©2003 larson, allen, weishair & co., llp effective tax strategies for dealerships presentation...

©2003 Larson, Allen, Weishair & Co., LLP

Effective Tax Strategies for Dealerships

Presentation to St. Louis Auto Dealers Association

January 13 , 2009


AGENDA

KEY DEALERSHIP TAX ISSUES

NEW TAX LAW CHANGES

TAX SAVINGS AND DEFERRAL OPPORTUNITIES

TAX COMPLIANCE ISSUES


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


UNICAP - Inventory Capitalization

IRS believes UNICAP presents most significant area of non-compliance within industry

IRS issued Taxpayer Advice Memo (TAM 200736026) 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


Single Pool Vehicle LIFO Method

New IRS Revenue Procedure issued in 2008 (Rev Proc 2008-23 - 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


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 200935024)

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


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


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?



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



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.



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!


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


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


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


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


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 (2009-52) for election and carryback instructions

SIGNIFICANT POTENTIAL BENEFIT TO DEALERS DUE TO EXPANDED ELIGIBILITY


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 1-1-09 and 12-31-09

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)


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


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


Expanded Section 179 Depreciation

Example:

A taxpayer purchased $250,000 of various 5 and 7 year new assets in 2009. 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.


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


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


Insurance Deductibility - Example

Determine premium year and unpaid balance Calendar year premium year:

Annual premium – WC and/or P & C $75,000

Tax rate 40% 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 31,250

Amount available to be accrued $43,750

Tax rate 40% Tax Deferral

$17,500


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


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


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.


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.


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 vehicles @ $500 ea.- 50% back end gross- $19,000 *42%=$8,000 tax

deferral


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)


Factory Advertising Credits

Included on Invoice Paid to Association When to Expense?

* When Vehicle is Sold?* When Invoiced by Manufacturer

TAM 9243010 Deduct When Invoiced Example: New Inventory= $3 million Tax Savings:

1.5% = $45,000*42% tax rate = $19,000


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!


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


Cost Segregation Study Example

Building Addition = $2.3 million Reclassified Amount = $800,000 PV of Tax Savings @ 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


TAX COMPLIANCE ISSUES

DEMO VEHICLE POLICY GUIDELINES

FORM 8300 CASH REPORTING REQUIREMENTS

STATE UNCLAIMED PROPERTY RULES

IRS AUDIT FOCUS ISSUES

IRS AUDIT PROCESS


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:

www.larsonallen.com/dealerships


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


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


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


IRS Audit Process

Filing the Return

Preparing for the Audit

Conducting the Audit

Top Audit Mistakes


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


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


IRS Audit - Conducting the Audit

Procedures

Requests for Information

Request Agents Plan

Computerized Records Request

Agent Relations

Resolving the Issues


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


ADDITIONAL DEALER RESOURCES

Dealership tools and information

– Demo Policy Guides

– Dealership Performance Guidelines

– Records Retention Schedules

– Dealership News Bulletins

www.larsonallen.com/dealerships

LarsonAllen Dealership Eflash newsletter

– Monthly dealership email bulletin

– Sign up at:

www.larsonallen.com/Subscribe

LarsonAllen Effect magazine


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!


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 on such 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.


SUMMARY

Questions?

Thank you!

DAIVD J. WIGGINS, CPA, CFE

Dealership Tax Principal

[email protected]

314-336-3816

JASON A. DUFFNER, CPA

Dealership Tax Principal

[email protected]

314-336-3816

©2003 larson, allen, weishair & co., llp effective tax strategies for dealerships presentation...

Documents

n tax benefits

industry n irs

vehicle pool method

loaner vehicles n irs

depreciation deductions

year period n tax planning

llp lifo options

llp irs guidance