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May 15, 2013

Exclusive: 2010-2011 Textile Care Processing Cost Benchmarks

CHICAGO — Data compiled from more than 470 domestic and international healthcare and hospitality laundry facilities

CHICAGO — Having received numerous requests for newly revised information on this subject, I have reviewed the volumes of information obtained from both healthcare and hospitality laundry operations worldwide for 2010-2011.

I did my best to convert foreign cost to U.S. cost—both were changing rapidly as of December 2011—and discovered that our foreign counterparts were, in most segments, slightly more cost-efficient and, due to exchange rates, getting more production for the money simply due to the value of certain currencies, lower fringe benefit cost and higher degrees of automation. (I am pleased to report that this gap is closing rapidly.)

There could be numerous explanations, of course, but the primary reason was the vast difference in labor and fringe benefit cost in our country vis-à-vis other foreign locations, primarily those in Europe, Russia and the Far East.

The basis for this analysis was to determine benchmark alignments once various currencies were adjusted to match the U.S. dollar. Both higher and lower extremes in costing for each element were evaluated for accuracy. A group of independent accounting specialists who volunteered its time was utilized to draw the various conclusions reached in the report. Foreign laundry experts assisted in the translation of some information.

Throughout the process of validating accuracy of the data provided and drawing comparisons, the identity of each facility remained confidential. Each facility was simply referred to as a number or letter, depending on the type of operation: healthcare or hospitality. For those with a combination of tasks, every effort was made to categorize each element.

Every facility that supplied information has done so every year since this periodic review began.

2011 FORECAST ON TARGET?

As consultants and various levels of internal management continue to overly complicate laundry operational cost scenarios, as well as depicting systems that may not prove cost-effective, it is apparent that laundry and facility managers, as well as top executives with a renewed interest, require a cost benchmarking rule of thumb that will assist them in selling their operations, i.e. justifying new systems or a new facility, obtaining new customers and, probably most important, comparing variable cost that should influence decisions to continue in-house operations or examine outsourced management, operations, linen rental, transportation, etc.

I remain amazed that folks who seem to be knowledgeable simply complicate data in such a form that it becomes extremely difficult if not impossible to interpret. The same situation applies when reviewing opportunities to automate and modernize operations. It is apparent in some cases that new operations with new systems are not as cost-effective as planned, mostly due to a misunderstanding of previous cost and the industry’s promises to improve on the status quo.

Institutions, general contractors and A/E’s that hire consultants to review laundry facility operations should also continue to rely on internal expertise and experience, I believe. The institutions should also ensure that the consultants and experts selected are experienced in reviewing all applicable operational elements. A consultant with expertise in energy management, for example, may not be qualified to review laundry production or linen distribution.

It is quite apparent that large laundry and linen-rental consortiums that deal specifically with healthcare markets are becoming more competitive. As business tends to escalate, and based on recent information, cost seems to be leveling out to some degree, with the exception of the impact of high cotton cost and, most recently, fuel cost.

My previous forecast that total cost of operations may reach $1.10 per pound processed/delivered by 2013 seems right on target. The rising cost of healthcare insurance benefits enacted as a result of healthcare reform could dramatically increase the cost of operations and associated product and equipment purchases in 2014.

A review of approximately 473 healthcare and hospitality laundry facilities located in the United States and 23 foreign countries with operations that process a combined 276 million pounds annually with varying degrees of efficiency reveal the following benchmark costs (in U.S. dollars) that should be deemed most efficient on the average, even though most every facility demonstrated opportunities to reduce cost, especially in labor-sensitive areas.

Most important to note in this analysis were the plans to reduce labor and utilities cost related to washing, drying, conveyance, and flatwork feeding and finishing. These facilities also reported that major efforts were under way to reduce textile-replacement cost through standardization efforts and by examining best value over lowest cost for an item. It’s unfortunate that the federal government seems to continue to focus on lowest cost rather than the impact of overall cost.

Other major components under review seem to drive at lowering chemical cost by conducting actual comparisons and focusing on the customer service element that is so critical to this facet of the operation.

The variables between healthcare and hospitality cost were certainly interesting. Hospitality was higher on the average, which was expected, with the average variance being between 6 and 7 cents per pound processed. This was mostly attributed to the higher quality/cost of textiles acquired, which is significant.

PRODUCTION COST BENCHMARKS

Processing Cost: Direct labor costs, including fringe benefits (health insurance, retirement, etc.), which are applicable to the receipt, sorting, washing, drying, ironing, conveying and preparing of textiles for delivery within a laundry processing facility. — 18-23 cents per pound processed

Administrative Cost: Covers personnel in laundry and textile product management, secretarial, contracting administration, general foreman and nonproduction employees/housekeeping (includes fringe benefit costs, such as union dues, health insurance, etc.). On average, fringe benefit costs were running at 24-32% of actual salary cost (in other words, add that percentage to base salary cost). — 3-5 cents per pound processed and delivered

Maintenance and Repair Cost: Labor cost and materials associated with routine maintenance of applicable systems, including processing and ancillary support equipment, carts, etc. — 7-11 cents per pound processed and delivered

Equipment Depreciation: Divide equipment value by 15 years. — 4-6 cents per pound processed

Depreciation of Property and Applicable Property Taxes: Divide aggregate cost of land and building plus annual taxes by 75 years. — 3-5 cents per pound processed and delivered

General Supply Cost: Includes leasing of office equipment, office supplies, covers, pads, hangers, thread, wax, patches, buttons, etc. — 2-4 cents per pound processed

Chemical Supply Cost: Laundry chemicals, water treatment, etc. — 3-5 cents per pound processed

Utility Cost: Electrical, steam, gas, water, oil, sewer, refuse removal, and solar. — 8-10 cents per pound processed

SUBTOTAL: For a most efficient operation, Production Cost should be 48-69 cents per pound processed.

TEXTILE DISTRIBUTION AND REPLACEMENT COST BENCHMARKS

Textile Distribution and Return Cost: Includes drivers, fees, tolls, leasing, fuel, vehicle maintenance/repair, linen room distribution (from cart assembly to end-user locations) labor and benefits, seamstress/repair/marking, uniform distribution, cart depreciation and replacement, and transportation to external customers. — 13-15 cents per pound processed (within this component, fuel cost was 4-5 cents per pound processed)

Textile Cost: Surgical, uniforms, general textiles, drapes and other textiles based on a seven-par maintenance value for healthcare or hospitality. — 17-21 cents per pound processed

SUBTOTAL: Textile Distribution and Replacement Costs should be 30-36 cents per pound processed and delivered.

TOTAL OPERATIONAL BENCHMARKS

The overall operational cost benchmark ranged in 2010-2011 from 78 cents to $1.05 per pound processed and delivered.

While the overall variance in cost ranges is certainly widespread, a manager must carefully and accurately calculate all costs associated with the actual operation—all are different.

A major failing on management’s part is the inability to calculate fringe-benefit cost and include it as part of the outcome. Calculating production cost while forgetting other costs simply raises additional questions. All costs depicted in this benchmark exercise are considered equally important; one without another would have painted an inaccurate picture.

If, for some reason, you think your costs are lower than the benchmark’s lowest range, I encourage you to re-examine and recalculate your numbers. More importantly, make sure you have included all costs so they parallel those listed in this report.

EXPECT COST INCREASES IN TEXTILE REPLACEMENT, TRANSPORTATION

As mentioned in my previous analysis, textile replacement cost and transportation cost for 2010-2011 did reflect marginal increases.

April 2, 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 Wednesday 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.

October 26, 2011

Deductions: Get ’Em While You Can (Part 2 of 2)

ARDMORE, Pa. — Thanks to the 100% “bonus” depreciation write-offs created by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, many laundry and dry cleaning businesses are discovering that capital investments in equipment, machinery and other business assets are more affordable today than ever before. Remember, however, the 100% bonus depreciation write-off is available only for qualifying purchases made by laundry services and businesses in 2011.

Those that have hesitated or postponed making capital investments because of the recent economic downturn might now want to consider how the combined use of incentives and the 100% bonus depreciation can substantially reduce the cost of capital investments. Even funding those new-equipment purchases is easier—at least for a while.

Opting Out

Although the 2010 Tax Relief Act included the best terms ever for bonus first-year depreciation, namely a 100% write-off of the cost of qualifying property, not all laundry and dry cleaning businesses will find it desirable to use front-load depreciation deductions. While it is possible to elect out of bonus depreciation entirely, it is, at least for now, less certain that a laundry or dry cleaning business can step down from 100% to 50% bonus depreciation.

The prime example of a situation crying out for a laundry business to opt out of 100% bonus depreciation is one where there are about-to-expire net operating losses, the value of which would be lost if current-year income were reduced too much by claiming the maximum depreciation allowance. Similarly, a laundry or dry cleaning business that currently is, and in the recent past, has been in a low tax bracket and expects to be in a higher bracket in future years may want to defer depreciation deductions to offset future higher-taxed income.

An election to take a reduced bonus-depreciation deduction was specifically authorized under prior law, when a taxpayer could elect 30%—instead of 50%—bonus first-year depreciation. Until recently, however, it appeared that the only choice for a laundry or dry cleaning business that does not want 100% bonus depreciation was to elect out of bonus depreciation entirely. Now, the IRS has decided to follow Congress’ “General Explanation” for the 2010 Tax Relief Act and permit a step-down election from 100% to 50% bonus depreciation.

Discretionary Incentives

When it comes to a financial helping hand, the best opportunity for laundry and dry cleaning businesses investing in capital improvements may come in the form of discretionary incentives available at the federal, state and local level. Although many of these incentives require some level of job-creation or, at least, job-retention criteria be met in addition to capital investment, there are some notable exceptions.

The Federal New Markets Tax Credit, for example, provides a significant financial incentive for qualified investments made in certain eligible census tracts. Also, Delaware and Virginia offer cash grants based on future capital investment made by existing businesses without requiring a commitment to job creation.

It is the incentives offered by many local jurisdictions that often provide the most significant level of benefit for capital investment activities. Many municipalities have the ability to offer property tax abatement or tax increment financing as tools to encourage capital investment. The property tax-related incentives are typically long-term in duration and provide significant savings for making qualified capital investment.

Funding Based on Need

Last fall’s Small Business Jobs Act created the State Small Business Credit Initiative and funded it with $1.5 billion to strengthen state programs that support lending to small businesses such as laundries and dry cleaning operations (and small manufacturers). Designed to spur up to $15 billion in lending, January saw the first wave of awards to the states.

Under the State Small Business Credit Initiative (SSBCI), participating states will use the federal funds for programs to leverage private lending to help finance small businesses such as dry cleaning plants and laundries that are creditworthy, but that are not getting the loans they need to expand and create jobs.

Last year’s Jobs Act included other provisions designed to help small businesses obtain funding. Among that bill’s many provisions were several new—but temporary—funding programs, such as the U.S. Small Business Administration’s amped-up extension of its lending guarantee programs and fee reductions. In addition, increases in the maximum loan size for the SBA’s 7(a), 504, and microloan programs will help. The 7(a) and 504 loan program maximums would bump from $2 million to $5 million and the microloans would increase from $35,000 to $50,000. Loans made under the SBA Express program would temporarily increase from $300,000 to $1 million. Also included is a temporary allowance for small-business owners to use 504 loans to finance certain mortgages to avoid foreclosure.

The SBA’s CDC/504 Loan Program provides long-term, fixed-rate financing to acquire fixed assets (such as real estate and equipment) for expansion or modernization. It is ideal for small businesses requiring “brick and mortar” financing. Rather than commercial lending institutions, 504 loans are delivered via CDCs (Certified Development Companies)—private, nonprofit corporations set up to contribute to the economic development of their communities.

Gone but Hopefully Not Forgotten

The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 provided many opportunities designed to help businesses reap tax benefits for capital investments and provide funding for doing so. The 2011 tax year may be the optimal time to take advantage of the federal, state and local tax or financing incentives that encourage capital investments.

Under the right capital-investment scenario, a savvy business may be able to claim 100% federal bonus depreciation, New Markets Tax Credit, state investment tax credits and municipal property tax abatement on the same capital investment. Or, the laundry business may benefit from the soon-to-expire funding opportunities available today.

Click here for Part 1.

October 25, 2011

Deductions: Get ’Em While You Can (Part 1 of 2)

ARDMORE, Pa. — Thanks to the 100% “bonus” depreciation write-offs created by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, many laundry and dry cleaning businesses are discovering that capital investments in equipment, machinery and other business assets are more affordable today than ever before. Remember, however, the 100% bonus depreciation write-off is available only for qualifying purchases made by laundry services and businesses in 2011.

Those that have hesitated or postponed making capital investments because of the recent economic downturn might now want to consider how the combined use of incentives and the 100% bonus depreciation can substantially reduce the cost of capital investments. Even funding those new-equipment purchases is easier—at least for a while.

Bonus Write-Off Background

Bonus depreciation was originally created in 2002 as a temporary economic incentive by which companies could immediately deduct 30% of the basis of qualifying assets that were placed in service after Sept. 10, 2001, and before Jan. 1, 2005. An increase in the percentage of the deduction in 2003 to 50% expired in 2005. Reintroduced by lawmakers in 2008, bonus depreciation has subsequently been extended three times.

Although the concept of taking the additional depreciation in the first year is quite simple, changes to the applicable percentage, timeframes during which each is available, and variations related to unique types of assets that qualify have made application of the rules somewhat complex.

The definition of property that is eligible for bonus depreciation under the 2010 Tax Relief Act is the same as under prior law, but the percentage and placed-in-service dates have changed. The percentage increased from 50% to 100% for qualifying property placed in service after Sept. 8, 2010, and before Jan. 1, 2012. Those laundries investing in qualifying assets will be able to fully deduct the cost during the current tax year. This will reduce taxable income and taxes paid, resulting in an increase in cash flow that can be reinvested in the business.

Expensing Write-Offs

Last fall’s Small Business Jobs Act increased the Section 179, first-year expensing dollar and investment limits to $500,000 and $2 million, respectively, for 2010 and 2011. The Tax Relief Act included a $125,000 dollar limit and a $500,000 investment limit for tax years beginning in 2012 and expiring after Dec. 31, 2012.

Unlike bonus depreciation that applies only to “new” property, a laundry or dry cleaning business may immediately deduct as a Section 179 expense, up to $500,000 of both new and used business property placed in service during the tax year. The Section 179 expensing write-off is reduced, dollar for dollar, by any property acquisitions in excess of the $2 million investment ceiling, limiting the write-off to smaller businesses.

Extending Leased Property and Other Write-Offs

Before passage of the Tax Relief Act, qualified improvements made to leased property, qualified restaurant property and qualified improvements to retail property that was placed in service before 2010 was included in the 15-year MACRS (Modified Accelerated Cost Recovery System) class for depreciation purposes—that is, those expenditures could be depreciated over 15 years under the MACRS standardized depreciation system.

The 2010 Tax Relief Act retroactively extended the inclusion of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property in the 15-year MACRS class for two years through 2011.

Layering Opportunity

It is not only federal tax write-offs that can help reduce the cost of capital investments. Many laundry and dry cleaning businesses making capital investments during the 2011 tax year can also benefit from state and local credit and incentive programs. In fact, many states offer a tax credit equal to a percentage of an eligible capital investment made in that state.

Eligibility for the credit may depend on industry or particular use of the underlying asset. For example, states like Massachusetts, New Jersey and Oklahoma offer investment tax credits to manufacturing business for assets purchased that will be used exclusively in manufacturing activities. As an alternative formula, Illinois offers businesses predominantly engaged in either manufacturing or retail an investment tax credit for the purchase of all qualified purchases placed in service during the year. Best of all, the assets are not required to be used exclusively for manufacturing or retail activities.

Tomorrow: Opting Out…

August 3, 2010

TRSA Seeks Rental Textile Deductions

ALEXANDRIA, Va. — TRSA is continuing to seek Congressional support for the industry’s effort to convince the Internal Revenue Service (IRS) that it should adhere to its 2008 plan to maintain rules governing deductibility of rental textile items. The agency seeks to disallow such deductions unless rental laundry companies account for the life cycles of individual items. That would create an onerous, if not impossible, inventory-tracking challenge for the industry, TRSA says.