Laundromat Loans, Record Keeping & Audits

Over the years I faced a number of audits on my income tax related to my Laundromat ownership. Fortunately, nothing in the last twelve years, but I think some of the points I will offer in this post should be helpful especially to those who are new to the business and who do not have an accountant on retainer. I’m going to briefly touch on Laundromat loans, record keeping and what to do in the event of an audit.

First, let’s discuss the financing options of a Laundromat. If you need a loan, this means you want a business but don't have the cash money to complete your purchase. ?If you’ve already arranged your financing, you can skip this point and move on to the Second and Third points below. ?

Sometimes your distributors run out of financing options and are unable to provide the lowest rates and down payments. It’s always smart to contact someone who has real experience in providing loans to Laundromat businesses. There are lots of individuals from SCORE and other experienced owners and SBA experts who have great opinions on getting a loan, here are mine:

1) Most banks are not actively pursuing lending programs for Laundromats. In some areas, smaller or regional banks are doing some loans. Included in these banks I’ve found that In SoCal, the Korean owned banks regularly lend to Laundromats with reasonable and extended terms. Worth a phone call and exploration.

2) SBA loans are often available to Laundromat buyers and my recommendation to contact is a frequent contributor to this forum, Deb Curtis. She seems to place reasonable analysis and help in your loan application process. She will explain the details, downpayments and unique requirements of SBA lending including their blanket on your assets, investments and real property. Worth a phone call and discussion with this loan obtaining talent.

3) Eastern Funding as a lender has concentrated on Laundromats for years. They should be one entity to consider in your search. Experienced in business acquisition and equipment loans.

5) Many manufacturers, including Alliance and Electrolux/Wascomat, have lending programs that may or may not have recourse agreements with their local distributors. Check with your equipment supplier if these loans are available for you. They are normally made in connection with a purchase of some new equipment of their manufacturer even when buying an existing site.

Additional loan information: Most buyers of existing Laundromats over value the equipment as a portion of the purchase price. A fifteen-year-old store with original equipment is likely to have about ten percent of the sales price reflected in the value of the equipment. Banks use the “red book” to determine that Laundromat loans on older stores have a ten percent recovery potential and often look to borrowers for 90% of alternative sources of repayment. Equipment in place and earning money has value, pulled out and on the street, not so much. An often-overlooked aspect of many banks is they only want to lend to experienced business owners with a history of profitable operation. A first-time buyer may have a difficult hill to climb or a larger required downpayment and this is why I advocate a search for an experience helper in obtaining a loan.

Second, here is my perspective on record keeping for Laundromats. I acknowledge that some owners have professionals do their taxes, just like some owners have professionals do all their equipment repairs. There is also a small percentage of owners who believe they know better about taxes and are set in their ways of doing things. However, I believe I have adequate experience in being audited by the IRS and I was also retained as an expert by the IRS when they were considering a national program to audit Laundromats (the IRS was focusing on the notion that owners were "skimming" profits), so I believe there is some merit in my contribution.

I think most owners devote too much thought and time to Laundromat bookkeeping. Here's one way to keep records and avoid problems if you are ever audited. Open a single bank account into which you deposit all your collections and nothing else. This is your INCOME for tax purposes. Now write out checks (or use a payment application) for all your expenses. This is your EXPENSES. These two areas will be explored by IRS audit agents prior to your audit so make sure the year end totals match exactly the numbers you enter on your tax returns. Don't mix in any other money. You do not need to keep collection sheets or even use them. Explain that ALL MONEY COLLECTED is deposited into your Laundromat account. It confuses IRS auditors if you mix in other money or make the claim that you kept out cash for refunds, payments to contract workers or just mixed in other deposits. Junior auditors are normally assigned to Laundromat audits. If you want to review the actual IRS agent audit manuals go to my website for the manuals previously used in audits by the IRS.

There is no requirement to keep records in a specific fashion or using bookkeeping software. Keep in mind that a few pages showing the above items created on a Microsoft Excel sheet, along with your bank statements, are adequate for Laundromat bookkeeping.

Depreciation is calculated on another line on your tax return, with a straight-line depreciation over five years, plus there are accelerated other options. Fixtures are depreciated over their actual remaining life. This is why experienced owners try to put as much of their purchase allocation towards equipment. The depreciation can be used more quickly. Your tax return also has a place for the deductions for automobile expenses and other expenses you want to claim. I always made a payment to another account from my Laundromat account to document these expenses.

Another often overlooked deduction is the money you spent searching and researching for your Laundromat. Mileage, seminars, food, paid consultations, demographic studies, CLA membership and many other items are all legitimate deductions. Start keeping records and receipts of these items right now if you are still in the stage of searching for your Laundromat.

Third, if you are ever audited, keep things simple and smile as you explain that you are not a professional bookkeeper but only a Laundromat owner and this is how you keep your income and expenses. Try to schedule any requested meetings to be held at the offices of the assigned auditor. The more items you have available in your office or home the more likely more questions will be asked and you won’t have time to prepare your proper answer. Don’t engage in conversation or explain your business to an auditor. Auditors are evaluated on the dollar per hour recovery they collect from taxpayers. The more time spent the more likely they will find a mistake; more time, conversation and attention can cost you money.

Never take your accountant with you. It is costly and he faces the potential of losing his license if an auditor believes he made a serious mistake in calculation or over reached on a claimed deduction. I’ve found that it is best to sign your own return and not have an accountant attest to having prepared the document. A competitive spirit seems to come over auditors when they have available a worthy adversary in your accountant.

If you have additional information, you feel should be provided to those new to the business please respond to this post. It’s your business and you’re free to ignore free advice any time you want.