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Automotive Dealerships - IRS Audit Guide Part 3

IRS Audit Guide Table of Contents 

 

Producer Owned Reinsurance Company (PORC) 

  • 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.  


Sales of Dealerships
 

  • 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?

                * Inventory

                * Equipment  


Compensation Issues
 

  • 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
       
     
  • 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.
     

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Contact 

Charles Diegel, CPA
215-881-8882

Tom Earley, CPA, MST
215-881-8883

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