adds.

For more information about these incentives, it’s recommended that you contact a professional tax adviser.

January 11, 2011
A Less-Taxing Experience? (Part 1 of 2)

CHICAGO — Some of you no doubt are still recovering from the holiday season, and want to lay low. Wanting to spend a little quality time on the couch is understandable.

While preparing your taxes may be low on your priority list at the moment, a little planning can go a long way in ensuring a smooth tax-prep process. Formulating the proper questions today can save you from plenty of headaches tomorrow. Maybe there are some tax considerations that you have never pondered.

December 11, 2009
Be Proactive with Tax Preparation

March 3, 2008
Small Businesses Catch a Break: Tax Breaks