Automotive Dealerships - IRS Audit Guide Part 3
IRS Audit Guide Table of Contents
- General Focus
- Books and Records
- Balance Sheet
- Extended Service Contractsand Aftermarket
- Producer Owned Reinsurance Company (PORC)
- Sales of Dealerships
- Compensation Issues
- Tool Reimbursement Programs
- Miscellaneous Provisions
- Items Not in the Guide
- Non-Qualified Deferred Compensation
- IRS Audit - Preparing
- Conducting an IRS Audit
- Top 5 Audit Mistakes
- Tax Deferral Opportunities
- Cash Benefits of Tax Deferrals
- Internal Gross Profit/Reconditioning
- Floorplan Credits
- Advertising Expense
- To LIFO or Not to LIFO?
- Cost Segregation
- Prepaid Expenses – 12-Month Rule
- Insurance Deductibility
- Potential Audit Issues:
- Insurance Company or Not
- the issuing of insurance or annuity contracts, or the reinsuring of risks underwritten by insurance companies must be the primary and predominant business activity
- Pricing is at Arms Length
- if not at arm’s length, additional income would be allocated to the dealership
- Sham Transaction
- If the arrangements are shams in fact or in substance, IRS may disregard the insurance and reinsurance arrangement. Additional portion of premiums would be reclassified as income.
- Know your PORC:
- Written under IRC §501(c)(15)
- If net written premiums for the tax year do not exceed $350,000, tax exemption is available.
- Written under IRC §806
- If assets are less than $500 million, get to deduct 60 percent of their life insurance taxable income for the year. Phase out limitations apply.
- Written under IRC §831(b)
- If premiums are more than $350,000 but not more than $1.2 million, taxed on taxable investment income only.
- Typical sale involves hard assets and “Blue sky”
- Sales price needs to be allocated between all assets (may need to file IRS Form 8594)
- Goodwill & covenant not to compete are amortized over 15 years
- Consulting agreements are deducted as incurred if reasonable and services are actually performed
- Opportunities available when acquiring assets?
- Auto Demonstrator Vehicles
- Revenue Procedure 2001-56, provides guidance for the taxation of personal use of a Demo Vehicle.
- Documents Agents will Request
- written demonstrator policy
- documentation of communication to employees
- payroll records, including W-2’s and payroll journals
- withholding and income accounted for on a monthly basis
- list of employees given demo vehicle
- valuation of the demo vehicle
- written demonstrator policy
- Reasonable vs. Unreasonable Compensation
- Following factors are considered
- Are salary and bonuses in excess of industry practice without a valid business reason.
- Who is the primary person responsible for the level of growth, productivity, and financial success of the dealership.
- If a large year-end bonuses were paid, any evidence of a pre-determined formula or other industry accepted method of determining the amount paid.
- Years of experience compared to the franchiser’s guidelines.
Charles Diegel, CPA
Tom Earley, CPA, MST