Accounting Experts Share Tax Time Strategies
McGladrey tax director Scott Ruby understands many buy-here, pay-here dealerships are small family operations without a squadron of certified public accountants on staff that watches every move the IRS makes. However, Ruby suggested that BHPH operators spend a fair amount of time with their tax professional throughout the year, but especially in the springtime when forms and filings must be completed.
“Make sure you’ve got good communication with your tax adviser. Don’t just send your data. Make sure you have discussions. Update them on what the year was like,” Ruby told BHPH Report.
Ruby shared some example questions BHPH operators and their tax professionals could discuss:
• What were the challenges in the past 12 months?
• Did you have new capital improvements this year?
• Are you planning capital improvements next year?
• Did you (or will you) expand your business by buying another business?
• Did you change any bonus or compensation plans (or do you plan to make any changes)?
• How do you determine the transfer rate when you sell installment sales contracts to your related finance company?
• Are you filing all the necessary Form 1099-C?
• What are the criteria for taking a bad debt deduction, and are you taking the deduction as early as the tax law allows?
• Have you created any reserves for future contingencies?
The McGladrey tax director noted that companies should also block time to discuss the recent tax law changes that impact the tax depreciation rules.
“The rules have a retrospective element and all business taxpayers will need to examine their tax depreciation computations. They will need to determine whether items that were expensed as repairs in prior years should have been capitalized or something things that were capitalized might be eligible to be expensed,” Ruby said.
“Some businesses may find favorable adjustments during this review and others will not,” he continued. “These new rules are very complex. Adding to the complexity is a very recent announcement giving smaller taxpayers additional time to comply with the rules.”
McGladrey’s website provides resources that can help taxpayers navigate the rule changes.
“The better your adviser understands your strategic plan the higher the chances are that you’re going to get a really good tax planning tip,” Ruby said.
“You might not want to pay the cost to have your tax accountant review all of the entries in your general ledger. Some operators just want to put their tax data in a shoebox and send it to the accountant,” he continued. “If you just want to send the data, at least leave a memo or note for your tax accountant so they are aware of significant items so they don’t miss something that is in the ledger details.”
While BHPH operators might not pay to have a tax accountant to look at all of the account details, Ruby cautioned “The IRS is going to come through and look at your books at ground zero. Good communication with your tax adviser will minimize the chance of a surprise if you are audited.”
And missing something not only could mean a BHPH operator pays too much — or too little — in taxes, but the records and other documents might also not be as strong as they could be if the IRS decides to audit the dealership and related finance company.
“Buy-here, pay-here is an industry where there are a lot of tax issues. That’s due to the nature of the specific industry rules. It is an area that makes the IRS exams more complicated when they do occur,” Ruby said.
“To sum it up, you can have the best accountants in the world, but if they don’t know you put something in your ledger, it can get missed when your return is prepared,” he continued. “If you’re not talking with your tax adviser planning opportunities can get missed. Perhaps you should invite your tax adviser to lunch to discuss your business and with proper documentation you can even deduct the cost of the lunch.”
Steven Goldberg is one of the partners with Shilson, Goldberg, Cheung & Associates, a Houston-based accounting firm that specializes in handling the complex needs of keeping accurate compliant records in BHPH. Goldberg explained that BHPH operators and their tax professionals need to work together closely, and dealers should “not to bury their heads in the sand” when it comes to following IRS protocol.
“Knowing what the IRS is focusing on and being prepared is the best way to defend yourself against IRS audit issues. You don’t want to have to react to an IRS problem when it’s too late and they’re already on your lot auditing you,” Goldberg said.
“I previously went through an audit that resulted in a no-change to the tax return. However, the IRS still assessed a penalty just for a failure to file Form 1099-C. It’s a real tic-tac penalty. But if the dealer knows this is where the IRS enforcement is headed, this entire penalty can be prevented simply by issuing the proper form,” he continued.
“It’s extremely important that they not bury their heads in the sand and be aware of what’s going on around them so they can be prepared in case they’re picked for an IRS audit,” Goldberg went on to say.
Capabilities of Inventory Write-Down & Other Best Practices
During the Best Practices Conference hosted by the National Alliance of Buy-Here, Pay-Here Dealers in Dallas earlier this year, Goldberg made a presentation emphasizing how BHPH operations can take advantage of the inventory write-down when used properly.
“Buy-here, pay-here dealers are required to report on the accrual basis of accounting, so that means the dealer must recognize its taxable income, the full sales price of the car, in the year the inventory item was sold,” Goldberg said. “The cash flow and taxable income are not the same. So the down payment is likely not even enough to replace the inventory item on the lot. That’s where the inventory write-down, if it’s done properly, can help out.
“An inventory write-down does not cost the dealer any cash, but it gets the writedown as a deduction. The effect of the inventory write-down is to defer income to the future and help reduce the tax burden caused by the required accrual method of accounting,” he continued.
Whether it’s to help with completing the inventory write-down process properly or other matters, Goldberg also maintained several recommended strategies for data and information organization that help dealers.
“I recommend purchasing a strong DMS system that can keep track of the receivables, the inventory and their collections. The DMS system will complement the dealer’s accounting software like QuickBooks and Peachtree. When it comes time to report Form 8300, the DMS will already have information ready and available. Many dealers are also using the DMS software to obtain the information required to file Form 1099-C, the cancellation of debt,” Goldberg said.
“I think a strong DMS system will definitely help any dealer keep their information organized and ready,” he continued.
Goldberg recounted an example of a BHPH operator who chose not to use some kind of digital system to keep track of store figures.
“I’ve actually heard of a case where someone had used basically cards, a manual system. They would keep track of the payments on these cards. They were telling me they put them in a fire-safe proof in case there is a fire,” Goldberg said.
“But the thing is at the end of the year when you have to aggregate all of your payments for Form 8300, that’s the one where it’s more than $10,000 in payments of cash or cash equivalents, if you use a manual system, it’s so hard to determine if you’ve hit $10,000 over the past 12 months,” he continued. “You really need it to be computerized, especially if there is any kind of volume or huge number of receivables. I think a strong DMS system would greatly help any dealer comply with all of the rules they’re being asked to comply with these days.”
How IRS Tangible Property Regulations Can Help Dealers
IRS officials indicated they made changes in an attempt to make it easier for small business owners such as BHPH operators to comply with final tangible property regulations.
Requested by many small businesses and tax professionals, the simplified procedure is available starting with the 2014 return taxpayers are filling out this tax season. The new procedure allows small businesses to change a method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after Jan. 1.
Also, the IRS is waiving the requirement to complete and file a Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014.
“We are pleased to be able to offer this relief to small business owners and their tax preparers in time for them to take advantage of it on their 2014 return,” IRS Commissioner John Koskinen said. “We carefully reviewed the comments we received and especially appreciate the valuable feedback provided by the professional tax community on this issue.”
The new simplified procedure is generally available to small businesses, including sole proprietors, with assets totaling less than $10 million or average annual gross receipts totaling $10 million or less. Details are in Revenue Procedure 2015-20, posted on IRS.gov.
“This may apply to some dealerships and many related entities such as real estate companies,” the National Automobile Dealers Association said. “The revenue procedure allows small-business taxpayers to make changes in methods of accounting associated with the tangible property regulations without filing Form 3115.”
The revenue procedure also requests comment on whether the $500 safe-harbor threshold should be raised for businesses that choose to deduct, rather than capitalize, certain capital expenses.
A fact sheet on the IRS guidance has been prepared for NADA by the dealer accounting firm Crowe Horwath. The fact sheet is available on NADA’s website.
“Dealers currently working with their tax preparers to adopt the regulations are encouraged to discuss the applicability of this new simplification provision,” NADA said.
Recovery Vehicle’s Lifting & Towing Equipment Not Subject To Excise Tax
For BHPH operators who handle their own repossessions with company owned equipment, McGladrey shared an IRS update that might help these dealers.
McGladrey recapped that the IRS released an update dealing with the taxability of certain machinery and equipment installed on an otherwise taxable vehicle. The taxpayer addressed in the ruling manufactures recovery vehicles in the United States and sells these vehicles to end users or to retail dealers.
The tax firm explained these recovery vehicles are mainly used to:
• Retrieve a damaged vehicle from a difficult- to-reach accident site
• Position a retrieved vehicle near a recovery vehicle that will tow the retrieved vehicle
• Lift heavy equipment, such as air compressors and electrical transformers, over fences or other obstacles
• Position heavy equipment, such as air conditioning units, on rooftops.
McGladrey indicated the following equipment sometimes is installed by the taxpayer on the taxable recovery vehicles:
“The IRS concluded that the taxpayer’s equipment contributes primarily to the non-highway transportation function of the recovery vehicles,” McGladrey said. “Any contribution to the highway transportation function of the recovery vehicles is merely incidental.
“Accordingly, the IRS ruled that the taxpayer is permitted to exclude from the taxable sale price of a recovery vehicle amounts charged for the installed equipment that is installed if the reasonableness of the charge for the equipment is supportable by adequate records,” the firm continued.
“This ruling serves as a reminder to examine trucks for onboard equipment that does not primarily contribute to the highway transportation function of a vehicle’s chassis or body in order to take advantage of the exemption from the retail excise tax,” McGladrey went on to say.