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Dealer Insights - July August 2014 - Dealer Digest: GAAP Alternative Now Available

Jul 1, 2014

Dealership owners commonly set up separate holding companies for equipment or real estate that lease assets back to the operating businesses. Doing so can result in certain tax and legal benefits for dealerships and owners, including limiting liability.

The Financial Accounting Standards Board (FASB) recently issued new guidance that allows private dealerships following Generally Accepted Accounting Principles (GAAP) to elect not to consolidate the financial reporting from variable interest entities that lease property to them. The guidance is specified in Accounting Standards Update (ASU) 2014-07.

The guidance is intended to simplify and improve the financial reporting of private companies when it comes to the consolidation of lessors that are considered variable interest entities. In addition to easing the burden of GAAP compliance, the alternate method of reporting common control leasing arrangements will better address the needs of financial statement users. Users who receive consolidated financial statements often request schedules they can employ to reverse the effects of the consolidation.

ACA taxes hit high earners

In addition to requiring most Americans to buy health insurance, the Affordable Care Act (ACA) contains two new taxes that affect high earners:

The net investment income tax (NIIT). This is a flat tax of 3.8% on certain types of investment income, including interest, dividends, annuities, capital gains, royalties, rents, and certain pass-through income from S corporations and partnerships. It’s assessed on top of ordinary income taxes that are due.

The additional Medicare tax. This is a 0.9% flat tax on earned income that applies to FICA wages or self-employment income that exceeds modified adjusted gross income (MAGI) thresholds. Both the NIIT and the additional Medicare tax apply to individuals with MAGI that exceeds $200,000, married couples with MAGI exceeding $250,000, and trusts and estates that exceed these thresholds.

Will we hit “peak car”?

Several auto industry analysts recently predicted that, sometime within the next decade, the world will hit “peak car,” the point at which new vehicle sales stop increasing. The expected plateau in worldwide auto sales can be attributed to several factors, including:

  • Growing pollution and gridlock in the world’s largest cities,
  • Cars that are built to last longer, and
  • A perception among many young urban people that the costs of owning a vehicle outweigh the benefits.

Researcher IHS Automotive foresees worldwide global auto sales topping out at about 100 million vehicles, up from 82 million in 2013. Slower (or zero) sales growth could have a significant impact on parts producers as well as auto dealers.

Dealer Insights - July/August 2014

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