Presentation is loading. Please wait.

Presentation is loading. Please wait.

Presented by Larry Adams, Larson Allen

Similar presentations

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 , 2009 1/19/05 Effective Tax Strategies

2 Presented by Larry Adams, Larson Allen


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


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

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

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

Download ppt "Presented by Larry Adams, Larson Allen"

Similar presentations

Ads by Google