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Automotive Dealerships - IRS Audit Guide Part 6

IRS Audit Guide Table of Contents 

 

Cash Benefits of Tax Deferrals 

  • Option #1 - Pay no tax
  • Option #2 - Defer Paying as Long as Possible
  • Example of Deferral: IRA’s
  • Time Value of Cash Savings
  • Example: $10,000 @ 9.5%
  • Pay back in 10 years = $4,234
  • Pay Back in 20 years = $1,643

 

Internal Gross Profit/Reconditioning 

  • Recondition Used Vehicles
  • Recognize Profit in Service or Body Shop
  • Vehicles Still in Inventory @ YE?
  • Why Pay Tax on Profit not Realized?
  • Example: 100 vehicles @ $500 ea. recon.
  • 50% back end gross $25,000 *45%=$11,250

 

Floorplan Credits 

  • Floorplan Credits: Interest Income or Purchase Discount
  • Receive Regardless of Expense
  • Receive Regardless of Days Vehicle is Actually in Inventory
  • Considered Discount?
  • Recognize Discounts When Vehicle is Sold
  • Defer Discounts Until Vehicle is Sold
  • Financial Statement Issues

 

Advertising Expense 

  • Included on Invoice
  • Paid to Association
  • When to Expense?
    • * When Vehicle is Sold?
    • * When Invoiced by Mfg?  
  • TAM 9243010
  • Deduct When Invoiced
  • Example: Inventory= $2 million
  • 1.5% = $30,000*45% = $13,500


To LIFO or Not to LIFO?
 

  • Last-in, First-Out
  • Don’t Pay Tax on Inflation
  • Dealers Afraid to Utilize?
  • New - Yes; Used - ?; Parts - No!
  • Used - write-offs vs. Lifo vs. inflation
    Example: $3,000,000 New Inventory
      3% inflation in base cost
       
      $90,000 deferral
      $36,000 in deferred taxes

 

Contact 

Charles Diegel, CPA
215-881-8882

 
Tom Earley, CPA, MST
215-881-8883

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