Dealer Insights - September/October 2013 - Be An Early Bird: Prepare For Your 2013 Financial Statements And Tax Strategies
For dealerships on a calendar year, it’s only a few months until year end financial statement and income tax planning will be here. Given the breadth of these documents and the complexity of changing tax laws, it’s not too soon to start collecting the information you’ll need and conferring with your CPA about strategies.
2013 TAX CONSIDERATIONS
Sizable tax incentives to buy fixed assets still exist in 2013. Under Section 179, you can immediately deduct up to $500,000 of new and used capital equipment purchases placed in service on or before Dec. 31, 2013. If you buy more than $2 million of equipment during the year, the Sec. 179 deduction begins to phase out dollar-for-dollar.
In 2013, bonus depreciation allows dealers to depreciate 50% of the cost of qualifying new assets placed in service before year end. There’s no annual maximum or phaseout for bonus depreciation.
If you’re thinking about replacing equipment or refreshing your signage, do it before Dec. 31 — as of this writing, the high 2013 Sec. 179 expensing limits and 50% bonus depreciation haven’t been extended to 2014.
THE FIXED ASSETS COMPONENT
One of the most time-consuming parts of an audit or review is fixed assets. So, get your records together before your CPA arrives. Prepare a detailed listing of fixed asset purchases, new equipment loans, and retired or sold fixed assets. If old property will be replaced, consider a Section 1031 “like-kind” exchange to defer capital gains.
Establish a formal policy that considers the asset’s value and useful life. You might, for instance, write off items that cost less than $100 or are likely to wear out within one year.
Look through the ledger for smaller items that were capitalized but could be expensed. For example, if you recorded a large order of tools as one combined fixed asset, consider reclassifying each individual item as a supply expense, not a fixed asset. Screwdrivers and wrenches aren’t worth capitalizing.
Look for repairs that have been capitalized. Repairs should be expensed as long as they don’t materially add value to a fixed asset, appreciably prolong an asset’s life, or adapt an asset to a new or different use.
LAST IN, FIRST OUT (LIFO) INVENTORY METHOD CONSIDERATIONS
Book LIFO adjustments to cost of sales before year end, if possible. If you still have cars and trucks in separate LIFO pools, analyze whether it would be advantageous to combine them into one pool.
For inventory that’s not on LIFO — parts, accessories and perhaps used cars — adjust to the lower of recorded cost or current wholesale value. Write off obsolete and damaged parts. Donate or scrap write-offs before year end, if they can’t be returned for credit.
Perform physical counts of miscellaneous inventory items, such as body shop materials, and adjust them to observed levels. Match work-in-process inventory to the amounts shown on your open repair orders and body shop tickets.
If owners or salespeople use demos, review IRS Revenue Procedure 2001-56 to determine the amount taxable to employees. There are a variety of methods you can use for demos. Ask your CPA which method is appropriate for your dealership.
THE AVOIDANCE OF ADJUSTMENTS
Adjusting journal entries (AJEs) muddy the waters when your CPA does his or her fieldwork. A long list of CPA-imposed changes could suggest that your CFO isn’t doing his or her job — and cause owners, franchisors and lenders to wonder what else might have fallen through the cracks. Plus, the fewer discrepancies between your controller’s year end statement and the CPA’s audited (or reviewed) financial statement, the fewer questions your franchisors and lenders will ask.
Review last year’s list of AJEs and see which year end adjustments you can handle in-house. Consider making adjustments for bad debt write-offs; prepaid expenses; benefit plan contributions; and accruals for wages, commissions, interest and taxes. Generally, accruals should tie to the payments paid in the following month (January) or shortly thereafter.
Ask your CPA what book-to-tax adjustments were recorded last year. This will help you anticipate document requests and estimate probable tax adjustments. Book and tax income usually differ, sometimes quite markedly. So, don’t make tax estimates based on pretax income shown on your income statement.
Decide on the payments you want to make to owners before Dec. 31, such as salaries, bonuses, benefits and perks. Payments to owners, including interest on loans to S corporation shareholders or to C corporation shareholders (those owning more than 50% of the dealership’s stock), will be deductible only if they’re paid before year end. This includes expenses owed to related parties.
Also determine the appropriate tax treatment for retirement and insurance benefits paid to owners. S corporation, LLC and partnership owners may have to report these as taxable fringe benefits, rather than deduct them as an expense.
UNDER THE WIRE
Year end comes quickly, but there’s still time to take advantage of the tax incentives that remain in place for 2013. Weigh possible asset purchases against your income and anticipated year end profits. And don’t fall behind by failing to pull together the information you’ll need for your tax returns as well as your annual financial statement.
Dealer Insights - September/October 2013 Issue