Content about Taxation in the United States

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.

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…

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.