Dealer Insights - November-December 2015 - Year End Tax Strategies Can Save Your Dealership Money
The last two months of the year are an opportunity for dealerships to engage in year end tax planning. Making some timely tax moves now might enable you to save big money on your 2015 tax bill. Following are a few areas of your dealership to discuss with your CPA.
Compare the detail shown on your books to a physical listing for all of your dealership's inventory, including vehicles, labor, shop materials, motor oil and parts. You should then write off any discrepancies. If you have stale parts inventory that's nonreturnable, consider giving it away or scrapping it to receive a tax deduction.
Meanwhile, if you use the lower of cost or market method to value your used vehicles, consider writing down your used inventory to market value at the end of the year. This will enable you to take a deduction for the reduction in value of your inventory.
Lawmakers in Washington have talked for years about eliminating the use of last-in, first-out (LIFO) inventory accounting, but LIFO remains a beneficial inventory management strategy for dealerships. LIFO can reduce your taxable income and taxes for the year by counting the last vehicles that come onto your lot (or "last in") — which likely have a higher cost — as the vehicles that were sold first (or "first out"). This reduces your profit on the vehicles for tax purposes.
When using LIFO accounting, make sure that a reasonable estimated LIFO adjustment appears on the versions of your December financial statements prepared for external parties, such as your bank or the manufacturer. Keep invoices on all new vehicles in stock at year end as evidence of new vehicle acquisitions. This will simplify making LIFO computations and help you comply with IRS recordkeeping requirements. (Similar requirements apply to used vehicle LIFO computations.)
Expense accruals and prepaid expenses
If your dealership pays taxes on an accrual basis (like most dealerships do), properly record and recognize expenses that were incurred this year but won't be paid until 2016. This will enable you to deduct those expenses on your 2015 federal tax return. For most dealerships these include:
- Commissions, salaries and wages,
- Payroll taxes,
- Property taxes, and
- Finance reserve chargebacks incurred.
Also review all prepaid expense accounts and write off any items that have been used up before the end of the year. If you prepay insurance for a period of time beginning in 2015, you can expense the entire amount this year rather than spreading it between 2015 and 2016 if a proper method election is made. This is treated as a tax expense and thus won't affect your internal financials.
New facilities, renovations and repairs
Remember that new IRS regulations are now in effect regarding the tax treatment of tangible property expenditures on things such as buildings, machinery, equipment and vehicles. You can expense and deduct certain costs in 2015 if they're devoted to incidental repairs and maintenance such as interior and exterior painting, parking lot repaving, cosmetic upgrades, and replacing and repairing restroom fixtures.
If you've constructed a new dealership facility this year or upgraded your existing facility to comply with factory image requirements, consider having a cost segregation study performed. This study will separate the costs of building components from the cost of components with shorter depreciable lives (for example, equipment and decorative fixtures), which accelerates your depreciation deductions.
Miscellaneous tax tips
Here are a few more year end tax tips to consider:
- Review your outstanding receivables (including vehicle, parts and service, factory and finance reserve) and write off any receivables you can establish as uncollectible.
- Pay interest on all shareholder loans to or from the company.
- Reconcile your floor plan schedule to a listing from the bank and expense the interest for December before year end even if it's due in January to accelerate your deduction.
- Update your corporate record book to record decisions and be better prepared for an audit.
Be sure to consult with your tax advisor for more details on how these and other year end tax strategies may apply to your dealership.
Sidebar: A word about fixed asset depreciation and tax extenders
In recent years, businesses have been able to deduct up to $500,000 of the cost of tangible fixed assets during the year in which they were placed in service, as long as their asset purchases didn't exceed certain limits. However, on January 1, 2015, this Section 179 expensing limit dropped to just $25,000, while 50% bonus depreciation generally was eliminated.
Because these breaks have repeatedly expired only to be extended retroactively by Congress, many believe that they'll be extended again for the 2015 tax year — in fact, they might have been extended by the time you're reading this. Consult with your tax advisor for the latest developments. If these breaks are extended, you may want to act fast to acquire and place in service before year end assets eligible for the breaks.
Dealer Insights - November/December 2015