Automotive Dealership Year-End Planning Guide 2020-2021

YEAR END

TAX PLANNING

TIPS & PROCEDURES

CITRIN COOPERMAN

AUTOMOTIVE DEALERSHIPS PRACTICE

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TAX TIPS and TAX PLANNING

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We welcome the opportunity to discuss your year-end tax compliance needs.

DEMOS

 The value of personal use vehicles should be added to the employee’s W-2. 401(k)

 Contributions and loan repayments withheld from employees must be paid into the plan on or shortly after the payroll issued date.

W-4

 Have employees update form W-4’s for the new tax year.

FORM I-9

 All employees must complete Form I-9 for employee status verification purposes.

THIRD-PARTY SICK PAY

 Include the reportable amount of sick pay paid to the employees by the insurance company on the employee’s Form W-2 as well as amount withheld for income taxes.

HEALTH INSURANCE PREMIUMS

 Premiums paid on behalf of a shareholder who owns more than 2% of the corporation are taxable as wages and are reported on Form W-2. For limited liability company (LLC) members, the premiums are considered guaranteed payments.

SELF-EMPLOYED RETIREMENT BENEFITS

 Often times on an LLC, these expenses are left in the employee benefit section of the P&L. These amounts should be considered guaranteed payments, similarly to health insurance premiums above.

POTENTIAL SALES TAX

TAX TIPS

 Review out-of-state sales (in dollars) and annual volume of transactions. For example, your parts department sells parts over the Internet or telephone and ships them out-of-state. Your dealership may be required to collect and remit sales tax to those states even though the dealership does not have any physical presence there.

AFFORDABLE CARE ACT

 Confirm with your health insurance provider that the coverage provided to the employees meets the new requirements under the Affordable Care Act. Service provider should complete Form 1095 – Employer-Provided Health Insurance Offer and Coverage Insurance.

TRAVEL AND MEAL EXPENSES

 Travel expenses are deductible in full. Certain meal expenses are limited, including breakroom snacks. Expenses incurred for holiday parties, promotions, and on-site employee meals are not limited and should be posted to separate accounts.

ENTERTAINMENT

 Entertainment expenses such as expenses incurred for amusement, recreation, membership dues for a club (i.e. golf) are no longer deductible. These should be posted to separate accounts.

EMPLOYEE FRINGE BENEFIT

 Employee fringe benefits, including transportation, and on-site gym paid by employees, are no longer deductible. These should be posted to separate accounts. Conversely, employees are not required to report these fringe benefit as income.

SECTION 163J

 The deduction of non-floor plan interest could be limited for tax purposes.

SECTION 199A

 Business owners could be eligible for the 20% deduction on the qualified business net income from partnerships or S-corporations originating from dealerships or realty companies.

 In certain circumstances, owners of the dealership are personally recognizing income related to the dealership (i.e. reinsurance rebates). Dealership should consider recognizing this income rather than the owner personally, to maximize Section 199A deduction.

FORM 1099

 Review all payments made to unincorporated entities and certain service providers during the year, and determine who was paid $600 or more.

 Verify that a W-9 is on file for ALL vendors. Consider sending a copy of a blank W-9 to all vendors paid in the last quarter of the year.

 Recipients must generally receive Form 1099 by February 1, 2020 for Form 1099NEC (non-employee compensation). All other types are due by March 1, 2021.

FORM 8300

 Dealership must provide a written notice by January 31, on an annual basis, to each person from whom the dealership received over $10,000 in cash payments. This is due to each person by February 1, 2021

FOR NEW YORK DEALERSHIPS

 If your dealership is located in Manhattan, Bronx, Brooklyn, Queens, Staten Island, Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess, and Westchester county, dealership maybe responsible for Metropolitan Commuter Transportation Mobility Tax (MCTMT), which is based on the covered employees' wages regardless of where they reside.

 All New York City employers, with more than 20 employees, must provide pre-tax transit fringe benefits.

 For dealerships that are located in the borough of Manhattan, south of the center line of 96th Street, and whose annualized gross rent paid is at least $200,000, a commercial rent tax and return may be required to be paid and filed.

PAYROLL TAX DEFERRAL

 Employer’s payroll tax deferral – If the dealership deferred its 6.2% share of the Social Security taxes from March 27 through December 31, 2020, make sure that the trail balance includes the accumulated liability a of December 31, 2020. 50% of this liability is due to IRS on December 31, 2021 and the remaining 50% is due December 31, 2022

 Employees payroll tax deferral – If the dealership participated in the President Trump’s executive order for employees to defer payment of the 6.2% employees’ share of the Social Security tax, make sure that the (respective) employees withholding is adjusted from January 1, 2021 through April 20, 2021

TAX TIPS

PPP LOAN

 Compile all necessary documents required (i.e. payroll registers, invoices for covered expenses, lease agreement, etc.) for the PPP loan forgiveness application.

 Begin the forgiveness application process as per your bank’s instructions if your covered period is completed.

DEBT REFINANCE

 With interest so low, work with your lender and refinance your debt with a fixed (lower) interest rate. If you have other debt (i.e. loans due to reinsurance companies or shareholder), also consider refinancing these debt.

QUARTERLY ESTIMATES

 Make sure the quarterly estimates due to federal, state, and local jurisdictions (if applicable) are paid timely.

FOR NEW JERSEY DEALERSHIPS

NEW JERSEY PASS-THROUGH TAX

 The Pass-Through Business Alternative Income Tax Act, which passed the New Jersey legislature, permts flow-through businesses in New Jersey, such as sub-S corporations and partnerships, to elect to pay and deduct the income taxes on the owners’ share of income at the entity level instead of at the personal income tax level.

TRANSACTIONS and CALCULATIONS

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TRANSACTIONS

CASH AND INVESTMENT ACCOUNTS

 Prepare all bank reconciliations. Review and investigate old outstanding items for potential yearend adjustments, and consider reporting unclaimed property to state agencies.

 Review the cash clearing accounts to ascertain that there are no unusual transactions in the account. Make sure that all balances are current and will clear in the subsequent month.

ACCOUNTS RECEIVABLES

 Review the aging of all receivable schedules, including contracts in transit and employee receivables.

 Determine why old outstanding receivables are not being collected. Is it a customer credit issue or is the lack of collection due to poor dealership operations?

 Make sure One Pays, or other forms of promissory notes to new and used vehicle customers, are not being abused by the sales department.

 Parts and Service Receivables - Revisit customers’ available credit. Consider reducing credit limits.

 Manufacturer Receivables (i.e. holdback, incentives, rebates, floor plan assistance and warranty)Determine why receivables are outstanding beyond normal payment terms. Typically, problems are a result of dealership issues and not the manufacturer (i.e. warranty submission and delivery reporting).

 Write off any uncollectible balances, after proper authorization.

 Review credit balances on the schedules for proper application of consumer accounts or potential year-end adjustments.

PREPAIDS (PROPERTY TAXES & INSURANCE)

 Review the prepaid schedules and re-calculate the actual pre-payments. Adjust for year-end, if necessary.

CALCULATIONS

FIXED ASSETS

 Review the fixed asset depreciation schedule. Consider taking an inventory of the fixed assets, especially computers and specialized tools.

 Be familiar with the company’s capitalization policy. The IRS has a DeMinimis safe harbor rule that allows purchases of $2,500 or less to be expensed. If you have an audited financial statement, you are allowed to expense purchases of $5,000 or less. Review all additions for the year and reclassify disbursements that do not conform to the policy. Consider some items as repairs, maintenance, office and shop supplies, etc. All expenses related to the addition of assets should be included with the respective assets (i.e. freight, tax, delivery, and installation).

 If eligible, take advantage of the IRS Section 179 deduction that allows for the immediate write off of up to 1,020,000 (limited to $25,000 for New Jersey) of qualified assets, placed into service by year-end.

 100% bonus depreciation may be available to dealerships for assets placed in service by year-end including leasehold improvements except for internal structural framework, enlargements to the building, and elevators or escalators.

 Have a cost segregation study prepared, if the dealership constructed/acquired a building, or made significant leasehold improvements. Cost segregation studies typically result in greater current depreciation expense.

 Review listing of demos, company vehicles, and service units. Demos and company vehicles (ex: loaners) should be written down, monthly. Review the valuation for demos and company vehicles at year-end and adjust the book-value accordingly. Service units, such as parts van and plow truck, are depreciable assets. These should not be written down monthly.

 Review all additions to fixed assets and make sure that sales tax is charged on the items purchased. Some vendors will not charge sales tax, or will charge a different rate. In this case, the use tax or differences should be included on your next sales and use tax return filing. Remit the use tax then.

ACCOUNTING, INVENTORIES and EXPENSES

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ACCOUNTING

FINANCE RESERVES

 Reconcile all receivables from financial institutions, per general ledger, to the financing source statement.

 Record all charge backs at year-end.

RENTAL UNITS

 If the dealership has leased rental units, the value of the rental units should be included on the balance sheet, along with the liability (pay-off) amount.

 Review the valuation for rental units at year-end and adjust the book value accordingly.

FLOOR PLAN

 Reconcile the floor plan statement to the general ledger. Investigate any unusual or old reconciling items.

 Accrue all floor plan interest and charges related to year-end.

NOTES PAYABLE AND LEASES

 Review statement and match principal balance to the trial balance.

 Review the amortization of the loan and reclassify the current and long-term portion of the note. Accrue loan interest expense.

VEHICLES

 If LIFO (Last In First Out) inventory method is used, make sure that the required 12th period LIFO adjustment is made. A “What If” analysis is needed in order to estimate the LIFO reserve.

INVENTORIES

 If Lower of Cost or Market (LCM) inventory method is used for new vehicles, consider writing down older model year vehicles.

 Identify the floor plan assistance (FPA) for each new vehicle and include it as inventory cost reduction on new vehicle inventory. Note: this adjustment is only allowed if the dealership has adopted the accounting method of capitalizing floor plan assistance, rather than offsetting floor plan assistance against floor plan interest expense.

PARTS

 Take a physical parts inventory. It is preferred to use an outside service to conduct the parts inventory. Ensure that the general ledger is being compared to the parts physical inventory results at the time it is being conducted. If no physical parts inventory is performed at year-end, reconcile parts inventory to the pad and general ledger.

 Have parts manager perform the following:

o Review the parts inventory for any slow moving or damaged inventory.

o Return parts to the manufacturer. Make sure the parts manager is aware of manufacturers’ parts return policy. The parts manager should be taking advantage of parts returns throughout the year.

o Identify any obsolete inventory that is not allowed to be returned and needs to be written off, after proper authorization.

 Used vehicles - If LCM inventory method is used, write down used vehicles to valuations listed in official used car guides (Galves, NADA) as the average wholesale price for a comparable vehicle. Each used car vehicle must be written down individually. If the vehicles are packed, the cost of the vehicle, for the purpose of calculating used vehicle write down, is the amount in inventory less pack amount. You cannot write down used vehicles by using an overall reserve method (i.e. fixed percentage).

 If inventory values include “hard” pack, the balance of pack accounts should be reviewed and adjusted to account for the actual number of vehicles in inventory at year-end.

WORK IN PROCESS (WIP)

 Review the open repair order (RO) report and reconcile WIP to the general ledger (GL). Make sure that differences between WIP and GL are analyzed.

UNIFORM CAPITALIZATION ADJUSTMENT

 Prepare the annual IRS Section 263A inventory adjustment.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accrue all year-end expenses. Any accrued expenses must be paid within 2 ½ months after year end.

Year-end bonuses (Note: year end salary accruals to owners of a dealership are not deductible for tax purposes.)

Normal Salaries and Pay Plans

Employee benefits (medical, 401K etc.)

Advertising

Rent (Note: rents paid to related cash basis parties must be paid by yearend in order for the dealership to deduct the expense during the year.)

Utilities

Manufacturer Audit Chargebacks

Litigation settlements that have not been paid  Keep accounts payable open as long as possible to capture all expenses.

 Reconcile the manufacturer open parts statement to the general ledger. Investigate any unusual or old reconciling items.

EXPENSES

 Corporate Taxes – maintain a schedule of when the estimated Federal, State and City corporate income/franchise taxes were paid. Include payee, amount, and payment date.

Non-Floor Plan Interest – make sure interest not related to floor plan is segregated from floor flan interest.

REINSURANCE COMPANIES

 Reconcile all payments made to the reinsurance company to the documents provided by the administrator. Make sure all payments and deals are recorded by the administrator.

 Have all payments made to the reinsurance company by year end. Accrue the December transactions at year end.

 Obtain the IRS warranty adjustment (SWIM) from the reinsurance administrator.

EXPENSES

OWNERS OF THE DEALERSHIP

 Determine the interest on loans with the owners of the dealership, or any other related entity. Make sure the calculated interest is received or paid by year-end.

 If the dealership operates as an S-corporation, ascertain that all shareholder distributions were made in proportion to their ownership interest. If not, make a distribution to match, based on year-end percentage.

 If the dealership operates as a Limited Liability Company (LLC), it is recommended that member distributions and contributions are made in proportion to each member’s ownership interest.

 Review shareholder or member basis to determine if there is sufficient tax basis for the shareholder to take tax losses on their individual return.

 Create and maintain a schedule of taxes paid on behalf of the owner. Include tax type paid, payee, date, and amount paid.