One of the best tools for reducing taxes year-round is the records maintained by the operation. Good records can help every snow removal business generate an accurate tax bill and ward off zealous IRS auditors. But, that’s not all.
Good records are also invaluable for monitoring the recovery of a troubled operation, when preparing financial statements required by lenders and investors, rewarding when trying to sell the business and particularly helpful for securing financing.
It should be no surprise that more deductions are disallowed by the IRS for lack of substantiation than for being nondeductible. The tax law, after all, requires a business purpose to be shown for all expenses in order to secure a deduction.The IRS doesn’t require a snow or ice removal business to keep records in a particular manner. So long as they produce an accurate accounting of income and expenses, the method best suited to the business can be used.
However, while the IRS doesn’t require receipts for expenditures of less than $75, most of our tax rules do require most expenses be documented – a chore that can mean ensuring there are receipts for every purchase.
Since the business will benefit from more rigorous and accurate record keeping, that can mean investing in the most effective – and affordable – record-keeping system. By monitoring expenses closely all year, analyzing each expense for its tax impact as it is made makes for smarter purchasing decisions.
The old adage that you have to spend money in order to make money got a shot in the arm when lawmakers increased the tax incentives for purchasing equipment and other business property. The 100% first-year “bonus” depreciation deduction generally applies to expenditures for equipment, vehicles, computers and other business assets of the snow removal and ice management operation and that are depreciable over 20-years or less.
What’s more, new guidelines were recently released by the IRS for businesses that want to take advantage of the current 100% write-off for equipment, fixtures and even some real estate. Now, the IRS will allow any business that failed to take advantage of these accelerated write-offs to retroactively claim them.
In addition to the 100% bonus depreciation, the TCJA increased the unique first-year write-off for so-called Code Section 179 equipment and property. Thanks to an inflation increase,, the Section 179 deduction for 2020 is $1,040,000. The deduction does, however, begin to phase out on a dollar-for-dollar basis after $2,590,000 is spent.
Although the write-offs under the TCJA are helping snow removal businesses that have purchased new equipment defray out-of-pocket costs with significantly larger tax deductions in year-one, it may not always be the best strategy for everyone.
After all, that immediate expensing deduction drops the book value or basis of the business asset to zero. And, then there is the question of what is the snow removal operation going to deduct these write-offs from? Income and tax bills will likely be down this year and will additional losses now be more valuable than depreciation deductions in later, more profitable years?
BUY VERSUS RENT
As an alternative to the outright purchase of equipment or other business property, there is leasing to be considered. As a general rule, it’s usually a good idea to buy small equipment and continuously needed hardware. Today’s tax laws and immediate write-offs, also favor purchasing – at least for a snow removal business that has the cash for a down payment and/or financing lined up to cover the cost.
SELLING IT OFF
Disposing of unneeded, unwanted, obsolete equipment or other property deserves some thought as part of year-round tax planning. After all, there’s no point in continuing to let excess equipment take up space when it could be contributing to the operation’s bottom-line.
Selling, donating those unwanted assets to a charity or non-profit organization, or actually abandoning them, create cash and/or tax write-offs. Don’t forget to document each event, keep receipts and physically abandon assets, not merely store them away.
HIRING AND FIRING MORE THAN A TAX ISSUE
Year-round planning should involve resolving employment issues. Every snow business owner and manager has plenty of changes to deal with in 2020 -– the impact of the Corona virus pandemic and higher labor costs for some operations.
As of Jan. 1, 2020, a quarter of the states had higher minimum wages. There are also new federal overtime rules. And, don’t forget about California’s controversial new law for freelancers and others in the so-called “gig” economy, that has more states considering the worker classification issue.
The IRS continues to monitor whether workers are employees or independent contractors. Independent contractors are not subject to withholding, relieving the employer of liability for payroll taxes. Workers, for their part, can avoid higher tax bills and lost benefits by knowing their proper status.
For those uncertain whether workers are classified correctly, the IRS can be asked to provide a determination letter telling how it views the operation’s workers – as employees or independent contractors. IRS Form SS-8 is used to request a determination of worker status.
An employer can also apply to the IRS if it has been erroneously classifying workers as independent contractors. This application for “530 relief” allows the operation to get relief from liability or payment if it has been classifying workers as independent contractors in error. It looks at factors that might be in the operation’s favor as good faith efforts to comply with the law.
Unlike a tax deduction that merely reduces the income upon which tax is based, a “credit” directly reduces the snow removal operation’s tax bill. Taking advantage of tax credits may appear to be wasted in a year with a low or no tax bill, but they can be carried over to more profitable years – or contribute to the operation’s net operating loss to generate a refund of previously-paid taxes.
Among the most popular tax credits – and the ones most likely applicable to a snow removal business include a number of virus-related tax credits:
Paid family and medical leave. Subject to certain limitations, the CARES Act included a payroll tax credit equal to 100% of the family leave wages paid by an employer.
Payroll tax credit for required paid family leave. Similar to the Paid Family and Medical Leave credit, this credit equals 100% of the qualified sick leave wages paid by the employer.
Self-employed individuals. Self-employed individuals were eligible for qualified family leave equivalent amounts and qualified sick leave equivalent amounts.
Employee Retention Credit. Employers can claim this credit only if they have not received a PPP loan. This fully refundable tax credit is equal to 50% of qualified wages paid to employees. While both the Employee Retention Credit and the tax credits associated with paid leave can be claimed, they can’t be claimed on the same wages.
Maximum tax savings for 2020 and, hopefully, many years to come, are possible with year-round tax planning. The first step should involve the snow removal and ice management operation’s record-keeping system – or lack of one.Mark E. Battersby is Snow Magazine’s financial writer. He resides in Ardmore, Pa.