Although tax planning should be a year-round strategy with year-end planning a good backup, even with filing deadlines fast approaching, it is not too late to reap tax savings. Keeping in mind that a car wash operator’s obligation is to pay only their fair share of taxes, and not a dollar more, consider a few last-minute tax savings tips such as those regarding the cost of the equipment and new technology that play such an important role in every car wash operation.

OVERLOOKED DEPRECIATION – AND ALTERNATIVES

Depreciation is an annual allowance for the wear and tear, deterioration, or obsolescence of business property such as buildings, machinery, vehicles, furniture, and equipment. Also depreciable is intangible property, such as patents, copyrights, and computer software.

The “extenders” bill passed late in 2015, permanently set the Section 179, first-year expensing write-off at $500,000 with a $2 million overall investment limit before phase-out. While there is no increase in the dollar amount of asset purchases that qualify, thanks to the inflation adjustment, the investment limit for 2016 increased to $2,010,000 before phase-out begins.

The same extenders bill also extended the 50-percent “bonus” depreciation write-off for equipment placed in service between 2015 and 2017, with a lower percentage kicking in for an additional two years. That means a write-off of 50 percent of the purchase price in the first year plus the regular depreciation write-off for the balance.

In many cases, taking those immediate, up-front deductions for Section 179 expensing or bonus depreciation makes sense. It’s a great way to boost cash flow. But spreading the deduction over time might make sense for a startup or a car wash that expects taxable income to be considerably higher in the future.

CALCULATING BUSINESS EXPENSE RECORDS

Just as all income should be reported to keep the tax folks at bay, all of the car wash operation’s expenses should be reported in order to keep the tax bill low. Of course, finding and documenting those business expenses is generally a big chore, especially close to the filing deadline. While the IRS doesn’t usually require receipts for expenditures of less than $75, most of our tax rules do require some expenses be documented — and those records also serve as an excellent reminder of deductions that might otherwise be overlooked.

Not too surprisingly, some of the most lucrative small business tax deductions are also some of the most complicated. The home office deduction, for instance, requires compiling multiple expenses and calculating percentages, while the deduction for auto expenses requires extensive recordkeeping that should have begun at the beginning of the year.

REPAIRS

Whenever possible, repairs and maintenance expenses should be deducted immediately, rather than capitalized and depreciated over their “useful life.” New “repair” regulations provide guidelines for deciding which expenditures for acquiring, repairing, or improving business property are deductible and when.

A small car wash business that lacks so-called “applicable financial statements” (AFS) can still take advantage of a unique de minimis safe harbor to deduct smaller purchases ($500 or less per purchase or per invoice). Businesses with an AFS can deduct as much as $5,000 per purchase or invoice. Small business with gross receipts of $10 million or less can also take advantage of a safe harbor for repairs, maintenance, and improvements to eligible buildings.

TAX CREDITS AND DEDUCTIONS

Thanks to the tax “extenders” bill, the Work Opportunity Tax Credit has been extended through 2019 for employers hiring members of targeted groups. That same bill also added qualified long-term unemployment recipients to the roster of targeted groups effective January 1, 2016.

As a general rule, software bought for the car wash or detailing business must be depreciated over a 36-month period, but there are some important exceptions. When, for instance, software comes with a computer, and its cost is not separately stated, it’s treated as part of the hardware and is depreciated over five years. However, under Section 179, the cost of a whole computer system (including bundled software) can be written-off in the first-year so long as the total cost is within the Section 179 annual deduction limits.

The cost of advertising the car wash operation or its services or goods — flyers, business cards, yellow page ads, and so on — is currently deductible as a current expense. Promotional costs that create business goodwill such as sponsoring a peewee football team are also deductible as long as there is a clear connection between the sponsorship and the car wash business.

KEEPING IT REAL

Over the years, the way the IRS has viewed “reasonable compensation” has changed significantly. With a car wash or detailing business operating as S corporations, the IRS’s goal was and continues to be preventing owners from exploiting a loophole in the payroll tax rules. As a result, when the IRS examines the tax returns of S corporations, the focus is usually determining whether the reasonable compensation amount paid to the S corporation owner was “reasonable” based on the services provided.

In a number of Revenue Rulings regarding S corporations — the most common corporate entity in the United Statestoday — the U.S. Treasury Department has determined that to the extent the owners of an S corporation performed services for their business, the business was required to pay that owner a reasonable salary as compensation for those services. In addition — and crucially — that reasonable salary is subject to self-employment tax. What’s worse, the IRS typically examines data in the three to five year range.

LOSSES AND MORE LOSSES

Often forgotten is the fact that casualty and theft losses that result from a sudden, unexpected, and unusual cause are tax deductible. Note, however, the tax deduction for a casualty loss is only allowed in the year of the loss and no deduction can be taken if reimbursement is anticipated. When it comes to theft losses, a deduction can be taken only in the year the theft was discovered.

There are also strict time limits for a car wash or detailing business to claim a Net Operating Loss (NOL) carryback or for choosing to forego the NOL carryback and just carry the loss forward. The typical statute of limitations for filing a claim for a NOL tax refund is three years from the time the return was filed or two years from the time the tax was paid, whichever period expires later.

Lawmakers enacted a special provision that requires the claim for a NOL refund to be filed within three years of the date on which the return was due to be filed (including extensions) for the taxable year of the net operating loss which results in such a carryback.

ACTIVITY DOCUMENTATION

The operators and shareholders of a car wash might not be subject to the often-overlooked 3.8-percent Medicare tax if they actually participate in the business. It is so-called “passive investors” that are hit with this tax.

Participating in the business means any work performed as an owner, manager, or employee, so long as it is not in-vestor activity.

Even so, activities must be documented with the IRS; it often rejects “ball park” after-the-fact estimates. Documenting the hours spent using calendars and appointment books, e-mails, and narrative summaries, if asked, are usually satisfactory.

IGNORE FOR SAVINGS

Obviously, it is not easy for any car wash operator to break a lifelong habit of minimizing income and maximizing deductions in order to produce a consistently low tax bill. Surprisingly, however, the lowest tax bills often result from legitimate tax deductions postponed or ignored.

Many car wash operators, owners, or managers often ignore perfectly legitimate deductions because of a fear it will increase the likelihood of an audit — or because the paperwork and recordkeeping isn’t worth the amount of the deduction. Although keeping track of small items purchased for the car wash or detailing business is often too time consuming to be worth the trouble, for many expenses such as travel, entertainment, and the like, physical receipts are not required for amounts less than $75.

EXTENDING THE PAIN IF NOT THE PAYMENT

Anyone who tried but couldn’t get their taxes prepared by the filing deadline can file a Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, or use an online service. The IRS will automatically grant extensions of as much as six months to file taxes. Remember, however, the tax extension provides more time to file the car care business’s tax returns but not more time to pay the tax bill — or a good estimate of the final tab.

Although taxes should never be the primary reason behind any strategy, purchase, or move made by a car wash operator, taking advantage of our tax rules is important. It is never too late to plan on saving taxes. In fact, any business owner changing their mind after the return is filed can amend or change an already-filed tax return. But, in order to achieve that low tax bill either before or after the return is prepared, professional assistance may be required.

Mark E. Battersby is an Ardmore, PA-based freelance writer, specializing in finance and tax issues.