Automotive Dealerships - IRS Audit Guide Part 7

IRS Audit Guide Table of Contents 

Cost Segregation

  • Depreciation for Buildings = 39 years
  • Lots of new facilities & remodeling
  • Manufacturer Initiatives
  • Building - many components
  • Need to Identify & Separately Depreciate
  • Requires Engineering Expert!
  • Can Utilize on Property Acquired in Prior Tax Years
  • Can Utilize on “Used” Facilities


Cost Segregation Example 

  • Building Addition = $2.3 million
  • Reclassified Amount = $864,000
  • PV of Tax Savings @ 7% = $122,000
  • Tax Savings - first 2 years = $70,000
  • Cumulative benefits if Placed in Service in a Prior Year
  • Bonus depreciation available for 2004


Prepaid Expenses – 12-Month Rule 

  • Allows a current deduction for certain expenses that do not extend beyond the earlier of:
    • 12 months after the first date on which the taxpayer realizes the benefit, or
    • The end of the taxable year following the year in which payment is made.
  • Possible opportunities:
    • Insurance
    • Taxes and Licensing Fees to governmental authority
    • Liabilities arising under workers’ compensation act
    • Prepaid rent does not qualify because the payment is for use of the property which has not been provided

Insurance Deductibility 

  • Prepaid expense rule change appears to allow the accrual of 2005 insurance premiums
    • Amount must be fixed and determinable
    • Recurring Item Exception
    • Can elect for tax purposes only
    • Need to pay premium with 8 & ½ months before year end
    • Need Change in Accounting election (IRS Form 3115)
    • Must extend tax return until paid in full

Insurance Deductibility - Example 

  • Determine premium year and unpaid balance
    • December 31 to December 30th premium year:
      Annual premium – WC and/or P & C $75,000
      Tax rate 40% 
      Tax Deferral $30,000 

    • August 1, 2004 to July 31, 2005 premium year:
      Total premiums due under the policy $75,000
      Premiums paid and/or expensed in ’04 31,250 
      Amount available to be accrued $43,750
           Tax rate 40% 
           Tax Deferral $17,500 

Learning Objectives 

  • Understand the key items of interest in the audit guide
  • Understand IRS audit techniques for specific areas
  • What to do in case of an IRS audit
  • Tax Planning Ideas



Charles Diegel, CPA

Tom Earley, CPA, MST

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