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A Less-Taxing Experience? (Part 1 of 2)

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Photo: ©iStockphoto/DNY59

Paul Partyka |

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.
Larry Larsen and Roy Herbert, both experienced in dealing with Laundromat tax issues, offer some tax-related thoughts that may cause you to rethink some of your planning methods.KEEPING IT SIMPLE
Surviving tax time is all about keeping things simple, says Larsen, an industry veteran with more than 30 years of experience in the ownership, management and construction of Laundromats. Larsen was one of the experts the IRS used in its development of the laundry audit program.
Being organized starts with maintaining a separate checking account for each Laundromat, Larsen says. Operators need to total the deposits made to this account at the end of the year.
“This is your income,” Larsen says. “The IRS will have pre-audit information of the yearly deposits before any meeting. They will question why the money deposited does not match the amount you list on your tax forms. Do not mix in any other funds from any other sources.”
Operators should deal with all of their expenses out of this account, he adds. “Do not write any checks not related to the Laundromat location out of this account. Income minus checks written is your net income.”
Give some thought to equipment depreciation, he advises. “Depreciation of equipment can be based on five years (12 years can also be used under the code). I suggest ‘straight-line’ depreciation rather than the accelerated.
“When you allocate a portion of the purchase price for ‘lease value,’ ‘fixtures,’ or ‘trade fixtures,’  these must be depreciated over their projected life, limited only by the remaining lease term. This is why the best leases are five-year leases with additional five-year options — all the assets can be depreciated in the first five-year period.”
A residual value of the equipment must be stated, he explains. “For example, use a $400,000 purchase price for the Laundromat. You claim a $40,000 residual value of the equipment, and depreciate $360,000 for five years. This gives you a depreciation of $72,000 per year.
“If you’re in the 40-percent tax bracket (federal and state), this is worth $28,800 per year in tax you don’t have to pay. If the store only breaks even, over the five years, you receive $144,000 in depreciation benefits. If you put down one-third of the purchase price when you bought the store (about $132,000), you receive your total down payment from the government in five years.”
While some of the number-crunching requires some planning, Larsen strongly urges operators to keep it simple.
“The more complicated (the) bookkeeping, the more likely a mistake will be found. There is no requirement for a specific type of bookkeeping or even using a CPA or accountant. An industry standard (i.e. using an Excel spreadsheet or your bank-account records) is acceptable. Using a CPA or bookkeeper is likely to cause you more difficulty than benefit during an audit. It’s better to be perceived as a struggling small-businessman who made an innocent mistake than a ‘crafty’ businessman trying to scam the government. Penalties, if any, are more likely to be waived if you are perceived as simply a small-businessman trying to do your best wading through all the tax laws and regulations.”
Some of you may be wondering how Larsen’s stint as Laundromat “expert” for the IRS turned out. The IRS was not satisfied with its ability to prosecute cases involving the underreporting of Laundromat income, he says, so it developed a utility-method analysis. Laundromat income would be tied to utility usage.
“I advised [the IRS] that I would be unable to support any claims of underreporting of income using the utility-method analysis. Although an analysis might show that a Laundromat produced more income than it reported, it would be impossible to pinpoint whether it was a case of an owner underreporting, employee theft, duplicate keys, service-door starts, bra-wire triggers, rubber surgical-glove triggers, silent partners or undiscovered water leaks.”
Larsen believes that only an admission by the taxpayer or the discovery of more funds being deposited in the bank account than reported would establish the proper person or event on which to place blame.
“Of the 26 cases I am aware of that were subject to intense audit security, only one resulted in prosecution. This involved an owner who claimed income of $12,000 per month, but was depositing $18,000 per month into his bank account.
“Currently, Laundromats are not on any priority agenda for audits. Of course, the new card systems will make it easier for the IRS to establish incomes and machine usage, which is why some owners refuse to consider card systems in their locations.”If you have any questions about this article, contact Larry Larsen at 714-390-9969 or laundromat123@aol.com.American Coin-Op urges operators to consult their accountant with specific tax questions.Please check back Thursday, Jan. 13 for Part 2 of this story.
 

About the author

Paul Partyka

American Coin-Op

Paul Partyka was editor of American Coin-Op from 1997 through May 2011.

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