CHICAGO — The owners and operators of most self-service laundries rely on the tax-saving abilities of professionals or software programs. Substantial tax savings are, however, largely the result of moves undertaken before the close of the tax year.
There’s still time for the vended laundry operator to ensure enough hours have been worked to constitute “material participation” in the business. Material participation is necessary for avoiding the label of “passive investor” and limited personal deductions.
It’s also not too late to qualify for the significant benefits of the soon-to-expire Work Opportunity Credit for hiring from specific groups of potential workers. Now might also be a good time to make any large equipment purchases for a write-off under the revamped bonus depreciation.
Part 1 of this article covered some newly created tax-saving opportunities and some Tax Planning 101 guidance. Let’s conclude:
(Editor’s note: This article is for educational and reference purposes only. It’s not intended to provide specific advice or individual recommendations. Consult your attorney or tax adviser for advice about your particular situation.)
THE DISAPPEARING WORK OPPORTUNITY CREDIT
The Work Opportunity Credit (WOTC) has long provided an incentive for employers to hire and retain individuals from groups that have consistently faced significant barrier to their employment. The WOTC is a tax credit that, unlike a deduction from taxable income, directly reduces the annual tax bill.
In general, the WOTC equals up to 40% of up to $6,000 in wages paid to or incurred on behalf of an individual. For disabled veterans, the credit may be available for the first $24,000 of wages or up to $9,600 per worker. Unfortunately, time is running out as the WOTC expires at the end of 2025.
ABANDON, DON’T SELL
If equipment or other business assets have no value to the self-service laundry, the benefits of abandoning it, rather than selling, might be rewarding.
Abandonment could generate an ordinary, fully deductible loss, rather than treating the loss as a capital loss, which is subject to limitations. Of course, abandonment must be documented and the property truly abandoned.
REPAIRS
Today, the so-called “de minimis” safe harbor deduction for materials and supplies has been increased from $500 to $2,500, at least for those businesses without an applicable financial statement.
It’s not too late to update an operation’s policy for differentiating repairs from capital expenditures to comply with the updated regulation.
REASONABLE COMPENSATION
The IRS can, and will, challenge salary amounts that it deems to be “unreasonable.” While the factors used by the IRS and the courts to determine reasonable compensation vary, the revenue service typically looks at training and experience, duties and responsibilities, time and effort devoted to the business, and more.
The courts generally look at amounts paid by comparable businesses for similar services, the use of a bonus formula, and the importance of the role played by the compensated individual.
RECORDS FOR PLANNING
Records aren’t merely proof of a deduction or other write-off, they’re both a reminder and an aid to tax planning. Even though the IRS doesn’t require receipts for certain expenses under $75, keeping detailed records is still recommended.
Although many deductions can be claimed even without receipts, alternative records like canceled checks, bank statements, written records such as calendar notations, and photographs are acceptable to the IRS. And, don’t forget that the push to go paperless isn’t limited to recordkeeping — it can apply to all transactions.
GOING PAPERLESS
The government’s recent announcement about “going digital” and “going paperless,” along with the lower electronic filing threshold, means many vended laundry operators will be required to file Form 1099s, W-2s and other tax forms electronically.
As of Sept. 25, an executive order has eliminated the U.S. government’s longstanding practice of issuing paper checks. With few exceptions, it is mandatory that all federal disbursements — including tax refunds, Social Security payments, vendor payments, and benefits — be made electronically by the government.
Payments made to the federal government — including taxes, fines, fees and loans — must be made electronically via accepted electronic methods such as direct deposits, debit/credit cards, digital wallets and real-time payment systems.
THINKING ABOUT PLANNING
A review of the self-service laundry operation’s current fixed assets, upcoming equipment needs, and year-to-date taxable income can help determine if new purchases make strategic sense.
For some operators, investing in equipment, technology or even vehicles before the year’s end may not only improve operations but also provide a meaningful tax deduction.
Now is the time to think about the tax impact of potential investments and align purchases with broader financial goals. Now is also the right time to identify and act on opportunities that can reduce taxable income before year’s end.
Structuring for tax efficiency — considering what is the best entity and the one that will produce the most favorable tax bills in the future — is important. Planning now for a potential entity switch can result in substantial savings.
Now might also be a good time to seek the assistance of a professional, both for tax return preparation and to help legitimately maximize the write-offs that will produce a favorable tax bill.
Miss Part 1? You can read it HERE.
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].
