Every snow removal and ice management business faces an ever-increasing amount of red-tape, rules, regulations, fees, and taxes that they must contend with. At the same time enforcement on every level is becoming more aggressive, more issue-focused – with even more, costly results. Fortunately, a combination of unique tax write-offs and strategies can help any snow removal contractor avoid potential pitfalls and make many of the changes necessary to grow their operation’s profitability.
Correcting or amending a tax return because of errors, omissions, mistakes, overlooked deductions or changes in our tax laws is actually encouraged by the Internal Revenue Service (IRS). Although it should come as no surprise that few taxpayers amend their returns to report additional income, some changes can mean substantial tax savings.
Generally, a snow removal business – or its owner – can change their mind about previously reported income and deductions 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. If the refund claim involves the deductibility of bad debts or worthless securities, the period is seven years.
Individuals, sole proprietors, etc., use Form 1040X, Amended Individual Tax Return. A corporation that filed Form 1120 uses Form 1120X, Amended U.S. Corporation Income Tax Return, to file an amended return, while S corporations and partnerships check a box on the Form 1120S or Form 1065.
A CHANGING MIND
Uncle Sam in the form of the Internal Revenue Service demands each snow and ice management professional as well as every business that is required to pay taxes guess their income for the coming year – and pay an estimated tax bill by making installment payments over the course of the year. Unfortunately, after the tax bill for the year has been estimated and payments computed, changes in income, adjustments, deductions, credits, or exemptions may make it necessary to refigure the estimated tax installment.
Should an incorporated snow removal business figure and deposit its estimated tax only to find that its tax liability for the year will be more or less than originally estimated, refiguring any remaining estimated payments will be necessary, especially if an overpayment might result.
Of course, an immediate catchup payment should be made to reduce any penalty that might result from underpaying either earlier or remaining installments.
There is no-right accounting method for all businesses. Both the cash method of accounting and accrual method accounting have their pros and cons. The basic difference between the methods is the timing of revenues and expenses.
The cash basis method of accounting recognizes revenues when money comes into the snow removal business and recognizes expenses when money is paid out. Cash basis doesn’t recognize accounts receivable or payable. Only when a bill is paid does an operation using the cash method recognize an expense.
Unfortunately, once an accounting method has been selected, the approval of the IRS is required before changing that method – even where the change is demanded by the IRS. Also remember, a snow removal operation’s accounting method includes not only the overall method of accounting used, but also the accounting treatment used for all transactions, income and expenses.
The IRS’s Form 3115, Application for Change in Accounting Method, is used to request a change in either an overall accounting method or the accounting treatment of any item. There are some instances when an incorporated snow removal business can obtain automatic consent from the IRS to change to certain accounting methods but professional assistance may be required.
The IRS’s recently revised procedure for Form 3115 filings, covers a diverse array of method changes including the method of accounting for bad debts, correcting depreciation methods, capital expenditures and more. The new procedure applies to Forms 3115 filed on or after April 19, 2017.
CHANGING BUSINESS ENTITIES
Changing circumstances, changes in the tax laws and even the success of the snow and ice management business might prompt a reassessment of the form your business operates under. It makes sense to ensure that the best entity possible is being used to provide the business – and you – with the most benefits and a consistently lowest tax bill.
Although many of the tax law’s provisions apply to all business entities, choosing among the various entities can result in significant differences in federal income tax treatment. But, there is also more to choosing the right structure for a snow removal business than taxes.
Not only will the decision to change the snow removal and ice management business’ entity impact on how much is paid in taxes, it will also affect the amount of paperwork required for the business, the personal liability faced by the principals and, especially important in today’s economy, the operation’s ability to raise money.
The lease accounting rules as we currently know them are changing. After their decade-long efforts, the Financial Accounting Standards Board (FASB) in a joint project with the International Accounting Standards Board (IASB) finalized their respective lease accounting standards, fundamentally changing the accounting rules for substantially all leases, including equipment and real estate leases.
The new guidelines will require many businesses to add all but the shortest leases to their balance sheets as liabilities, much like debt. The impact on a snow removal business when a supplier, lender or even a potential buyer expects to see leases reflected on the operation’s financial statements. The many businesses that currently have borrowing limits and/or restrictions placed on them by lenders and investors could, once leases must be included on the operation’s balance sheet, be in violation of those agreements.
Fortunately, there will be a considerable delay before the new rules become effective. This will give snow removal contractors and their businesses time to comply and, in some cases, to renegotiate loan agreements.
Rent is often a snow and ice management business’s largest recurring expenses. However, unlike many other fixed costs, a commercial lease is negotiable – even if the operation is already locked into a contract. In fact, there are three situations where it might make sense to approach your landlord: (1) the __business/practice__ is struggling; (2) the local rea-estate market is experiencing a downturn, or (3) the lease will expire within a year or two.
Rarely will a lender or landlord agree to reducing a financially strong tenant's rent unless, of course, the restructured agreement will provide the landlord with an economic advantage. There are strategies when such economic benefits are possible for you, which can turn out to be a win-win for the tenant contractor as well as the landlord, including:
- Create Competition: Even if you don't want to move, shopping around and collecting written offers from other landlords that can be used as leverage when renegotiating with your current landlord.
- Never Make the 1st Offer: Making the first offer in renewal negotiations should be resisted. By doing this prior to your renewal, it implies that you will stay — thereby undermining your negotiating strength.
- Asking for the Moon: When negotiating for free rent, tenant allowance, or any other term, always ask (negotiate) for more than what is needed. By asking for more than what you expect to receive, you are positioning yourself for any give and take based on the importance of certain negotiating point.
- Negotiate Non-Rent Issues: These include parking, fencing, signage, paint and any deposit or personal guarantee which might have been agreed to previously. Is more space needed for off-season truck, plow and equipment storage? Want additional parking for staff? Would more or better signage outside of the property be beneficial? As a current tenant, the landlord will want to you to remain and the landlord’s expenditures for these non-rent items is usually far less than the cost of attracting a new tenant.
FINDING A NEW PRO
Making many of these and other changes may require the services of a professional, perhaps even one more experienced than the snow removal and ice management business’s current advisers. As the business grows, the need for professional advice, assistance and guidance may become more acute, requiring the services of better-skilled professionals.
Fortunately, there are a variety of skilled professionals just waiting to serve you and your snow removal and ice management business. The first step to finding the right professional requires an inventory of what the snow removal operation – and you, the owner – actually need in the way of services and advice and, most importantly, how much the operation can afford to pay for that advice or services.
Shopping for any professional is virtually a necessity in today’s business economy and many professionals offer free first meetings for discussion of expectations, services needed and provided, extent of involvement by the professional and the portion of the work the contractor expects to shoulder, time constraints and, above all, costs.
It is not “tacky” to discuss fees before engaging the services of a professional although money should not be the sole criteria for selecting that professional. Obviously, finding a professional at an affordable price is a process that should begin immediately.