<![CDATA[MBAF - Newsletters - Dealership Services Advisories]]> <![CDATA[Automotive Dealerships Advisory - IRS Issues Revenue Procedure with Safe Harbors on UNICAP Rules]]>
Daniel Flugrath
Rosamaria Bravo
The IRS on November 9 issued Revenue Procedure 2010-44 which provides guidance to motor vehicle dealerships regarding the costs that they are required to capitalize under the inventory uniform capitalization (UNICAP) rules. In general, those rules require that resellers of motor vehicles include purchasing, storage, handling and certain overhead costs in the cost of inventory. The new revenue procedure sets forth the following two safe harbor elections for the application of UNICAP:
 
  1. Retail sales facility safe harbor

    The dealership may elect to treat its entire sales facility from which it normally and routinely conducts on-site sales to retail customers as a retail sales facility. As a result, the dealership would not be required to capitalize handling and storage costs incurred at the retail sales facility.

  2. Reseller without production activities

    Dealerships may elect to treat themselves as retailers without production activities. Dealerships that perform activities on customer vehicles or those owned by the dealership would only need to capitalize the cost of vehicle parts so that amounts related to handling the parts at a retail sales facility need not be capitalized in inventory for tax purposes.

A dealership may adopt either or both of these safe harbor methods by filing an "Application for Change in Accounting Method" (Form 3115) with the IRS. The form may be filed any time during the year of change until the extended due date of the return for the year of change.

Dealerships that have capitalized UNICAP costs to inventory which were not required to be capitalized and have removed such capitalized amounts by including negative amounts in the UNICAP calculations are not eligible to use the above safe harbor. If such dealerships wish to adopt the above safe harbor methods, they must change their method of accounting to only capitalize required costs. The dealership can concurrently apply for a change in accounting method regarding these negative adjustments and the safe harbor elections.

Handling and storage costs related to off-site storage and or production activities not on the retail sales facility location would continue to require capitalization.

If you would like additional information on the IRS's new Revenue Procedure on UNICAP, do not hesitate to contact us at (305) 373-5500.
 
]]> <![CDATA[Automotive Dealerships Advisory - Dealer Fee and Pre-Delivery Charges Must be included in Advertised Price ]]>
Ira Silver

It is the responsibility of Compliance Officers of the Florida Department of Safety and Motor Vehicles (DMV) to monitor deceptive advertising under the Florida Deceptive and Unfair Trade Practices Act.

DMV Compliance Officers visit dealerships and may issue fines for deceptive advertising if they find dealerships that have failed to have the dealer fee or other pre-delivery charges included in the advertised price of motor vehicles.

An advertised price includes, but is not limited to, print, television, radio, Internet or stickers on the motor vehicle stating the price of the vehicle. The only charges that may be added to the final price of a vehicle are state and local taxes, tag, registration fees and title fees, unless those fees are otherwise required by local law or standard to be disclosed in the advertised price.

Dealerships should review their current advertised prices, including any advertised Internet pricing. Dealerships must ensure that all prices advertised include any applicable dealer fees which are charged, and any other pre-delivery fees. Also, dealerships need to ensure that any pay plans specifically exempt the dealer fee or other pre-delivery charges from the commissionable gross on which commissions are based.

If you would like additional information about the Florida DMV requirements for including dealer fees and other other pre-delivery charges in advertised prices, do not hesistate to contact us at (305) 373-5500 or (407) 237-3600.

]]> <![CDATA[Automotive Dealerships Advisory - All Dealers Face Potential Liability on Sales of Recalled Toyotas]]>
Ira Silver
Ed Blum

Toyota's recall of eight models because of accelerator problems and its suspension of sales of those vehicles are not confined to Toyota dealerships. All Toyota and non-Toyota auto dealers may not have liability coverage on sales of a new or used vehicle, if they know that the vehicle is subject to Toyota's recall.

The units under recall should be parked until Toyota announces a remedy and the unit is repaired under Toyota's warranty program.
 
 
The Toyota units under recall are:
 
  • 2009-2010 RAV4
  • 2009-2010 Corolla
  • 2009-2010 Matrix
  • 2005-2010 Avalon
  • 2007-2010 Camry
  • 2010 Highlander – exclusive of hybrids
  • 2007-2010 Tundra
  • 2008-2010 Sequoia

Details on Toyota's recall and suspension of sales of the eight models can be found at www.toyotausa.com. Click on "News Alert" on the lower left of the home page.

On its Web site, Toyota said it is recalling the vehicles because: "In rare instances, there is a possibility that certain accelerator pedal mechanisms may mechanically stick in a partially depressed position or return slowly to the idle position."

Toyota said its recall of the eight models is separate from an ongoing recall, announced last November, of about 4.2 million Toyota and Lexus vehicles to repair acceleration problems caused by out of place floor mats.

If you would like additional information on the Toyota recalls do not hesitate to contact us at (305) 373-5500, (407) 237-3600 or (303) 381-2550.

]]> <![CDATA[Automotive Dealerships Advisory - IRS Gives Final Chance to Comply with Deferred Compensation Rules]]>
Ed Blum

The IRS on January 5, 2010 issued a notice that gives auto dealerships and other businesses a final chance to comply with rules for nonqualified deferred compensation plans, and thus avoid tax penalties for themselves and recipients of that compensation.

Notice 2010-6 provides a limited voluntary program under which employers and other service recipients can correct deficiencies in documentation for compliance with Section 409A of the Internal Revenue Code. Employers, subject to certain limitations, have until the end of 2010 to identify errors and correct the documentation for deferred compensation plans that are subject to Section 409A.

Your dealership will be subject to the Section 409A rules if it has pay plans that include deferral provisions, bonus plans and long-term incentive plans. These rules apply to any arrangement under which compensation may be paid in a year after the year in which the individual’s legally binding right to the compensation is created.

The IRS added Section 409A to the tax code for compensation amounts that were deferred or became vested on or after January 1, 2005, but delayed full compliance until January 1, 2009. It recently announced an enhanced audit initiative that will include compliance with Section 409A.

If you would like additional information on requirements for complying with Section 409A, do not hesitate to contact us at (305) 373-5500 or (303) 381-2550.

]]> <![CDATA[Automotive Dealerships Advisory - New Year is Perfect Time for Short-Term and Long-Term Planning]]>
Ed Blum

With the arrival of the New Year, it's a great time for dealerships and other businesses to make new resolutions to ensure success. It's a time to look at your business from a perspective of short-term, mid-range and long-term goals for 2010, and to analyze cash flow from an operating and from a compliance perspective based on loan covenants.

You must adapt your business model to the shopping habits of your customers, keeping in mind that making a friend, makes a sale. Customers need to leave saying, "WOW, what a great experience it was doing business with you!"

It is important to review all expenses and budgets based on low, medium and high sales levels. Advertising should be analyzed for the best and most opportunistic medium (radio, TV, internet, etc.). Timing of inventory levels for both new and used vehicles, as well as model break-downs, will be imperative to your success.

Businesses should evaluate their insurance policies to address costs not budgeted -- such as claims from employee dishonesty, property damage and other potential liabilities. Compliance with operational and regulatory procedures should be reviewed to avoid civil and criminal litigation. Internal control procedures should be reviewed to determine that they are not being circumvented.

It is a perfect time for a reminder that expectations must be met and every person, in every department, must come to work every day as if they are applying for a job tomorrow. The issues of discussions should be how to keep taxes low, not profits.

If you would like additional information about operational and compliance planning for 2010, do not hesitate to contact us at (305) 373-5500 or (407) 237-3600.

]]> <![CDATA[Automotive Dealerships Advisory - IRS Suspends UNICAP Examinations of Dealerships]]>
Daniel Flugrath
Rosamaria Bravo

In a Memorandum issued to examiners on September 15, the IRS announced that it will temporarily suspend its evaluations of how auto dealerships account for handling and storage costs related to vehicles held for sale as well as handling and storage costs for parts, repairs and installation activities for vehicles. The IRS will not include the review of Uniform Inventory Capitalization (UNICAP) rules to develop UNICAP issues during examinations it begins on dealerships examinations between September 15, 2009 and December 31, 2010. For dealerships under examination before September 15, 2009, the examining agent may continue to develop inventory issues related to Section 263A of the U.S. Tax Code.

The IRS said it suspended the development of issues on UNICAP matters to give dealerships "an opportunity to voluntarily change their methods of accounting to comply with the legal reasoning" of a Technical Advice Memorandum (TAM) it issued on May 30, 2007.

On September 15, the IRS said examining agents have found a significant amount of noncompliance by dealerships on UNICAP rules and on the 2007 Memorandum.

It is likely that after December 31, 2010 the IRS will be more vigorous in applying and developing UNICAP rules. That could result in it assessing and collecting more penalties related to UNICAP noncompliance.

If you would like additional information on IRS UNICAP rules, do not hesitate to contact us at (305) 373-5500.

]]> <![CDATA[Automotive Dealerships Advisory - Cash for Clunkers to End on Monday Night]]>
Marc Dickler
Ira Silver

The U.S. Department of Transportation (DOT) announced on Thursday, August 20 that the government’s Cash for Clunkers program will close on Monday, August 24 at 8 p.m. Eastern Time. In a statement, the DOT said that time on Monday will be its deadline for accepting dealerships’ applications for rebates in the program whose formal name is the Car Allowance Rebate System (CARS).

The DOT also said that dealerships should not make further sales without receiving all necessary paperwork from customers. It advised them to submit complete applications, which would expedite payment. In addition, DOT said dealerships will be able to resubmit rejected applications after the deadline.

On its www.cars.gov Web site, the DOT also released a two-page Wind-Down Strategy with additional information for dealerships.

Transportation Secretary Ray LaHood said the Monday deadline will allow dealerships and buyers sufficient time to finalize purchases and submit applications for rebates from the remainder of the $3 billion provided by Congress. DOT has projected that the CARS program has enough money to continue accepting applications through the deadline.

In order to assist cash strapped dealers, General Motors is making interest free loans to their dealers equal to the amount owed on the CARS program.

Dealers should watch inventory levels and not get caught off guard because of the current sales increase.

If you would like additional information on the pending termination of the Cash for Clunkers program, do not hesitate to contact us at (305) 373-5500.

]]> <![CDATA[Automotive Dealerships Advisory - Tax Tips: Understanding an Important Road to Savings for Dealerships]]>
Rosamaria Bravo
Daniel Flugrath

Auto dealerships should keep in mind these critical tax tips as they begin year-end tax planning for 2009:

  • Hiring unemployed or disabled veterans, food stamp recipients and disconnected youth helps your community. It's not only the right thing to do – it can also qualify your dealership for $2,400 (higher in some instances) in tax credits for each eligible employee that is hired –see Section 1221 on page 223 of the American Recovery and Investment Act of 2009.
  • If you need to purchase machinery or other equipment before mid-2010, consider a 2009 purchase since qualified property is eligible for 50% bonus depreciation, and as much as $250,000 of acquisitions may be eligible for expensing under the 2009 tax law – see Section 1202 on page 221 of the American Recovery and Investment Act of 2009.
  • Review expenses and confirm that all expenses have been properly accrued for and expensed on the books of the dealership. Make sure proper accruals have been made for payroll, interest, advertising and other recurring charges.
  • Write down used car inventories and parts to their fair market value if the LIFO method of accounting is not used for inventory valuation of such items.
  • Identify obsolete parts and return them to suppliers. Parts that cannot be returned should be scrapped or donated in order to obtain a tax deduction.
  • Review the fixed asset schedule to ensure that all listed assets are still owned and used by the dealership. Assets that are no longer in working condition should be scrapped.
  • Accelerate and bunch expenses and defer income, where appropriate.
  • Remember to properly accrue December charge-backs that are not reflected on the finance reserve statement until January.
  • If your dealership is an S Corporation or partnership and is in a loss position for 2009, make sure that you have sufficient capital or loans to the business to deduct the loss on your personal tax return.

To see how we can help your dealership in these extraordinarily difficult times, contact Rosamaria D. Bravo at rbravo@mbafcpa.com or (305) 206-6309, and Daniel Flugrath at dflugrath@mbafcpa.com or 305 373-5500.

]]> <![CDATA[Automotive Dealerships Advisory - Contingency Agreements Warning!]]>
Ira Silver
Ed Blum

While much has been written about the "Cash for Clunkers", the government continues to release more rules and regulations that the dealers must follow.

The newest requirement as posted on the Official Government Site, U.S. Department of Transportation (NHTSA), is that dealers may not have the customers sign a contingency agreement. These contingency agreements stipulate that if the traded– in unit did not qualify for the government rebate, the customer would have to make up the difference or take back their vehicle.

According to the NHTSA web site (www.cars.gov), "consumers should not sign contingency agreements to pay back the dealer should the cars be rejected."

The site goes on to say that "if the dealer has the car in stock, the dealer must allow you to take possession of the new car before the dealer may submit the credit application to the government."

Under the Consumer Allowance Rebate System Act ("CARS"), it is entirely up to the dealer to comply with all aspects of the programs from submission of the proper government forms, to the proper disposition of the trade-in.

***Any departure from these procedures will result in the disqualification of the dealer’s payment. ***

Therefore, it is imperative to follow all guidelines as no one knows what happens when the money runs out and dealers still have an open claim.

Finally, the NHTSA exhorts the buyer to: "please report any dealer to NHTSA that does not allow you to take possession of a new car purchased under the cars program by calling the cars hotline at 1 (866) CAR-7861."

Time truly is of the essence.

If you have any questions regarding the CARS program or any other matters effecting your dealerships operation, please don’t hesitate to contact our automotive group.

]]> <![CDATA[Automotive Dealerships Advisory - IRS Ruling Guides Dealership on Tool Reimbursement]]>
Rosamaria Bravo

On July 24, 2009, the Internal Revenue Service issued a private letter ruling that specifies circumstances under which tool reimbursement arrangements might qualify for accountable plan tax status. Under that status, payments in which auto dealerships reimburse technicians for purchase of tools and other equipment are tax-free to the recipients and are not subject to payroll and withholding taxes.

The IRS private letter ruling applies only to the taxpayer that requested it, but can serve as a guide for dealerships that want their technicians to have accountable plan treatment.

Many dealerships and other businesses require some employees to provide their own tools and equipment, which must be kept on premises. Under IRS rules, to be an accountable plan an employer's reimbursement or allowance arrangement must include all of the following:

  • Expenses must have a business connection – that is, an employee must have paid or incurred deductible expenses while performing services as an employee of the employer.
  • The employee must adequately account to the employer for these expenses within a reasonable period of time.
  • The employee must return any excess reimbursement or allowance within a reasonable period of time. The IRS definition of reasonable period of time depends on the facts and circumstances of each situation.

The IRS has strictly interpreted those rules, to prevent dealerships and other employers from attempting to reduce employees' taxable income by recharacterizing wages as reimbursements for tools and other equipment. That strict interpretation has resulted in the IRS rejecting numerous employers' requests for accountable plan status.

The IRS's July 24 private letter ruling said the business's plan for reimbursing technicians for purchase of tools and equipment qualified as an accountable plan because:

  • The plan only covers expenses incurred on job assignments while employed by the employer during the current reimbursement plan year and while enrolled in the plan. Covered costs include expenses to buy tools, equipment, uniforms, safety equipment, and supplies, and to obtain employee training and certification directly related to the employer's trade or business. The plan won't reimburse expenses incurred while a technician was employed by another employer or expenses for anything bought before the plan's start date.
  • To be reimbursed, technicians must submit a claim form requiring them to validate that they have read and understand the plan, and to certify that: the information provided is correct and complete; the expense is required to complete job assignments; the item will only be used in the performance of job assignments; and the item was bought from an approved vendor list.
  • The plan only makes reimbursements and doesn't make cash advances or allowances.
  • Reimbursements under the plan do not result in adjustments to compensation.

If you would like additional information on determining whether a tool reimbursement arrangement may qualify as an accountable plan, do not hesitate to contact us at (305) 373-5500. Also, if there's a topic of interest you'd like covered in a future newsletter or advisory, please let us know.

]]> <![CDATA[Automotive Dealerships Advisory - Cash for Clunkers Update]]>
Rosamaria Bravo

The Obama administration said on July 30 that it will honor all valid transactions that have taken place to date in the Car Allowance Rebate System (CARS) program, which also is known as "cash for clunkers". White House press secretary Robert Gibbs said the administration was working to "assess the situation facing what is obviously an incredibly popular program. Auto dealers and consumers should have confidence that all valid CARS transactions that have taken place to date will be honored."

A spokesman for the president made that statement following news reports that the government might suspend the program because it was approaching its $1 billion budget. As of Friday morning July 31 there was no announcement of a suspension.

A total of $1 billion is allocated for the program that is scheduled to run through November 1, 2009, provided that all funding is not utilized before that date. The $1 billion is in vouchers of $3,500 and $4,500 that buyers can use on the trade-in of vehicles with low miles-per-gallon ratings for new vehicles that are more fuel efficient.

The National Highway Traffic Safety Administration (NHTSA) on July 23 issued final rules for the "cash for clunkers" program. The program is authorized under the Consumer Assistance to Recycle and Save Act of 2009, which President Obama signed on June 24. The National Automobile Dealers Association (NADA) on July 24 issued a summary of the NHTSA rules and a list of "Frequently Asked Questions." The NHTSA has a web site with details on "cash for clunkers." The Web site has link with information for dealerships.

On July 15, MBAF issued an Advisory with detailed information about the program. MBAF accountants and consultants are available to advise dealership clients on vehicle sales and other aspects of the program.

If you would like additional information on the cash for clunkers program, do not hesitate to contact us at (305) 373-5500.

]]> <![CDATA[Automotive Dealerships Advisory - Cash for Clunkers]]>
Rosamaria Bravo

President Obama on June 24 signed The Supplemental Appropriations Act of 2009 (H.R. 2346), which includes the “cash for clunkers” program with cash incentives of up to $4,500 on the trade-in of vehicles with low miles-per-gallon ratings for new vehicles that are more fuel efficient.

The program’s formal name is the Car Allowance Rebate System (CARS). Details are in Title XIII of the bill. A total of $1 billion is allocated for “cash for clunkers,” on which purchases can be made by consumers and businesses between July 1, 2009 and November 1, 2009.

The National Highway Traffic Safety Administration (NHTSA), which is administering the program, has a Web site with details. The NHTSA is scheduled to release final rules for the program no later than July 24, 2009.

The federal government is providing tax-free vouchers of $3,500 and of $4,500, depending on the types of vehicles traded in and purchased (or a qualified lease) and their fuel efficiencies. The vouchers will be issued to dealers that are registered in the program, to reduce the purchase/lease price of the vehicle. Vouchers cannot be used to offset any other rebate or incentives offered by the manufacturer.

Eligible trade-in vehicles are those that are:

  • In drivable condition.
  • Have been continuously insured and registered to the same owner for at least one year.
  • Were manufactured less than 25 years before the trade-in date.
  • In the case of passenger automobiles, achieve a combined fuel economy (CFE) of 18 miles per gallon (mpg) or less.

In addition, trade-in vehicles must be scrapped with the exception of certain salvaged parts.

For passenger automobiles, the vouchers are:

  • $3,500 if the CFE of the new passenger automobile is at least four mpg higher than that of the trade-in vehicle.
  • $4,500 if the CFE of the new passenger automobile is at least 10 mpg higher than that of the trade-in vehicle.

The Web site of the National Automobile Dealers Association (NADA) has a chart with details on the size of vouchers available for purchase of passenger cars and several categories of trucks.

If you would like additional information on the “cash for clunkers” program, do not hesitate to contact us at (305) 373-5500.

]]> <![CDATA[Best Practices in Dealership Financial Management and Expense control]]>
Ira Silver

At the Mercedes-Benz Pacific Northwest Business Management Roundtable on May 21, 2009 in Seattle, Washington, I was honored to present the topic: Best Practices in Dealership Financial Management and Expense Control.

To view the presentation, please click here and then select Best Practices in Dealership Financial Management and Expense Control.

Controlling expenses is such an important part of operations and there is a laundry list of areas including legal, compliance, etc. to scrutinize. In times as trying as these, you will most certainly find a cost saving idea by reviewing the PowerPoint. I would be happy to personally discuss these ideas with you.

If you would like more information, do not hesitate to contact us at (407) 237-3600.

]]> <![CDATA[Automotive Dealerships Advisory - Plan B - Detroit Files Bankruptcy]]>
Ira Silver
Mark Thaw

With all of the buzz in the air regarding the Federal Government's continued bailout of the auto industry, it appears quite likely that the insolvency issues can and will be dealt with in the form of an organized bankruptcy.

For many businesses, a bankruptcy filing can occur and cause little or no disruption to ongoing operations. For a domestic car dealer, however, a bankruptcy filing by auto manufacturers might very well be the final straw that breaks the back of their dealership business. As a result, dealers need to develop “Plan B” in order to prepare for the potential of a massive reorganization in Detroit.

A dealership's Plan B should address three main factors: the business's relationships with 1) their financial institutions, 2) their customers, and 3) the automobile manufacturers (i.e. the factory).

Financial Institutions
Now is the time for dealerships to meet with the key financial representatives. Dealers should discuss their concerns with regard to floor plan lines of credit, real estate mortgage loans and other existing lines of credit.

It is very important to reduce inventory as much as possible. Banks understand that their ability to send new vehicles back to the manufacturers may not exist anymore, even under the state franchise laws, thereby increasing their exposure if they had to sell off the vehicles.

If and where possible, it may be prudent to allow additional liens on property to help secure the bank for any shortfalls with its inventory. This step can give the dealership the needed credit to operate.

Businesses should net dealer trade checks with other dealers. This approach prevents the dealer from losing substantive amounts (e.g. $ 30,000 or more) if the dealer's other check bounces and there has been no netting. If the check is netted, the exposure can be less (e.g. maybe $1,000 or less).

Dealerships should have a plan to sustain themselves with a cash flow that coincides with current sales levels, thereby demonstrating to financial lenders that the business has a viable liquidity plan in place.

Customer Relationships
At the same time, dealers need to figure out how to keep selling, servicing and providing parts for customers.

This may be the time to have an advertising plan that shows the customers that the dealership will be there for them in the long–term. Potential customers need to know that the dealership can get them financed, that they will have a product that has value after the sale, and that the dealership will be there to repair the car if needed.

Customers will have a much easier time buying from the dealership that clearly reassures them of all of these services. Marketing and customer attentiveness cannot be more important than at this time.

Relationships with the Factory
The most important recommendation in regard to the factory is to submit, submit, and submit (all pertinent documents). The accounting staff must be trained and required to send in warranty claims, incentives and other monies due from the factory daily. In the past, factory submissions were done weekly or even monthly; that luxury must stop immediately. With the uncertainty surrounding bankruptcy, no one will have a clear understanding of when and how normal recurring payments will be made. Thus it is critical to have filed all items with the factory in a timely manner.

In addition, dealership management should meet with legal counsel to develop a clear understanding of how floor plan cash offset accounts will affect the business. For example, will these funds be allowed to be netted against outstanding debt on vehicles, or will the dealership become an unsecured creditor?

In conclusion, the importance of having a Plan B cannot be understated as Plan C may be the dealership's own bankruptcy plan.

To contact Ira Silver at isilver@mbafcpa.com or call (407) 237-3600 or Mark R. Thaw, mthaw@ mbafcpa.com or call (954) 760-9000.

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