Automotive Dealerships - IRS Audit Guide Part 4


Tool Reimbursement Programs 

  • Compensation broken into two parts
    • Normal Hourly wages – taxable as usual
    • Reimbursement for Use of Tools - not wages or subject to payroll taxes
      • value of rental not based on actual expenses paid or incurred by the technicians – must be a logical connection to the expenses incurred
      • business connection test met only if the expenses are actually incurred during current employment (tools typically a condition of employment)
      • Substantiation of expenses must be timely (30 to 120 days)
      • Substantiation must be detailed and complete
      • Excess reimbursements must be returned
      • Re-characterization issue (i.e. vacation, meetings, etc)  
  • IRS Audit Guide conclusion:
    • “ Generally, amounts paid to motor vehicle service technicians as tool reimbursements do not meet the accountable plan requirements. Amounts paid under an unaccountable plan are included in the employee’s gross income, must be reported to the employee on Form W-2 and are subject to the withholding and payment of federal employment taxes”
  • If you still want to do it…
    • -seek a private letter ruling from the IRS
    • -seek indemnification from the administrator
    • -seek a good tax attorney

Miscellaneous Provisions 

  • Manufacturer’s incentives paid to salespeople–
    1. not subject to withholding tax
    2. Not considered self-employment income
  • Treatment of Driver/Shuttlers
    1. Treated as employees or independent contractors?
    2. Tests include: means & method; results of work; control over drivers; written instructions; mandatory meetings, etc.  

Items Not in the Guide

  • Items Frequently Addressed in an IRS audit of a Dealership
    1. Travel and entertainment deductibility
    2. Personal versus business expenses
    3. Club Dues
    4. Classification of depreciable lives (cost segregation)
    5. Passive versus Active Income
    6. Deductibility of Reserves and allowances
    7. Proper deferral of income


Charles Diegel, CPA

Tom Earley, CPA, MST

Dealer Insights

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