1. Presented by Larry Adams, Larson Allen
Effective Tax Strategies for Dealerships Presentation to St. Louis Auto Dealers Association January 13 , 2009
1/19/05 Effective Tax Strategies

2. Presented by Larry Adams, Larson Allen
AGENDA
KEY DEALERSHIP TAX ISSUES
NEW TAX LAW CHANGES
TAX SAVINGS AND DEFERRAL OPPORTUNITIES
TAX COMPLIANCE ISSUES
1/19/05 Effective Tax Strategies

3. KEY DEALERSHIP TAX ISSUES
Presented by Larry Adams, Larson Allen
KEY DEALERSHIP TAX ISSUES
UNICAP – INVENTORY CAPITALIZATION REQUIREMENTS
SINGLE POOL VEHICLE LIFO METHOD
LIFO OPTIONS FOR TERMINATED DEALERS
IRS GUIDANCE ON LOANER VEHICLES
REINSURANCE COMPANY TAX ADVANTAGES
TIMING OF GOODWILL WRITE-OFF FOR TERMINATED DEALERS
TAX TREATMENT OF TERMINATION PAYMENTS
1/19/05 Effective Tax Strategies

4. UNICAP - Inventory Capitalization
IRS believes UNICAP presents most significant area of non-compliance within industry
IRS issued Taxpayer Advice Memo (TAM ) in 2007 on UNICAP
Significant proposed increase in capitalized costs
Capitalized amount may exceed $100,000 for many dealers
TAM is not official IRS law or position
Key Issues: (1) Is a dealer a reseller or producer
(2) Are fleet, internet, dealer trades and lease sales considered retail or wholesale sales?
IRS issued Field Directive/Tool Kit on UNICAP for auditors (September 2009)
IRS is currently in stand-down mode on issue until January 2011 for audit purposes

5. Single Pool Vehicle LIFO Method
New IRS Revenue Procedure issued in 2008 (Rev Proc Vehicle Pool Method)
Combined new car and new truck pools into one pool for LIFO purposes (also applies to used)
Tax Benefits to dealers:
Reduces LIFO fluctuations from inflation
Reduces LIFO fluctuations from changing FIFO cost levels within a specific pool
Reduce administrative burden from 2 pools
Avoids vehicle classification issue for crossover vehicles
Annual analysis should be done to understand potential tax benefits from combination of pools

6. LIFO Options for Terminated Dealers
Dealerships that lost new vehicle franchise in 2009 have a few alternatives on LIFO reserves:
File Automatic Change in Accounting Method (Form 3115) to elect 4 year spread on income recognition from LIFO reserve
4 Year spread is only allowed if dealership maintains other new/used car sales activities during period (IRS CCA )
Could be beneficial for GM dealers if lower inventory levels at year-end
Not allowed to re-elect LIFO method for 5 year period
Tax Planning: Review pickup of LIFO reserve in 2009 to offset prior year losses and/or goodwill writeoff

7. IRS Guidance on Loaner Vehicles
IRS position: Loaner vehicles should be subject to luxury auto depreciation limits
Significant limitation on depreciation deductions
Not eligible to be expensed under Sec 179
Key tax planning opportunities to avoid limitations:
Regularly engage in business of leasing
Frequency of lease contracts with customers is key
Service loaner fleet that is complimentary to service customers create issue with IRS
Must prove for-profit use of loaner vehicles

8. Timing of Goodwill Write-Off for Terminated Dealers
When acquiring dealer franchises many buyers allocated purchase price to goodwill or other intangibles.
During 2009 or 2010 many of these dealers lost franchises from manufacturer terminations
Key Tax Issues:
What tax options are available for the unamortized goodwill or intangible asset tax basis?
When can these assets be written off?
Is there a difference in timing between Chrysler and GM dealers?
How does the recent reinstatement provisions via binding arbitration impact timing of the writeoff?
What if dealer continues with used vehicle operation?

9. Timing of Goodwill Write-Off for Terminated Dealers
General Rules for Writing Off Goodwill:
If a dealer paid goodwill in the acquisition of a single franchise, then the unamortized amount of the intangible assets may be deductible upon termination.
If a dealer acquired multiple franchises in a single transaction and paid goodwill, dealer may not be allowed to deduct unamortized goodwill if a single franchise is terminated.
IRS position: Entire disposition of all originally acquired franchises must occur before early writeoff allowed

10. Timing of Goodwill Write-Off for Terminated Dealers
Intangible assets subject to these rules are:
Any franchise, trademark or trade name
Goodwill
Going-concern value
Existing workforce
Business operating intangibles (operating systems or information base)
Customer based intangibles (Customer Lists)
Supplier based intangibles
License, permits or other government granted right
Any non-compete agreement.

11. Timing of Goodwill Write-Off for Terminated Dealers
Some dealerships may need to delay goodwill write-off due to Chrysler and GM binding arbitration process for terminated dealers
Negotiation process needs to be finalized before dealers are able to calculate their actual loss
Difference in Chrysler terminations and GM wind-down agreements
Chrysler Dealers = 2009 deduction due to effective date of termination
GM Dealers = 2010 deduction due to termination of franchise agreement
Dealership impact from Cadillac, Pontiac and Saturn closures
Complicate tax issues surrounding each franchise!

12. Tax Treatment of Termination Payments
Timing of receipt by dealer is key to income recognition
Capital gain vs. ordinary income tax treatment to dealer
Review agreement to identify payment streams
Potential planning opportunity: Personal vs. Corporate Goodwill
Potential tax planning opportunities related to wind-down income and franchise goodwill write-off

13. Presented by Larry Adams, Larson Allen
NEW TAX LAW CHANGES
CHANGES TO NET OPERATING LOSS (NOL) CARRYBACK RULES
Small Business Provisions (Feb 2009)
Revenues < $15 million
Expanded NOL Provisions to all Businesses (Nov 2009)
EXTENSION OF 50% BONUS DEPRECIATION
EXPANDED SECTION 179 DEPRECIATION PROVISIONS
PREPAID EXPENSE DEDUCTIONS
Potential Acceleration of Insurance Deduction
1/19/05 Effective Tax Strategies

14. NOL Carryback Provisions for Small Businesses
Provisions included in American Recovery and Reinvestment Act passed February 2009
General Net Operating Loss carryback rules:
2 yrs: Business net operating losses (NOL)
3 yrs: Casualty and theft losses
5 yrs: Farm losses
Tax Law Change on 2008 NOLs
Eligible small business taxpayer allowed 3, 4 or 5 yr. carryback for a 2008 NOL
Eligible: Corp., partnership or proprietorship with ave. 3 yr. gross receipts of ≤ $15 million
3 yr gross receipt test: 2006, 2007 and 2008
Aggregation rules apply for $15M test

15. NOL Carryback Provisions for Small Businesses
2008 NOL = tax year ending in 2008
May elect to use tax year beginning in 2008
AMT NOL offset ltd. to 90% prior AMT income
Special 5 yr. carryback election required within 6 mos. of due date of ’08 return
Filed with either original return or NOL carryback claim
Minimal benefit to most dealers due to revenue cap

16. Expanded NOL Carryback Provisions
Expanded Provisions included in Worker, Homeownership and Business Assistance Act passed November 2009
NOLs incurred in either 2008 or 2009 (but not both) eligible for up to five year carryback
Election made by due date (including extensions) for the last tax year beginning in 2009
No small business income limitation, but NOL carried back to the 5th year is limited to 50% of available taxable income.
Remaining NOL can offset taxable income in the remaining 4 tax years.
IRS Revenue Procedure issued ( ) for election and carryback instructions
SIGNIFICANT POTENTIAL BENEFIT TO DEALERS DUE TO EXPANDED ELIGIBILITY

17. Extension of 50% Bonus Depreciation
Presented by Larry Adams, Larson Allen
Extension of 50% Bonus Depreciation
For eligible assets placed in service during 2009, the tax law allows an additional bonus depreciation of 50%.
Eligible property is defined as
Property with a < 20yr recovery period
Original use with taxpayer (new property)
Acquired and placed in service between and
Qualifying Leasehold Improvements
To interior portion of bldg
Nonresidential realty
Made by lessee or lessor
Bldg has been in service >3 yrs
Ineligible Improvements: Bldg enlargements, structural framework, elevators, escalators
Related party leases ineligible (> 80% common ownership)
1/19/05 Effective Tax Strategies

18. Extension of 50% Bonus Depreciation
Example 1: A taxpayer places a new 5-year $50,000 asset into service on 6/15/09. Depreciation for the year is as follows:
$50,000 x 50%(bonus) 25,000
($50,000 – 25,000) x 20% 5,000
Total Depreciation 30,000
Example 2: Same as in Example 1 except placed into service 1/1/10.
$50,000 x 20% 10,000

19. Expanded Section 179 Depreciation
Presented by Larry Adams, Larson Allen
Expanded Section 179 Depreciation
Allows businesses to claim an immediate deduction for the cost of fixed assets purchased and placed in service up to an annual limit of $250,000 for 2009
Asset addition phase-out starts at $800,000
Income Limitation (§179 can’t increase NOL)
May elect late or amend prior election
Depreciation Deduction Ordering:
Take Sec 179 first; 50% bonus depreciation second
Be aware of state conformity issues on both §179 and 50% bonus depreciation
1/19/05 Effective Tax Strategies

20. Expanded Section 179 Depreciation
Presented by Larry Adams, Larson Allen
Expanded Section 179 Depreciation
Example:
A taxpayer purchased $250,000 of various 5 and 7 year new assets in Assuming the taxpayers taxable income is $250,000 or more and fixed asset additions are not greater than $800,000, the taxpayer can deduct the full $250,000. If taxable income is less than $250,000 the unused §179 balance will carryforward.
1/19/05 Effective Tax Strategies

21. Prepaid Expenses – 12-Month Rule
Presented by Larry Adams, Larson Allen
Prepaid Expenses – 12-Month Rule
Allows a current deduction for certain expenses that do not extend beyond the earlier of:
12 months after the first date on which the taxpayer realizes the benefit, or
The end of the taxable year following the year in which payment is made.
Possible opportunities:
Insurance
Taxes and Licensing Fees to governmental authority
Prepaid rent does not qualify because the payment is for use of the property which has not been provided
1/19/05 Effective Tax Strategies

22. Insurance Deductibility
Presented by Larry Adams, Larson Allen
Insurance Deductibility
Prepaid expense rule change allows accrual of insurance premiums:
Amount must be fixed and determinable
Recurring Item Exception
Can elect for tax purposes only
Need to pay premium with 8 & ½ months after year-end
Need Change in Accounting election (IRS Form 3115)
Must extend tax return until paid in full
1/19/05 Effective Tax Strategies

23. Insurance Deductibility - Example
Presented by Larry Adams, Larson Allen
Insurance Deductibility - Example
Determine premium year and unpaid balance
Calendar year premium year:
Annual premium – WC and/or P & C $75,000
Tax rate % Tax Deferral $30,000
August 1, 2009 to July 31, 2010 premium year:
Total premiums due under the policy $75,000
Premiums paid and/or expensed ,250
Amount available to be accrued $43,750
Tax rate % Tax Deferral $17,500
1/19/05 Effective Tax Strategies

24. TAX SAVING & DEFERRAL OPPORTUNITIES
Presented by Larry Adams, Larson Allen
TAX SAVING & DEFERRAL OPPORTUNITIES
CASH BENEFITS FROM TAX DEFERRALS
F&I REINSURANCE
ESTATE AND GIFT PLANNING
RECONDITIONING COSTS
FACTORY FLOORPLAN CREDITS
FACTORY ADVERTISING CREDITS
LIFO INVENTORY METHOD
COST SEGREGATION STUDIES
1/19/05 Effective Tax Strategies

25. Cash Benefits of Tax Deferrals
Presented by Larry Adams, Larson Allen
Cash Benefits of Tax Deferrals
Option #1 - Pay no tax
Option #2 - Defer Paying Tax as Long as Possible
Example of Deferral: LIFO
Time Value of Cash Savings
Assume $20,000 of Tax Deferred @ 6%
Cash Savings over 10 years = $16,000
Cash Savings over 20 years = $46,000
1/19/05 Effective Tax Strategies

26. F&I Reinsurance
Provides underwriting income to dealer/dealership for F&I department products normally sold from 3rd parties. If structured correctly can also provide:
Tax deferral – amounts reinsured are not taxed currently
Tax savings – when amounts are withdrawn from the reinsurance company they may qualify for capital gain rates that are less than ordinary income rates.
Estate tax benefits – often can be part of estate planning to transfer wealth from dealer owners to successors.

27. Estate and Gift Planning
Dealership Values are at the lowest values in the last twenty years.
It is likely that values will rebound in the future.
Focus on making estate tax transfers and planning while values are low.
Make gifts while values are low.
The lifetime applicable exemption amount is at fairly high amounts - $3,500,000 per person
The 2010 no estate tax amount may be rescended this year and won’t last for future years.

28. Presented by Larry Adams, Larson Allen
Reconditioning Costs
Recondition Used Vehicles
Recognize Internal Profit in Service or Body Shop
Used Vehicles in Year-End Inventory
Why Pay Tax on Profit not Realized?
Example: - 75 $500 ea. - 50% back end gross - $19,000 *42%=$8,000 tax
deferral
1/19/05 Effective Tax Strategies

29. Factory Floorplan Credits
Presented by Larry Adams, Larson Allen
Factory Floorplan Credits
Floorplan Credits: Interest Income or Purchase Discount
Receive Regardless of Expense
Receive Regardless of Days Vehicle is Actually in Inventory
Considered Discount?
Recognize Discounts When Vehicle is Sold
Defer Discounts Until Vehicle is Sold
Change in Accounting Method Election Required (Form 3115)
1/19/05 Effective Tax Strategies

30. Factory Advertising Credits
Presented by Larry Adams, Larson Allen
Factory Advertising Credits
Included on Invoice
Paid to Association
When to Expense? * When Vehicle is Sold? * When Invoiced by Manufacturer
TAM
Deduct When Invoiced
Example: New Inventory= $3 million
Tax Savings:
1.5% = $45,000*42% tax rate = $19,000
1/19/05 Effective Tax Strategies

31. Presented by Larry Adams, Larson Allen
LIFO Inventory Method
Last-in, First-Out
Don’t Pay Tax on Inflation
Dealers Don’t Like LIFO Complexities
New - Yes; Used - Maybe; Parts – Maybe
Used - write-offs vs. Lifo
Significant inflation projected for 2009
New Vehicle Example:
$3,000,000 New Inventory
2% inflation in base cost
$60,000 tax deferral
$25,000 in current CASH SAVINGS!
1/19/05 Effective Tax Strategies

32. Cost Segregation Studies
Presented by Larry Adams, Larson Allen
Cost Segregation Studies
Available on new buildings or remodeling
General IRS rule for buildings = 39 year depreciable life
Goal: Segregate building components into shorter lives
Need to identify and separately depreciate
IRS rules require engineering expert!
Can Utilize on Property Acquired in Prior Tax Years
Potential significant tax benefit from New NOL Carryback provisions
1/19/05 Effective Tax Strategies

33. Cost Segregation Study Example
Presented by Larry Adams, Larson Allen
Cost Segregation Study Example
Building Addition = $2.3 million
Reclassified Amount = $800,000
PV of Tax 6% = $100,000
Est. Tax Savings - first 2 years = $50,000
Bonus Depreciation Benefits if Eligible New Property
Cumulative benefits if Placed in Service in a Prior Year
- Automatic Acct Method Change- File Form 3115 to Catch Up on Missed Depr Expense in Current Tax Yr
1/19/05 Effective Tax Strategies

34. Presented by Larry Adams, Larson Allen
TAX COMPLIANCE ISSUES
DEMO VEHICLE POLICY GUIDELINES
FORM 8300 CASH REPORTING REQUIREMENTS
STATE UNCLAIMED PROPERTY RULES
IRS AUDIT FOCUS ISSUES
IRS AUDIT PROCESS
1/19/05 Effective Tax Strategies

35. Demo Vehicle Policy Guidelines
Presented by Larry Adams, Larson Allen
Demo Vehicle Policy Guidelines
Have policies been updated with the latest requirements?
Written policy
Using average sales price (new or used)
Add to taxable compensation monthly
Need to pickup demo income on dealer and managers
No mileage recordkeeping requirements for sales staff if done correctly!
Example of Demonstrator Vehicle Policy Guide available at:
1/19/05 Effective Tax Strategies

36. Form 8300 Cash Reporting Requirements
Presented by Larry Adams, Larson Allen
Form 8300 Cash Reporting Requirements
Form 8300 must be completed when cash or cash equivalent payments are received of greater than $10,000 in a 12 month period.
Do you have a process in place to make sure reporting is being properly handled?
Training?
Employee acknowledgement – signed?
IRS has stepped up audits in this area
Penalties
Civil
Negligent
Intentional
up to $25,000, or amount of cash received and required to report
Criminal
up to $250,000 or up to 5 years in prison, or both
Cash equivalent includes:
Cashier checks/Bank drafts
1/19/05 Effective Tax Strategies

37. State Unclaimed Property Rules
Presented by Larry Adams, Larson Allen
State Unclaimed Property Rules
What is Unclaimed Property? - Old Outstanding Checks
- Customer deposits
Why is it an Issue? - States need the money!
-Majority of dealers are handling incorrectly
Why should I care?
-Can go back 10 ten years on an audit
- Audits with penalties of up to 50%
What should I do?
-Evaluate your situation
-Consider modifying sales documents
1/19/05 Effective Tax Strategies

38. Presented by Larry Adams, Larson Allen
IRS Audit Focus Areas
Passive loss rules
UNICAP (Sec 263a)
Service tech tool rental programs
Overpayments on warranty contracts
LIFO Conformity
Demonstrator vehicles
Producer owned reinsurance co.’s
Travel and entertainment documentation
Note: IRS has Recently Expanded Team to Audit High Net Worth Individuals so Audits will be Increasing
1/19/05 Effective Tax Strategies

39. Presented by Larry Adams, Larson Allen
IRS Audit Process
Filing the Return
Preparing for the Audit
Conducting the Audit
Top Audit Mistakes
1/19/05 Effective Tax Strategies

40. IRS Audit - Filing Your Tax Return
Presented by Larry Adams, Larson Allen
IRS Audit - Filing Your Tax Return
What’s Your Exposure?
Support for Positions Taken?
Breakdown of Expenses - Lots!
Use of Generic Titles on Return
Red Flag Titles
Year End Adjustments
1/19/05 Effective Tax Strategies

41. IRS Audit – Preparing for the Audit
Presented by Larry Adams, Larson Allen
IRS Audit – Preparing for the Audit
Decide who will work with the agent - Controller or CPA
Designate Employee for Agent contact
Determine Audit Site - Dealership or Offsite
1/19/05 Effective Tax Strategies

42. IRS Audit - Conducting the Audit
Presented by Larry Adams, Larson Allen
IRS Audit - Conducting the Audit
Procedures
Requests for Information
Request Agents Plan
Computerized Records Request
Agent Relations
Resolving the Issues
1/19/05 Effective Tax Strategies

43. IRS Audit - Top Audit Mistakes
Presented by Larry Adams, Larson Allen
IRS Audit - Top Audit Mistakes
Allowing unrestricted access to Information
Agents allowed unlimited access to copier
Significant number of dealership interviews
Challenging every aspect of the audit
Computer-based audits
1/19/05 Effective Tax Strategies

44. ADDITIONAL DEALER RESOURCES
Dealership tools and information
Demo Policy Guides
Dealership Performance Guidelines
Records Retention Schedules
Dealership News Bulletins
LarsonAllen Dealership Eflash newsletter
Monthly dealership bulletin
Sign up at:
LarsonAllen Effect magazine

45. Key Limitations of Presentation
Presented by Larry Adams, Larson Allen
Key Limitations of Presentation
Individual Situations Require Tailored Advice
Seminar Presents Concepts Only
Implementation Requires Professional Advice
Implementation May Require IRS Elections – Form 3115
Talk to a Dealership CPA Who Knows Your Business!
1/19/05 Effective Tax Strategies

46. Required IRS Disclaimers
NOTICE: The information contained herein is of a general nature and is not
intended to address the circumstances of any particular individual or entity.
Although we endeavor to provide accurate and timely information, there can
be no guarantee that such information is accurate as of the date it is received
or that it will continue to be accurate in the future. No one should act on
such information without appropriate professional advice after a thorough
examination of the particular situation. In addition, no information
contained herein should be construed or interpreted as providing tax advice
regarding any particular situation, transaction or event.
CIRCULAR 230 NOTICE:
This notice is required by IRS Circular 230, which regulates written
communications about federal tax matters between tax advisors and
their clients. To the extent the preceding correspondence and or any
attachment is a written tax advice communication, it is not a full
"covered opinion." Accordingly, this advice is not intended and cannot
be used for the purpose of avoiding penalties that may be imposed by
the IRS.

47. Presented by Larry Adams, Larson Allen
SUMMARY
Questions?
Thank you!
DAIVD J. WIGGINS, CPA, CFE
Dealership Tax Principal
JASON A. DUFFNER, CPA
1/19/05 Effective Tax Strategies