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.


Charles Diegel, CPA

Tom Earley, CPA, MST

Have Questions or Comments?

If you have any questions about this media item, we'd like to hear your opinion. Please share your thoughts with us.

Contact EisnerAmper

* Required