The passage of the Tax Increase Prevention Act of 2014 late last year retroactively extended 54 tax breaks, but only for the 2014 tax year. The so-called “tax extenders” law opened the door for car wash operators and their businesses to claim many of these popular but temporary tax incentives when their 2014 tax returns are filed — or even after they have been filed.
Commuters who use public transportation, teachers who spend their own money on classroom supplies, individuals who claim the state and local sales tax deduction, people who live in states without state income taxes, and businesses big and small would have been denied these tax breaks without this one-year extension.
Without the new law, car wash operations would be unable to claim energy incentives and write-offs such as bonus depreciation, Section 179 first-year expensing, or the Work Opportunity Tax Credit. Unfortunately, the Tax Increase Prevention Act does not make permanent any extenders — nor extend any of them for the usual two-year period. Instead, under the new law, these extenders are for the 2014 tax year only. Making matters worse, in order to benefit from any of the new tax saving provisions may require postponing the filing of the 2014 tax return or changing an already-filed return.
THE BUSINESS TAX EXTENDERS
As mentioned, the Tax Increase Prevention Act extends many previously expired business tax incentives for one year. Included are a number of provisions likely to lower the tax bills of car care businesses, such as:
Business Property Write-Offs
Bonus depreciation has been extended allowing an additional first year deduction of 50 percent of the cost of equipment acquired during the 2014 tax year. With 50 percent bonus depreciation, a car wash operation or business can deduct half the cost of new capital purchases in the first year.
Section 179 of the tax code has also been extended allowing car wash operators and other small businesses to deduct the cost of assets when purchased, rather than over many years, thus creating a more immediate tax windfall. In other words, Section 179 of the tax law allows a business to deduct the entire cost (100 percent) of up to $500,000 of new or used computer equipment, conveyors, vacuum systems, water heaters, and compressors — in fact, most equipment, software, and other depreciable assets with less than a 20-year life are 100 percent deductable.
Many car wash operators will find the bonus depreciation break may be more valuable than the Section 179 deduction because the Section 179 expensing deduction is limited to the taxable income of the car wash business with any excess carried forward. Those actively involved in running a car wash or auto detailing business can, however, claim losses generated by 50 percent bonus depreciation against other income, but can also carry any still unused losses back for two years, thereby getting a refund check from Uncle Sam.
And don’t forget, a car wash business may be able to use Section 179 expensing on improvements or modifications made to leased equipment or property placed in service by December 31, 2014. Of course, there’s a limit of $250,000 on these so-called “qualifying leasehold improvements.”
New Life for Leasehold Improvements
The new law will allow car wash operations and other businesses to continue using a 15-year “life” for improvements made to leased property placed in service in 2014 for any costs remaining after bonus depreciation or the Section 179 expensing deduction have been taken — instead of the usual 39-year period under the standard MACRS depreciation system.
Work Opportunity Tax Credit
A car wash operation or business can once again apply for theWork Opportunity Tax Credit if they hire military veterans and active reservists. An even larger credit is available to a small business that hires individuals who receive supplemental security income or long-term family assistance, were long-unemployed, or are service-disabled veterans. Other hiring-related provisions that were restored for the 2014 tax year include credits for businesses that hire qualified ex-felons, or qualified summer youth employees.
Small Business Financing
Many car wash operators have used a unique “small business stock” to finance the growth of their operations. The 100 percent exclusion from capital gain that was allowed on the sale or exchange of qualified small business stock held for more than five years by non-corporate investors has been extended. Stock acquired by investors in a business after 2014 will be entitled to exclude only the regular 50 percent of the gain realized when disposing of their interest in the car wash operation.
Recognizing S Corporation
As the economy improves many businesses are replacing much of their equipment and other business assets. Unfortunately, many are just discovering that a corporate-level tax is being imposed at the highest marginal rate (currently 35 percent) on the so-called “built-in gain” of a car wash business operating as an S corporation. That built-in gain is usually gain that arose prior to the car wash’s conversion from a regular C corporation to an S corporation, and arises when assets are sold. Under the new law, an S corporation’s recognition period for built-in gains tax is five years rather than 10 years.
Energy-Related Tax Savings
The extension of the energy efficient commercial buildings deduction allows an above-the-line deduction for energy efficient commercial buildings. Until the end of 2013, business owners who built or renovated shop or office property featuring renewable energy technology — such as solar panels or “green” lighting equipment — could take a special tax deduction. Now, any such property placed in service in 2014 would qualify for the deduction.
MORE EXTENDED DEDUCTIONS
There are, of course, quite a few other tax-saving provisions — many of them quite narrow in scope such as those for film and theater producers, NASCAR racetrack owners, racehorse owners, and rum producers in Puerto Rico and the Virgin Islands — included in the Tax Increase Prevention Act. The new law also extends a tax credit for rescue-team training and the option of expensing safety equipment — both are limited to the mining industry. However, among the other extended provisions that might apply to a car wash are:
• The New Markets Tax Credit
• Tax incentives for empowerment zones
• The extension of basis adjustment to stock of S corporations making charitable contributions of property
• Indian employment credit and accelerated depreciation on Indian reservations
• S corporation charitable donation of property
• Biodiesel and Renewable Diesel Tax Credit
• Other energy credits and deductions
CHANGING YOUR MIND ABOUT TAXES
Under the new law, the extended provisions are for the 2014 tax year only. Obviously, coming so late in 2014 left little time for planning and, may in fact, require changes to already filed 2014 tax returns. Fortunately, once a car wash business’s tax returns have been filed, changes can be made on an amended tax return.
Generally, a car wash — or its owners — can change their mind about previously reported income, missed deductions, and retroactive tax breaks within three years from the time the return was filed, or within two years from the time the tax was fully paid, whichever is later.
Individuals, sole proprietors, etc., use Form 1040X, Amended Individual Tax Return. An incorporated car wash business that filed Form 1120 uses Form 1120X, Amended U.S. Corporation Income Tax Return, to file an amended return, while S corporations and partnerships merely check a box on the Form 1120S or Form 1065.
MONEY NOW, RETURNS LATER
Uncle Sam, in the form of the IRS, usually wants its money sooner rather than later, a requirement that usually means pre-paying estimated tax bills or fully paying tax bills on or before the deadline (either March 15 or April 15 for those businesses and individuals using a calendar year). Today, however, car wash operators and businesses can delay filing their 2014 tax return with little worry about the IRS’s strict pre-payment rules.
Using Form 4868, “Automatic Extension of Time to File a U.S. Individual Tax Return,” an operator can obtain an automatic, six-month extension of time in which to file his or her tax returns. Incorporated car wash businesses may obtain the automatic six-month extension of time to file income tax returns by submitting Form 7004, “Application for Automatic 6-Month Extension of Time to File Certain Business, Income Tax, Information, and other Returns.” The automatic six-month extension of time to file also applies to the returns of pass-through entities such as partnerships, S corporations, and limited liability companies (LLCs).
While a delay in filing tax returns does not extend the time for paying taxes, the Tax Increase Prevention Act of 2014 is all about reducing an operator’s or car wash operation’s tax bill making it unlikely that additional taxes will be due. Naturally, the assistance of a tax professional is necessary in both taking advantage of the tax breaks that have been extended and ensuring they are claimed properly.
Will your car wash business reap the reward of a lower tax bill thanks to the Tax Increase Prevention Act of 2014?
Mark E. Battersby is an Ardmore, PA-based freelance writer, specializing in finance and tax issues.