Rundown of Tax Savings
A partner addressed a receptive Arkansas Automobile Dealers Association on current federal income opportunities available to car dealers and dealerships. We've been advising clients to take advantage of such opportunities for years. While much of this was new information for most of the dealers in attendance, they know that tax savings and deferrals mean more cash. And cash is The following are crowning
June 1, 2003
A partner addressed a receptive Arkansas Automobile Dealers Association on current federal income opportunities available to car dealers and dealerships.
We've been advising clients to take advantage of such opportunities for years. While much of this was new information for most of the dealers in attendance, they know that tax savings and deferrals mean more cash. And cash is “king.” The following are crowning points that I hope are used in your kingdom, er, dealership.
Accelerated depreciation
30% bonus depreciation for personal property acquired or under contract by Sept. 10, 2004.
New tangible personal property only with limited exceptions
Certain leaseholds qualify
Not subject to the alternative minimum tax
Not subject to the same phase outs as the Section 179 deduction
Elect out required
Class 57.0 assets
Used for “distributive trades and businesses” such as automobile dealerships
Reduced depreciation life to five years for qualifying property
Applicable to property specific to the business and used in the selling function
Furniture in dealer's office would not qualify
Furniture in salesperson's closing office would qualify
Lot lighting would
Parts bins and shop equipment would
May file a change in accounting method to catch up since date of acquisition.
Cost Segregation Studies
An engineering study to segregate property in a real estate project eligible for quicker depreciation (including 30% bonus depreciation if acquired during the correct period)
Can be used for real estate you construct or purchase
Benefit is calculated by calculating the interest earned on the tax money saved over the longer alternative life of the asset vs. the cost of the study
Cost of the study is typically $8,000 - $20,000
Assets reclassified are subject to ordinary income recapture upon sale
However, these assets are typically the ones that are worth less at time of sale
Proper documentation is extremely important in case of examination
IRS has consistently lost in cases on this topic
Can file a change in accounting method to catch up since date of acquisition
Other Miscellaneous Opportunities
Gifting limits have increased to $11K ($22K with gift-splitting) annually per donee
The 2001 tax act had many provisions related to retirement plan contributions
Roth IRA or Regular IRA
If the AGI is between $64K and $150K and both are participants in a qualified plan, then the Roth is allowed but not the regular IRA
If the AGI is more than $160K and neither party is an active participant in a qualified plan, then only the regular IRA is allowed
A regular IRA is favored when tax rates are greater in the year of contribution than the year of withdrawal. A Roth IRA is favored when the opposite occurs, contributions are desired after 70 1/2, withdrawals are neither required nor desired.
Higher limits are in place for SEP contributions and 401(k) contributions…take advantage of them.
2003 Personal estimated tax payments' safe harbor provisions have been reduced from 112% to 110% of the prior year tax
Tax case allowing expensing (rather than capitalization) of roof re-decking that should be reviewed by your tax professional
You truly have a white knight if your tax advisor has already approached you with these opportunities.
Don Ray is a senior member of the George B. Jones Dealer Services division of Dixcon Odom, a national accounting and consulting group for dealers. He's at 901-684-5643 and [email protected].
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