Tax strategy for small-business owners, creators and individual taxpayers. Clear, practical updates from an enrolled agent so you don't overpay the IRS.
Your Perc Machine Has a Deadline, and So Does Its Write-Off
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If you still run perchloroethylene ("perc"), you already know it's being phased out. What the phaseout does to your taxes is less obvious. Replacing the machine, retiring the old one and cleaning up the site are three separate tax decisions. Each one has a right year and a right category, and if you lump them together as a cost of doing business, you can end up deducting too little, too late, or in a way that won't hold up. The deadlineEPA's 2024 rule (40 CFR §751.605) sets three dates: - Machines acquired after June 16th, 2025 can't use perc at all. In July 2026, EPA extended some worker-protection dates but left these phaseout dates alone. It says it's still reconsidering the rule, and the rule is being challenged in court. Some states have earlier bans, so your preparer checks yours. If you run a third-generation machine, you have about 14 months, and the year you replace it changes your tax result. Writing off the new machineA hydrocarbon, wet-clean or other non-perc machine is new equipment, not a repair. You can recover the cost three ways: - Regular depreciation: Dry cleaning equipment is generally 5-year property (asset class 57.0, Rev. Proc. 87-56). The machine goes on the year's return when it's placed in service, meaning installed and ready to run. A machine delivered December 28 and hooked up January 6 belongs to next year. Example: you install a $90,000 machine in December 2026, and the shop's other profit is $30,000. Full bonus depreciation creates a $60,000 loss. If you're an S corporation shareholder with low stock basis, you may not be able to use that loss this year. Taking $30,000 under §179 and depreciating the rest spreads the deduction out. Run both before you file. Many states don't follow federal bonus depreciation, and some cap §179 lower. Your accountant should know yours. Taking the old machine off the books- Scrapped or retired: Once the old machine is permanently out of service, its remaining tax basis is generally deductible in the year you got rid of it (Reg. §1.168(i)-8). Being obsolete isn't enough while it's still running. A machine junked in an earlier year needs a prior-year fix from your preparer, not a deduction on this year's return. Example: you trade in a fully depreciated perc machine for a $5,000 credit. That $5,000 is ordinary income, and the new machine's basis is its full price before the credit. Cleanup costs depend on who made the messPerc contamination in floors, soil and groundwater is common at older sites, and the tax treatment depends on the property's history: - Your own contamination: Cleaning up soil and groundwater your business contaminated, back to how it was before you did, is generally deductible (Rev. Rul. 94-38; Reg. §1.263(a)-3(j)(3), Example 2). The old §198 election to expense environmental cleanup expired for costs paid or incurred after December 31th, 2011. If someone cites it, they're working from an old return. If you rent, read your lease before you assume the deduction is yours. It generally belongs to whoever bears the cost under the lease, and your preparer checks the terms. What to do1. Find your machine's generation and purchase date. That sets your deadline, and it costs nothing. The tradeoffWriting off the new machine now leaves fewer deductions for later years and makes any future sale of it taxable as ordinary-income recapture, up to the depreciation taken. Expensing cleanup is right only when the facts support it, and capitalizing cleanup that qualified for a deduction leaves money stuck in land basis for years. Getting the year and the category right takes a projection and paperwork, not a guess in April. If you're facing a machine replacement, have cleanup costs on the books, or haven't checked your depreciation schedule against what's actually in the plant, book a 30-minute Tax Leak Review before year-end: https://cal.com/mister-moneysleeves/tax-leak-review Tristan D. Taylor, EA |
Tristan D. Taylor, EA
Tax strategy for small-business owners, creators and individual taxpayers. Clear, practical updates from an enrolled agent so you don't overpay the IRS.
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