As mentioned last month, a colleague spoke to the Arkansas Automobile Dealers Association. His presentation focused on current federal income opportunities available to car dealers and dealerships.
The dealers gave it such accolades, I thought I'd share more of it with readers. We've advised our clients to take advantage of these opportunities for years.
While much of this was new information for most of the Arkansas dealers in attendance, they are very aware that tax savings and deferrals mean more cash to them and theirs.
As I said last month, cash is king! And so, here are some more of those crowning points:
Offsetting profit against the cost of vehicles until sold
- Manufacturer interest assistance
- Uses the interest assistance that is taken into income when received and offsets it against the vehicles until sold for tax purposes
- An example would be if you have 100 units in stock with $300/unit interest assistance, the tax deferral could approach $12,000
- Not a permanent savings; but a deferral
- Internal repair order profit on reconditioning charged to used vehicles and accessories charged to new vehicles
- Takes the internal markup and removes it from income until the vehicle is sold
- An example would be 100 units in stock with $600/unit reconditioning and a $250 cost/unit; the tax deferral could approach $14,000
- Not a permanent savings; but a deferral
C Corporation NOL carryback time periods increased
- NOL's in 2001 and 2002 can be carried back 5 years instead of 2 years
Captive finance companies for BHPH paper
- Suggested for entities that have more than $1 million in BHPH paper carried on the dealership books
- This is the point at which we believe the administrative costs of the second company become worth the effort due to the tax deferral
- Effectively reinstates the installment method for selling vehicles and carrying the paper in house
- The dealership sells the paper to another company owned by the dealer whose job it is to make collections and control repossession activities
- The paper is sold at a market discount to the finance company
- The loss is taken at the dealership level in the year the paper is sold
- The collections are done at the finance company
- The income earned “on the discount” is reported as payments made by customers
- Example: Deferral of $2 million of paper on 24 month notes at the maximum tax rates sold at a 40% discount would translate into $175,000
- Administrative items to consider
- Separate company requiring income, payroll, etc. tax returns
- State may require the company to register as a finance company and be subject to additional regulations
- Separate employees and segregated physical space
- Obtaining and using the market discount for this type of paper
Tax credits for buyers of Hybrid vehicles
- Currently the Toyota Prius, Honda Insight, and Civic Hybrid qualify for the clean-fuel deduction
- Customers claim the deduction of $2,000 for the year in which the vehicle was placed in service
- Amended returns are required for prior year tax adjustments
- Sending a letter to consult with their tax advisor on this matter would be informative I hope, after reviewing these tax opportunities, you still find the armor of your tax advisor gleaming in the sun.
May your kingdom prosper.
Don Ray is a senior member of the George B. Jones Dealer Services division of Dixon Odom, a national accounting and consulting group for dealers. He's at 901-684-5643 and [email protected].
