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  • Slide 1
  • 2003 Larson, Allen, Weishair & Co., LLP Effective Tax Strategies for Dealerships Presentation to St. Louis Auto Dealers Association January 13, 2009
  • Slide 2
  • 2003 Larson, Allen, Weishair & Co., LLP AGENDA n KEY DEALERSHIP TAX ISSUES n NEW TAX LAW CHANGES n TAX SAVINGS AND DEFERRAL OPPORTUNITIES n TAX COMPLIANCE ISSUES
  • Slide 3
  • 2003 Larson, Allen, Weishair & Co., LLP KEY DEALERSHIP TAX ISSUES n UNICAP INVENTORY CAPITALIZATION REQUIREMENTS n SINGLE POOL VEHICLE LIFO METHOD n LIFO OPTIONS FOR TERMINATED DEALERS n IRS GUIDANCE ON LOANER VEHICLES n REINSURANCE COMPANY TAX ADVANTAGES n TIMING OF GOODWILL WRITE-OFF FOR TERMINATED DEALERS n TAX TREATMENT OF TERMINATION PAYMENTS
  • Slide 4
  • 2003 Larson, Allen, Weishair & Co., LLP UNICAP - Inventory Capitalization n IRS believes UNICAP presents most significant area of non-compliance within industry n 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? n IRS issued Field Directive/Tool Kit on UNICAP for auditors (September 2009) n IRS is currently in stand-down mode on issue until January 2011 for audit purposes
  • Slide 5
  • 2003 Larson, Allen, Weishair & Co., LLP Single Pool Vehicle LIFO Method n New IRS Revenue Procedure issued in 2008 (Rev Proc 2008-23 - Vehicle Pool Method) n Combined new car and new truck pools into one pool for LIFO purposes (also applies to used) n 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 n Annual analysis should be done to understand potential tax benefits from combination of pools
  • Slide 6
  • 2003 Larson, Allen, Weishair & Co., LLP LIFO Options for Terminated Dealers n 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 n Tax Planning: Review pickup of LIFO reserve in 2009 to offset prior year losses and/or goodwill writeoff
  • Slide 7
  • 2003 Larson, Allen, Weishair & Co., LLP IRS Guidance on Loaner Vehicles n IRS position: Loaner vehicles should be subject to luxury auto depreciation limits n Significant limitation on depreciation deductions n Not eligible to be expensed under Sec 179 n 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
  • Slide 8
  • 2003 Larson, Allen, Weishair & Co., LLP Timing of Goodwill Write-Off for Terminated Dealers n When acquiring dealer franchises many buyers allocated purchase price to goodwill or other intangibles. n During 2009 or 2010 many of these dealers lost franchises from manufacturer terminations n 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?
  • Slide 9
  • 2003 Larson, Allen, Weishair & Co., LLP Timing of Goodwill Write-Off for Terminated Dealers n 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
  • Slide 10
  • 2003 Larson, Allen, Weishair & Co., LLP Timing of Goodwill Write-Off for Terminated Dealers n 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.
  • Slide 11
  • 2003 Larson, Allen, Weishair & Co., LLP Timing of Goodwill Write-Off for Terminated Dealers n 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 n 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 n Dealership impact from Cadillac, Pontiac and Saturn closures n Complicate tax issues surrounding each franchise!
  • Slide 12
  • 2003 Larson, Allen, Weishair & Co., LLP Tax Treatment of Termination Payments n Timing of receipt by dealer is key to income recognition n Capital gain vs. ordinary income tax treatment to dealer n Review agreement to identify payment streams n Potential planning opportunity: Personal vs. Corporate Goodwill n Potential tax planning opportunities related to wind-down income and franchise goodwill write-off
  • Slide 13
  • 2003 Larson, Allen, Weishair & Co., LLP NEW TAX LAW CHANGES n CHANGES TO NET OPERATING LOSS (NOL) CARRYBACK RULES Small Business Provisions (Feb 2009) < Revenues < $15 million Expanded NOL Provisions to all Businesses (Nov 2009) n EXTENSION OF 50% BONUS DEPRECIATION n EXPANDED SECTION 179 DEPRECIATION PROVISIONS n PREPAID EXPENSE DEDUCTIONS Potential Acceleration of Insurance Deduction
  • Slide 14
  • 2003 Larson, Allen, Weishair & Co., LLP 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
  • Slide 15
  • 2003 Larson, Allen, Weishair & Co., LLP 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
  • Slide 16
  • 2003 Larson, Allen, Weishair & Co., LLP Expanded NOL Carryback Provisions n Expanded Provisions included in Worker, Homeownership and Business Assistance Act passed November 2009 n NOLs incurred in either 2008 or 2009 (but not both) eligible for up to five year carryback n Election made by due date (including extensions) for the last tax year beginning in 2009 n No small business income limitation, but NOL carried back to the 5 th 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 n SIGNIFICANT POTENTIAL BENEFIT TO DEALERS DUE TO EXPANDED ELIGIBILITY
  • Slide 17
  • 2003 Larson, Allen, Weishair & Co., LLP Extension of 50% Bonus Depreciation n 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 n Qualifying Leasehold Improvements To interior portion of bldg Nonresidential realty Made by lessee or lessor Bldg has been in service >3 yrs n Ineligible Improvements: Bldg enlargements, structural framework, elevators, escalators n Related party leases ineligible (> 80% common ownership)
  • Slide 18
  • 2003 Larson, Allen, Weishair & Co., LLP Extension of 50% Bonus Depreciation n 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 Depreciation30,000 n Example 2: Same as in Example 1 except placed into service 1/1/10. $50,000 x 20%10,000
  • Slide 19
  • 2003 Larson, Allen, Weishair & Co., LLP