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 Self-Service - August 2008  |
More Profits, Part III: From Your Wash In this series of articles, we are discussing tested ways to operate self-service car washes more profitably. All told, we’ll be looking at 12 separate issues:
In the June and July issues of Auto Laundry News, we considered the first eight issues on the list. This month, we conclude the series with a discussion of the final four. 9. TAXES Perhaps the largest single tax item paid each year on self-service car washes is the real estate tax. Nearly all local governments tax real estate. The taxing agency estimates the value of the real estate and its estimated value determines the amount of real estate tax due each (and every) year. Often the amount is in the thousands of dollars — almost always hundreds of dollars are involved each year. In many cases it is abundantly clear that self-service washes are being overly and unfairly taxed. Here’s why. In nearly all cases, the total value of the entire car wash business is far greater than the value of the real estate associated with it. The fair market value of any car wash business is based on the land value, the building value, the value of the equipment, and the value of the good will. Equipment and good will are not real estate and should not be subjected to real estate taxes — though they often are. Here’s how it happens. Many taxing agencies base the estimated value of the real estate on the price paid by the purchaser — the agencies require that the sale price be reported to them. That works fine for residential property because there is no good will or equipment involved in residential sales. Not so for car washes. The purchase price of any car wash includes equipment and good will, and since these are not real estate, it is unfair to levy real estate taxes on them. In buying any car wash, the sales contract should specify exactly what portion of the sale price was for land, what portion was for the building, what portion was for the equipment, and what portion was for good will. This is necessary not only to avoid real estate taxes on non-real-estate items, but also to establish the depreciation schedules needed for income tax purposes. If this was not done when an existing wash was purchased, then it is the total sale price that is likely to be used by the taxing agency to estimate the value of the real estate. The obvious implication is that the wash owner is paying real estate taxes on non-real-estate items, namely equipment and good will. An appeal needs to be filed. Nearly all taxing agencies have a standard appeal process. The appeal consists of the owner demonstrating what portion of the entire value of the business is for land, what portion is for the building, what portion is for equipment, and what portion is for good will. In some cases an independent business appraiser will be needed to establish these values, but it is a worthwhile endeavor — it is not uncommon for one third of the total value of the business to be in the equipment and the good will. As a result, real estate taxes could be one third higher than they should be. Some owners will be able to make their case without the aid of an independent business appraiser to document the fair market value of each portion of the business. 10. DEPRECIATION, OTHER EXPENSES As mentioned above, the separate value of the building, land, equipment, and good will are also needed for determining depreciation schedules. The land is not subject to depreciation. Car wash buildings can be depreciated over 15 years (not 31.5 as some accountants seem to believe). The 15-year depreciation is covered in a document called Revenue Procedure (different from the Tax Code). The specific section needed is 87-56. It is on page 47 of that document where car wash buildings are specifically mentioned. Good will can also be depreciated on a 15-year basis. Any new equipment you purchase can be depreciated over its useful life. Up to $17,500 worth of equipment can be expensed out in a given tax year (there are exceptions like cars and computers). If the purchase is above the $17,500 limit, the balance can be depreciated over seven years and an accelerated depreciation schedule can be used to get more depreciation in the earlier years (less in the later years). Beyond depreciation there are many other legitimate business expenses — as no doubt most owners already know. If they are business related, your car expenses are deductible. Likewise, expense for trips to conventions and memberships in professional associations are legitimate deductions. Realize also that how you view certain purchases affects their taxation. Whether a given expense is a repair cost (100 percent deductible) or a long-term capital improvement (only partially deductible the first year) can be a matter of interpretation. The general rule has to do with the life expectancy, but you’re free to call it as you see it, and if your position is reasonable and not excessive, the IRS will probably allow it. In any tax matter, the current laws are what are important. Tax laws change, so if you are uncertain, get legal advice. What’s written above should be checked against the laws at the time you are paying your taxes. Realize also that questions about allowing business expense are quite different from not reporting all the income. Unreported income is a far more serious matter, and tempting though it may be not to report it, the consequences are serious. Moreover, unreported income has other consequences. The fair market value of any car wash is based, in large part, on its income. To sell a wash or to refinance one, an appraisal of the facility will be needed. The appraisal will determine the fair market value using the reported income. Unreported income not only has legal consequences but has a significant impact on appraised values and therefore on loans. 11. RESTORE VS. NEW-BUILT In my experience, the cost of restoring old car washes is a better investment than building new ones. I have purchased and restored car washes for as little as 25 percent of the cost of the same number of new bays. That simply means a new one would have to have four times the profit to show the same rate of return, and I don’t see that happening. New ones look nicer, will last longer, and are easier to maintain. Maybe there are cases where their rate of return is better than older restored ones. I realize it depends on what you have to pay for one in need of restoration. My rule of thumb varies depending on how much restoration is needed, but my experience is that they can be bought and restored at well below 50 percent of the cost of a new one. I believe it’s worth considering, especially since the cost of new ones — and the seemingly increasing restrictions placed on building them — require questionable volumes in order for them to be profitable. 12. VIDEO SURVEILLANCE Of course, video surveillance costs. It also saves. Here’s how:
This concludes our discussion of ways to operate self-serve car washes more profitably. In all, we have looked at 12 separate issues. There are, no doubt, additional methods to improve the bottom line. Hopefully this series of articles will have inspired a critical appraisal of your current operation. Patrick Crowe is a veteran self-serve car wash operator and a recognized author and speaker on the subject. He owns Wonderful Waldo Car Wash in Kansas City, MO. For information about his Self-Service Car Wash Technical Bulletins, visit www.carwashappraisal.com. |