Presentation on theme: "Presented by Larry Adams, Larson Allen"— Presentation transcript:
1 Presented by Larry Adams, Larson Allen Effective Tax Strategies for Dealerships Presentation to St. Louis Auto Dealers Association January 13 , 20091/19/05 Effective Tax Strategies
2 Presented by Larry Adams, Larson Allen AGENDAKEY DEALERSHIP TAX ISSUESNEW TAX LAW CHANGESTAX SAVINGS AND DEFERRAL OPPORTUNITIESTAX COMPLIANCE ISSUES1/19/05 Effective Tax Strategies
3 KEY DEALERSHIP TAX ISSUES Presented by Larry Adams, Larson AllenKEY DEALERSHIP TAX ISSUESUNICAP – INVENTORY CAPITALIZATION REQUIREMENTSSINGLE POOL VEHICLE LIFO METHODLIFO OPTIONS FOR TERMINATED DEALERSIRS GUIDANCE ON LOANER VEHICLESREINSURANCE COMPANY TAX ADVANTAGESTIMING OF GOODWILL WRITE-OFF FOR TERMINATED DEALERSTAX TREATMENT OF TERMINATION PAYMENTS1/19/05 Effective Tax Strategies
4 UNICAP - Inventory Capitalization IRS believes UNICAP presents most significant area of non-compliance within industryIRS issued Taxpayer Advice Memo (TAM ) in 2007 on UNICAPSignificant proposed increase in capitalized costsCapitalized amount may exceed $100,000 for many dealersTAM is not official IRS law or positionKey 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 inflationReduces LIFO fluctuations from changing FIFO cost levels within a specific poolReduce administrative burden from 2 poolsAvoids vehicle classification issue for crossover vehiclesAnnual 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 reserve4 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-endNot allowed to re-elect LIFO method for 5 year periodTax 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 limitsSignificant limitation on depreciation deductionsNot eligible to be expensed under Sec 179Key tax planning opportunities to avoid limitations:Regularly engage in business of leasingFrequency of lease contracts with customers is keyService loaner fleet that is complimentary to service customers create issue with IRSMust 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 terminationsKey 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 nameGoodwillGoing-concern valueExisting workforceBusiness operating intangibles (operating systems or information base)Customer based intangibles (Customer Lists)Supplier based intangiblesLicense, permits or other government granted rightAny 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 dealersNegotiation process needs to be finalized before dealers are able to calculate their actual lossDifference in Chrysler terminations and GM wind-down agreementsChrysler Dealers = 2009 deduction due to effective date of terminationGM Dealers = 2010 deduction due to termination of franchise agreementDealership impact from Cadillac, Pontiac and Saturn closuresComplicate tax issues surrounding each franchise!
12 Tax Treatment of Termination Payments Timing of receipt by dealer is key to income recognitionCapital gain vs. ordinary income tax treatment to dealerReview agreement to identify payment streamsPotential planning opportunity: Personal vs. Corporate GoodwillPotential tax planning opportunities related to wind-down income and franchise goodwill write-off
13 Presented by Larry Adams, Larson Allen NEW TAX LAW CHANGESCHANGES TO NET OPERATING LOSS (NOL) CARRYBACK RULESSmall Business Provisions (Feb 2009)Revenues < $15 millionExpanded NOL Provisions to all Businesses (Nov 2009)EXTENSION OF 50% BONUS DEPRECIATIONEXPANDED SECTION 179 DEPRECIATION PROVISIONSPREPAID EXPENSE DEDUCTIONSPotential Acceleration of Insurance Deduction1/19/05 Effective Tax Strategies
14 NOL Carryback Provisions for Small Businesses Provisions included in American Recovery and Reinvestment Act passed February 2009General Net Operating Loss carryback rules:2 yrs: Business net operating losses (NOL)3 yrs: Casualty and theft losses5 yrs: Farm lossesTax Law Change on 2008 NOLsEligible small business taxpayer allowed 3, 4 or 5 yr. carryback for a 2008 NOLEligible: Corp., partnership or proprietorship with ave. 3 yr. gross receipts of ≤ $15 million3 yr gross receipt test: 2006, 2007 and 2008Aggregation rules apply for $15M test
15 NOL Carryback Provisions for Small Businesses 2008 NOL = tax year ending in 2008May elect to use tax year beginning in 2008AMT NOL offset ltd. to 90% prior AMT incomeSpecial 5 yr. carryback election required within 6 mos. of due date of ’08 returnFiled with either original return or NOL carryback claimMinimal 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 2009NOLs incurred in either 2008 or 2009 (but not both) eligible for up to five year carrybackElection made by due date (including extensions) for the last tax year beginning in 2009No 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 instructionsSIGNIFICANT POTENTIAL BENEFIT TO DEALERS DUE TO EXPANDED ELIGIBILITY
17 Extension of 50% Bonus Depreciation Presented by Larry Adams, Larson AllenExtension of 50% Bonus DepreciationFor eligible assets placed in service during 2009, the tax law allows an additional bonus depreciation of 50%.Eligible property is defined asProperty with a < 20yr recovery periodOriginal use with taxpayer (new property)Acquired and placed in service between andQualifying Leasehold ImprovementsTo interior portion of bldgNonresidential realtyMade by lessee or lessorBldg has been in service >3 yrsIneligible Improvements: Bldg enlargements, structural framework, elevators, escalatorsRelated 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% 5,000Total Depreciation 30,000Example 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 AllenExpanded Section 179 DepreciationAllows 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 2009Asset addition phase-out starts at $800,000Income Limitation (§179 can’t increase NOL)May elect late or amend prior electionDepreciation Deduction Ordering:Take Sec 179 first; 50% bonus depreciation secondBe aware of state conformity issues on both §179 and 50% bonus depreciation1/19/05 Effective Tax Strategies
20 Expanded Section 179 Depreciation Presented by Larry Adams, Larson AllenExpanded Section 179 DepreciationExample: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 AllenPrepaid Expenses – 12-Month RuleAllows 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, orThe end of the taxable year following the year in which payment is made.Possible opportunities:InsuranceTaxes and Licensing Fees to governmental authorityPrepaid rent does not qualify because the payment is for use of the property which has not been provided1/19/05 Effective Tax Strategies
22 Insurance Deductibility Presented by Larry Adams, Larson AllenInsurance DeductibilityPrepaid expense rule change allows accrual of insurance premiums:Amount must be fixed and determinableRecurring Item ExceptionCan elect for tax purposes onlyNeed to pay premium with 8 & ½ months after year-endNeed Change in Accounting election (IRS Form 3115)Must extend tax return until paid in full1/19/05 Effective Tax Strategies
23 Insurance Deductibility - Example Presented by Larry Adams, Larson AllenInsurance Deductibility - ExampleDetermine premium year and unpaid balanceCalendar year premium year:Annual premium – WC and/or P & C $75,000Tax rate % Tax Deferral $30,000August 1, 2009 to July 31, 2010 premium year:Total premiums due under the policy $75,000Premiums paid and/or expensed ,250Amount available to be accrued $43,750Tax rate % Tax Deferral $17,5001/19/05 Effective Tax Strategies
24 TAX SAVING & DEFERRAL OPPORTUNITIES Presented by Larry Adams, Larson AllenTAX SAVING & DEFERRAL OPPORTUNITIESCASH BENEFITS FROM TAX DEFERRALSF&I REINSURANCEESTATE AND GIFT PLANNINGRECONDITIONING COSTSFACTORY FLOORPLAN CREDITSFACTORY ADVERTISING CREDITSLIFO INVENTORY METHODCOST SEGREGATION STUDIES1/19/05 Effective Tax Strategies
25 Cash Benefits of Tax Deferrals Presented by Larry Adams, Larson AllenCash Benefits of Tax DeferralsOption #1 - Pay no taxOption #2 - Defer Paying Tax as Long as PossibleExample of Deferral: LIFOTime Value of Cash SavingsAssume $20,000 of Tax Deferred @ 6%Cash Savings over 10 years = $16,000Cash Savings over 20 years = $46,0001/19/05 Effective Tax Strategies
26 F&I ReinsuranceProvides 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 currentlyTax 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 personThe 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 CostsRecondition Used VehiclesRecognize Internal Profit in Service or Body ShopUsed Vehicles in Year-End InventoryWhy Pay Tax on Profit not Realized?Example: - 75 $500 ea. - 50% back end gross - $19,000 *42%=$8,000 taxdeferral1/19/05 Effective Tax Strategies
29 Factory Floorplan Credits Presented by Larry Adams, Larson AllenFactory Floorplan CreditsFloorplan Credits: Interest Income or Purchase DiscountReceive Regardless of ExpenseReceive Regardless of Days Vehicle is Actually in InventoryConsidered Discount?Recognize Discounts When Vehicle is SoldDefer Discounts Until Vehicle is SoldChange in Accounting Method Election Required (Form 3115)1/19/05 Effective Tax Strategies
30 Factory Advertising Credits Presented by Larry Adams, Larson AllenFactory Advertising CreditsIncluded on InvoicePaid to AssociationWhen to Expense? * When Vehicle is Sold? * When Invoiced by ManufacturerTAMDeduct When InvoicedExample: New Inventory= $3 millionTax Savings:1.5% = $45,000*42% tax rate = $19,0001/19/05 Effective Tax Strategies
31 Presented by Larry Adams, Larson Allen LIFO Inventory MethodLast-in, First-OutDon’t Pay Tax on InflationDealers Don’t Like LIFO ComplexitiesNew - Yes; Used - Maybe; Parts – MaybeUsed - write-offs vs. LifoSignificant inflation projected for 2009New Vehicle Example:$3,000,000 New Inventory2% 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 AllenCost Segregation StudiesAvailable on new buildings or remodelingGeneral IRS rule for buildings = 39 year depreciable lifeGoal: Segregate building components into shorter livesNeed to identify and separately depreciateIRS rules require engineering expert!Can Utilize on Property Acquired in Prior Tax YearsPotential significant tax benefit from New NOL Carryback provisions1/19/05 Effective Tax Strategies
33 Cost Segregation Study Example Presented by Larry Adams, Larson AllenCost Segregation Study ExampleBuilding Addition = $2.3 millionReclassified Amount = $800,000PV of Tax 6% = $100,000Est. Tax Savings - first 2 years = $50,000Bonus Depreciation Benefits if Eligible New PropertyCumulative 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 Yr1/19/05 Effective Tax Strategies
34 Presented by Larry Adams, Larson Allen TAX COMPLIANCE ISSUESDEMO VEHICLE POLICY GUIDELINESFORM 8300 CASH REPORTING REQUIREMENTSSTATE UNCLAIMED PROPERTY RULESIRS AUDIT FOCUS ISSUESIRS AUDIT PROCESS1/19/05 Effective Tax Strategies
35 Demo Vehicle Policy Guidelines Presented by Larry Adams, Larson AllenDemo Vehicle Policy GuidelinesHave policies been updated with the latest requirements?Written policyUsing average sales price (new or used)Add to taxable compensation monthlyNeed to pickup demo income on dealer and managersNo 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 AllenForm 8300 Cash Reporting RequirementsForm 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 areaPenaltiesCivilNegligentIntentionalup to $25,000, or amount of cash received and required to reportCriminalup to $250,000 or up to 5 years in prison, or bothCash equivalent includes:Cashier checks/Bank drafts1/19/05 Effective Tax Strategies
37 State Unclaimed Property Rules Presented by Larry Adams, Larson AllenState Unclaimed Property RulesWhat is Unclaimed Property? - Old Outstanding Checks- Customer depositsWhy is it an Issue? - States need the money!-Majority of dealers are handling incorrectlyWhy 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 documents1/19/05 Effective Tax Strategies
38 Presented by Larry Adams, Larson Allen IRS Audit Focus AreasPassive loss rulesUNICAP (Sec 263a)Service tech tool rental programsOverpayments on warranty contractsLIFO ConformityDemonstrator vehiclesProducer owned reinsurance co.’sTravel and entertainment documentationNote: IRS has Recently Expanded Team to Audit High Net Worth Individuals so Audits will be Increasing1/19/05 Effective Tax Strategies
39 Presented by Larry Adams, Larson Allen IRS Audit ProcessFiling the ReturnPreparing for the AuditConducting the AuditTop Audit Mistakes1/19/05 Effective Tax Strategies
40 IRS Audit - Filing Your Tax Return Presented by Larry Adams, Larson AllenIRS Audit - Filing Your Tax ReturnWhat’s Your Exposure?Support for Positions Taken?Breakdown of Expenses - Lots!Use of Generic Titles on ReturnRed Flag TitlesYear End Adjustments1/19/05 Effective Tax Strategies
41 IRS Audit – Preparing for the Audit Presented by Larry Adams, Larson AllenIRS Audit – Preparing for the AuditDecide who will work with the agent - Controller or CPADesignate Employee for Agent contactDetermine Audit Site - Dealership or Offsite1/19/05 Effective Tax Strategies
42 IRS Audit - Conducting the Audit Presented by Larry Adams, Larson AllenIRS Audit - Conducting the AuditProceduresRequests for InformationRequest Agents PlanComputerized Records RequestAgent RelationsResolving the Issues1/19/05 Effective Tax Strategies
43 IRS Audit - Top Audit Mistakes Presented by Larry Adams, Larson AllenIRS Audit - Top Audit MistakesAllowing unrestricted access to InformationAgents allowed unlimited access to copierSignificant number of dealership interviewsChallenging every aspect of the auditComputer-based audits1/19/05 Effective Tax Strategies
45 Key Limitations of Presentation Presented by Larry Adams, Larson AllenKey Limitations of PresentationIndividual Situations Require Tailored AdviceSeminar Presents Concepts OnlyImplementation Requires Professional AdviceImplementation May Require IRS Elections – Form 3115Talk 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 notintended to address the circumstances of any particular individual or entity.Although we endeavor to provide accurate and timely information, there canbe no guarantee that such information is accurate as of the date it is receivedor that it will continue to be accurate in the future. No one should act onsuch information without appropriate professional advice after a thoroughexamination of the particular situation. In addition, no informationcontained herein should be construed or interpreted as providing tax adviceregarding any particular situation, transaction or event.CIRCULAR 230 NOTICE:This notice is required by IRS Circular 230, which regulates writtencommunications about federal tax matters between tax advisors andtheir clients. To the extent the preceding correspondence and or anyattachment is a written tax advice communication, it is not a full"covered opinion." Accordingly, this advice is not intended and cannotbe used for the purpose of avoiding penalties that may be imposed bythe IRS.
47 Presented by Larry Adams, Larson Allen SUMMARYQuestions?Thank you!DAIVD J. WIGGINS, CPA, CFEDealership Tax PrincipalJASON A. DUFFNER, CPA1/19/05 Effective Tax Strategies