• Mark R. Thaw
• CPA/ABV/CFF, CVA
• Principal
• mthaw@mbafcpa.com
• (305) 373-5500

• Ira Silver
• CPA, Principal
• isilver@mbafcpa.com
• (407) 237-3600

• Ana M. Larias
• CPA, Senior Manager 
• alarias@mbafcpa.com
• (305) 373-5500

A look back at some recent headlines will remind dealership owners that natural disasters can strike almost anywhere at almost any time, and this reminder should lead them to ask, "How well are we prepared, and how quickly could we recover?"

Consider the destructive tornadoes that hit the Dallas area in early April, just several weeks after an unprecedented number of tornadoes struck in several Midwestern and Southern states.

In a preliminary estimate, the National Oceanic and Atmospheric Administration (NOAA) reported that there were 223 tornadoes in the United States this March. That was a record for March, a month where the average number of tornadoes is 80.

In fact, the twisters struck during what NOAA research shows was the country's warmest March on record. Summer is usually the heaviest season for tornadoes, which generally hit without warning. Now, there are concerns that 2012 could be a record year for tornadoes.

Last year's most publicized natural disaster - in fact a combination of incidents - occurred in August.

A 5.8 Richter Scale earthquake rocked New York and other Atlantic Coast states just several days prior to the destruction caused by Hurricane Emily.

These events confirm a simple truth: a disaster that "isn't supposed to happen here" can happen. Tornadoes and fires, for instance, may be uncommon in a particular geographic area, but they still represent a possibility that dealers must anticipate.

Of course, there are some disasters that are "expected" each year in certain parts of the country. Although we hope that they don't occur, we recognize the higher probability. For example, summer will arrive soon, bringing with it the heaviest months for hurricanes, tornados and flooding for many parts of the country.

As a result, May is a month when dealerships should be conducting thorough reviews of their disaster preparedness plans.

This article will provide details of how those plans should be set up for three stages: Preparation, Testing and Recovery.

Springtime should be "test time" for dealerships in Atlantic Coast and Gulf of Mexico states, where the hurricane season will officially begin on June 1 and extend through November 30. Preparation is especially important for dealerships in Florida, which each year is in the official "warning cone" for numerous hurricanes and tropical storms.

Fortunately, Emily was the first hurricane to make landfall in the United States since 2008.

But in case anyone has become lax about hurricane preparations, reports about Emily from NOAA emphasize the importance of disaster preparedness programs. Ultimately, Emily was responsible for more than 40 deaths and caused approximately $7.3 billion in damages. The hurricane was one of a record 14 "severe weather events" that NOAA reported for 2011. Floods and extreme heat or extreme cold also make the list.

Some natural disasters - most notably hurricanes and flooding from overflowing rivers - arrive with several hours or even several days of warning. There usually are several hours of warning for wildfires. On the other hand, tornadoes hit with just minutes of notice, and earthquakes occur with none at all.

But no matter the type of disaster or the warning time, auto dealerships and other businesses can take steps to prepare and fortify their properties with a goal of minimizing potential damages.

They also can have detailed plans in place for resuming operations. This includes a system for communication among management and employees during the hours and days after a disaster strikes.

This issue of Driving Profits includes an accompanying Disaster Preparation Tips article that provides details on the steps that dealerships should take if a storm or other disaster is in the forecast. The list is particularly important for dealerships located in states that can be impacted by hurricanes.

Here is a detailed look at the three distinct steps in a disaster preparation plan:

First: Prepare

The overall goal of disaster preparedness is to keep employees safe, protect essential equipment and inventory, safeguard vital electronic and physical documents, and ensure business continuation. To this end, dealerships should constantly evaluate and quantify infrastructure investments across every department.

Starting at least several months before insurance policies' annual renewal dates, the management of dealerships should review policies to make sure that coverage has kept pace with exposure. That review should be extensive for property and casualty policies and for business interruption insurance.

Business interruption insurance is critical. This type of insurance, often called business income insurance, provides money to a policyholder with claims for a pre-designated period to replace lost revenue and pay employees when a business is shut down. Dealerships should study their business interruption policies to be certain of what damages are covered. Business interruption coverage usually only applies to on-site damages from wind, fire and other specific perils.

Business interruption policies and many property and casualty policies do not cover flood damage. The National Flood Insurance Program includes the option of buying business interruption coverage for flood damage.

Many business interruption policies do not pay claims when a business is shut due to off-site events, such as electrical damage when a hurricane knocks down power lines.

In some states, many insurance companies do not include coverage for hurricane damage, also known as windstorm, and for earthquake damage as part of standard property insurance policies. Businesses and homeowners are usually able to obtain separate policies to cover windstorm and earthquakes. Insurance agents can provide details.

The preparation stage also should include daily electronic backups of important documents, files and databases. Dealerships should make copies of those records and store them in an off-site, physically secure facility. Articles of incorporation, accounts receivable, client records and important personnel and administrative documents should be among the priorities for back-up.

Physical preparations should include having enough generators – and the necessary gas – to operate the office and other facilities if electricity is off after a storm or other disaster.

Dealerships also should have an employee communications plan. This plan starts with each employee having a list of all employee addresses, home phone and cell phone numbers. A call system should be established, with department heads and other "captains" calling designated employees to find out if their homes suffered damage and if they need any assistance.

Dealerships should make special efforts to secure their service departments from potential damage, and to have generators and other equipment that could help those departments quickly return to work.

Other key preparation issues include:

• Credit: Because insurance payments can be delayed, it is important to maintain a sufficient line of credit for business continuation.
• Tax Issues: Depending on the magnitude of the disaster, federal aid may be available in the form of tax breaks at the end of the year. Thus, it is critical to stay up-to-date on tax policy changes.

Second: Test the Plan

A dealership should conduct a dry run of the process for backing up computer files. This will reveal the amount of time it would take to duplicate files under emergency conditions.

Testing the employee communications system can uncover areas of vulnerability, including incomplete phone lists and problems with equipment. If a dealership finds potential problems, it should consider setting up an out-of-state toll-free number that employees and clients can call for updated information.

A walk-through of the facility during the days when a hurricane is approaching might reveal the need to move some vehicles from areas near high trees or from areas prone to flooding. That precaution can save substantial amounts in insurance claims.

In addition, dealerships should consider reviewing disaster situations with banks to verify the reliability of credit and withdrawal requests.

Most of the testing can be simulated, and critical aspects can be checked without mimicking all the conditions of a disaster.

Third: Recovery

After a hurricane or other disaster, recovery for a dealership involves rebuilding the physical structures and rebuilding the financial structure.

By combining traditional accounting practices and investigative techniques, MBAF can provide forensic accounting services to help give a disaster-stricken dealership an advantage when legal disputes arise.

Forensic accounting is also invaluable when insurers question claims and when important financial records are lost. By recreating documentation, forensic accounting can help decipher the true value of property and help rebuild operations processes.

When a dealership is a victim of digital tampering, sabotage or fraud, forensic accounting can help to uncover the truth and resolve problems.

Dealerships that have planned for the worst can be steps ahead of their competition in the recovery process after the lights go off, the walls come down or the computer systems fail—or all of the above.

To contact Mark R. Thaw, email mthaw@mbafcpa.com. To contact Ira Silver, email isilver@mbafcpa.com. To contact Ana Larias, email alarias@mbafcpa.com. Or call 1-800-239-1474.

• Ira Silver
• CPA, Principal
• isilver@mbafcpa.com
• (407) 237-3600

Here is a checklist of steps that dealerships should take to prepare for natural disasters. In addition to safeguarding business records, good planning will help achieve another critical goal – ensuring a quick and efficient recovery after a disaster occurs.

The tips that follow are especially important in preparing for a hurricane, flood or other natural disaster for which there is an advance warning.

• Get two back-up tapes of your system, including the configuration tape. One should go with the Controller, the other with the GM. In addition, verify that computer vendors have back-ups of all your current data files.
• Set up a response team that will give employees updates, including notification of when to return to work. This includes having a system for recorded messages at the dealership's main number, and providing each department manager with a list of home phone and cellular phone numbers and e-mails for employees.
• Get copies of all your insurance information: agent, policy numbers, and contact phone numbers. Once again, a copy should go to both the Controller and the GM.
• Check your business interruption insurance policy to determine the post-storm situations when you will be covered, and those when you will not be covered.
• Pre-arrange for ren   tal of generators. These agreements should be made early each year.
• Print copies of all your inventories and your open RO list in order to have details of what is on the lot.
• Verify that your bank accounts have adequate funds to cover outstanding checks, since it may be a week or more before you will be able to make deposits.
• Pre-arrange with your bank to have one week of advance payroll set aside, with a procedure where you can authorize direct deposit for employees if your dealership is closed or there are other inconveniences following a disaster.
• Mail out accounts receivable statements when a hurricane warning is posted. It would be beneficial to have the accounts receivable payments mailed to a post office box, rather than the dealership address.
• Write down all of your log-ons and passwords to all the manufacturers and bank websites. The Controller and GM/Principal should exchange this information.
• Take digital pictures and/or a video of the entire dealership, including the inventory on the lot.
• Prepare for possible flooding and looters. Try to secure all vehicle keys, customer cars and cash drawers.
• Consider taking important documents if they cannot be properly secured at the dealership in water-tight containers. This would include key documents, titles, MSOs, contracts, legal agreements and personnel files.
• Move high-end vehicles and any collectibles, such as artwork, off site.

Important phone numbers and Web sites to have on hand:

• American Red Cross Food, Shelter, and Financial Assistance: 1-866-438-4636; www.redcross.org
• Florida Division of Emergency Management: (850) 413-9969; www.floridadisaster.org
• New York State Office of Emergency Management: (518) 292-2200; http://www.dhses.ny.gov/oem/
• Federal Emergency Management Agency (FEMA) Registration: 1-800-621-3362; www.fema.gov
• Florida Department of Financial Services Storm Line and Insurance Claim Hotline: 1-800-227-8676; www.fldfs.com

You also should have copies of the mailing address, phone number, website and email of your property insurance company—and the same information of your local insurance agent.

If your county is declared a disaster area under a Presidential Decree, you may be eligible for business interruption insurance coverage and for loans or grants from the Federal Emergency Management Agency (FEMA).

Please consult your insurance agent for a more detailed listing of hurricane planning steps.

To contact Ira Silver, email isilver@mbafcpa.com or call 1-800-239-1474.

• Daniel Flugrath
• CPA, CFP, Principal
• dflugrath@mbafcpa.com
• (305) 373-5500

• Jaclyn Binelo
• CPA
• (305) 373-5500

Just a few years ago, many dealership owners were so focused on day-to-day crisis management that they would say, "Let's wait until later" when tax advisors suggested that they discuss plans for transferring the dealership and other assets within their families.

"Later" has arrived.

Dealerships sold 1.4 million vehicles in March, giving the industry its best month since August 2007.

The rebound in sales is no doubt giving you added confidence that your dealership will survive. You now have more time to make decisions on the tax implications of succession planning and the strategic timing of family gifts as part of your overall tax planning.

In fact, 2012 is a year of urgency in planning for transfers of all or part of a dealership and transfers of other assets and of cash to family members. Because of some important changes in tax laws that are scheduled for 2013, you might want to accelerate your plans and start making some of those one-time gifts in 2012.

Relatively favorable rules on the tax rates and exemption levels for the gift tax and for the estate tax are in place for the 2012 tax year, but might not be in effect starting in 2013.

The gift tax is a tax on the transfer of property (including money) by one individual to another while receiving less than full value in return. The tax applies whether or not the donor intends the transfer to be a gift.

Unless Congress makes some changes in tax laws, the maximum tax rate for the gift tax will increase from 35 percent in 2012 to 55 percent in 2013. The size of gifts that are exempt from that tax is scheduled to be reduced from $5,120,000 per individual and $10,240,000 per married couple in 2012 to $1 million and $2 million in 2013.

The tax rate on the estate tax is scheduled to increase from 35 percent for 2012 to 55 percent for 2013.

The exemptions from the estate tax, for individuals and married couples, are the same as for the gift tax in 2012 and also are scheduled to be reduced to $1 million and to $2 million for 2013 and beyond.

For the first time in almost a decade, the estate and gift tax exemptions are unified, so that an individual's estate tax exemption is reduced dollar for dollar by the value of such individual's lifetime gifts.

A quick review of the above numbers explains why anybody with an interest in making large lifetime gifts should act quickly.

The current law allowing increased tax-free gifts is scheduled to return to the $1 million estate and gift tax exemptions in 2013. For example, on a $3 million gift the maximum tax rate would be 35 percent if made this year and 55 percent if made in 2013. The tax bill would rise from $1,050,000 to $1,650,000.

The rates and exemptions for the gift tax and the estate tax for 2012 and subsequent years were established under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Act), which Congress passed and President Obama signed in December 2010.

Because 2012 is a presidential and congressional election year, there is little prospect that Congress this year will take any action to reverse or otherwise change the pending 2013 rules on the gift tax and estate tax.

The outcome of this November's election will be a major factor in determining what Congress and the executive branch might do in 2013 regarding the gift tax and the estate tax. Basically, it is expected that Republicans would favor a return to the 2012 tax rates and exemption levels and that Democrats would favor a continuation of the rules that were in place before the George W. Bush Administration's tax cuts.

However, if a compromise is not reached rates will be higher and exemptions will be lower starting in 2013.

Amid the uncertainty, a good tax planning strategy is to assume that higher rates and lower exemptions will take effect in 2013 and remain in place for several years.

One basic consideration for the pending change is that the maximum tax on a $1 million gift would be $350,000 in 2012 but would be $550,000 in 2013.

In addition, gifts made in 2012 would reduce the size of your estate assuming the assets that are gifted appreciate at the rate of inflation. The result would be a lower estate tax for your heirs. In some cases, family gifts can reduce your estate to a size where it is not subject to the estate tax.

For many dealership owners, planning for gift taxes and the estate tax is an important part of the transition of the business to the family's next generation.

Or, maybe the younger generation doesn't want to stay in the business, and it may be time to start planning for a sale of the dealership and preparing a plan for the most tax efficient transfer of some proceeds.

In either situation, it is important to become familiar with the tax laws in place for 2012 and changes that are scheduled for 2013.

At MBAF, we understand the intricacies of the tax laws as they impact succession planning and we understand your goals for your dealership and for your family. In this critical tax year of 2012, we are prepared to advise and assist you to help assure that your estate and succession planning will be carried out in a manner that is tax efficient and also suits other goals for yourself and for your family.

To contact Daniel Flugrath, email dflugrath@mbafcpa.com. To contact Jaclyn Binelo, email jbinelo@mbafcpa.com. Or call 1-800-239-1474.

• Mark Thaw
• CPA/ABV/CFF, CVA, 
• Principal
• mthaw@mbafcpa.com
• (954) 760-9000

• Ana M. Larias
• CPA, Senior Manager 
• alarias@mbafcpa.com
• (305) 373-5500

Identity theft has become a financial epidemic, and the Federal Trade Commission (FTC) has a mandate for automobile dealerships to combat it. The requirement is in the Red Flags rules that the FTC has been enforcing since the start of last year.

So, more than ever, you should be asking yourself: "How good is our dealership's anti-identity theft program, and what are we doing to update and test it and to train our employees to detect and prevent attempts to steal customers' identities?"

The answer to the first part of the question had better be "excellent," considering the extent of the problem and the potential consequences to a customer and to your business if an identity theft occurs as a result of a sale or other activity at your dealership. Recent reports from the FTC and the IRS contain some alarming information about the number of identity theft cases and the methods that identity thieves are using to gain access to consumers' financial information.

Meanwhile, it seems that every time you turn on a TV news program you find another story about an identity theft scam. In fact, the FTC estimates that every year about nine million Americans have their identities stolen.

In addition to its long-established role of assisting victims of identity theft, the FTC since January 1, 2011 has been enforcing its Red Flags rules. Details of the "red flags" suspicious activities that dealerships must look for are provided later in this article.

The rules require automobile dealers and other designated "creditors" that are involved in the extension and approval of credit to develop and implement written identity theft prevention programs. Those programs must help a dealership identify, detect and respond to patterns, practices or specific activities – known as "red flags" – that could indicate identity theft.

The extension of credit under the Red Flags rules includes loans that are made by banks and auto finance companies and are approved by dealerships for customers to purchase vehicles.

The FTC can seek monetary and civil penalties and injunctive relief for violations, with a maximum civil penalty of $3,500 per violation. It can conduct audits of businesses' identity theft programs, where it might find violations. It also can investigate when a consumer files a complaint alleging that an action or inaction by a business resulted in an identity theft.

The identity theft programs that dealerships are required to establish must be managed by a dealership's board of directors or senior employees. In addition, dealerships must provide appropriate staff training and oversight of any service providers.

With FTC enforcement in place for the past year, it is timely and vital for dealerships to review and update their programs for detecting, deterring and preventing identity theft. Dealerships should provide training to technical and operational staffs, and test the program and its controls. As they manage their own security procedures, dealerships should also ensure that banks and other service providers have effective identity theft programs in place.

Our accountants and consultants at MBAF can advise dealerships on monitoring, testing and upgrading of identity theft programs. We can build on top of the dealership's customer information safeguards program and policies to help it maintain an efficient process for preventing identity theft.

Data on Identity Theft

On February 28 the FTC released its annual report on consumer complaints for 2011, with identity theft ranking first in the number of complaints for the 12th consecutive year. It received 279,156 complaints on stolen identities last year, a 12 percent increase over 250,854 in 2010.

Some identity theft numbers in the report for 2011 are eye-opening for dealerships in Florida and several other markets where our firm has offices, and where we can provide advice on maintaining and improving identity theft programs. Below are some key facts from the report:

• Florida was first in per capita complaints, with 178 per 100,000 in population.
• New York, New Jersey, Maryland and Colorado ranked in the top 11 in per capita complaints--all with at least 83 complaints per 100,000.
• Miami-Fort Lauderdale-Pompano Beach was first among Metropolitan Statistical Areas with a troublesome 324 complaints per 100,000.

On February 16, the IRS put identity theft at the top of its list of "Dirty Dozen" tax scams for 2012.

The IRS said that there has been an increase in identity thieves looking for ways to use a legitimate taxpayer's identity and personal information to file a tax return and claim a fraudulent refund. An IRS notice informing a taxpayer that more than one return was filed in the taxpayer's name or that the taxpayer received wages from an unknown employer may be the first tip off that the individual receives indicating that he or she has been victimized.

Dealerships should be aware that a person who has stolen a tax refund might use the money and stolen identity in an attempt to purchase a vehicle.

Red Flags Details

The FTC Web site has a section on Frequently Asked Questions on the Red Flags rules and Identity Theft Protection Programs. In addition, a list of the FTC's 25 Red Flags can be found on the next-to-last page of the full regulation that the FTC issued in 2007.

The red flags are not a checklist, but instead are examples that dealerships may use in developing programs to determine if a transaction involves a stolen identity. The red flags fall into five categories:

• Alerts, notifications or warnings from a consumer reporting agency
• Suspicious documents
• Suspicious personally identifying information, such as a suspicious address
• Unusual use of or suspicious activity related to a checking account, credit card or other account
• Notices from customers, identity theft victims, law enforcement or other businesses about possible identity theft in connection with an account

Dealerships with questions may contact the FTC at redflags@ftc.gov.

Other Safeguards

In addition to following the FTC rules, dealerships are subject to federal and state laws regarding the sharing of customers' information and other privacy issues that are part of identity theft programs.

Dealerships should consider contacting their insurance agents about the availability of identity theft insurance policies. Those policies can help cover legal liability damages and defense costs in situations where identity theft victims maintain that the theft resulted from negligence by a business or its employees.

The purpose of an identity theft program is to make sure that the sales person, the sales manager, the staff members in the finance department or someone else at the dealership does not deliberately or inadvertently let information about a buyer's financial records fall into the hands of people who should not have it.

In addition to safeguards that center around your computer systems, you can use some standard common sense.

For example, make sure that when employees leave for the day they do not leave a prospective customer's information about credit history or bank accounts on a desk where it is visible. Another employee or a member of the cleaning crew who finds that paperwork could use it to begin stealing an identity.

By having identity theft programs that are in compliance with FTC rules, and by taking other precautions, you can have added assurance that the next happy buyer who drives out of your dealership's lot in a new vehicle is indeed the person he or she claims to be.

To contact Mark Thaw, email mthaw@mbafcpa.com. To contact Ana Larias, email alarias@mbafcpa.com. Or call 1-800-239-1474.

• Ira Silver
• CPA, Principal
• isilver@mbafcpa.com
• (407) 237-3600

One of the biggest ongoing controversies in the automotive industry is the justification of costs in manufacturers' investment image programs.

Many dealers feel that their required expenditures to remodel and in some cases to rebuild facilities are excessive, and they are uncertain if the changes will generate enough additional sales to cover the costs of their physical improvements.

An overview on the issue, with some answers and also some new questions, is provided in a report on "Factory Image Programs" that the National Automobile Dealers Association (NADA) released in February 2012 at its annual convention in Las Vegas.

The NADA commissioned industry consultant Glenn A. Mercer to prepare the report. It is an independent assessment of the return on investment (ROI) dealers can expect to obtain from the renovations, which are strongly encouraged and sometimes required by various manufacturers.

The cost per dealership is usually at least $200,000 and in some cases is more than $5 million. The factories, also known as Original Equipment Manufacturers (OEMs), view the programs and dealers' expenditures as absolutely necessary to support volume growth and brand identities.

Perhaps the most telling finding in the report is that few if any customers base their buying on dealership facilities. The decision to buy is based on the vehicle's size, features, price and quality and on the dealership's service.

In addition, the report found that the factories are not providing data on the justifications of factory image costs—despite the likelihood that they have data from previous upgrades.

The NADA report also has details on why dealerships support the concept of manufacturer-mandated upgrades of facilities but are skeptical about the current programs' requirements and their potential for increasing sales and revenues.

The report is based on information and views obtained from manufacturers, dealers, lawyers, accountants, other industry advisors and consumers.

Mercer is a former director of automotive services at McKinsey & Co. Here are some highlights of his report and of his presentation at the NADA convention:

• NADA undertook the report as a result of dealers' frustration about the fairness and cost of the programs and what they regarded as excesses demanded by the manufacturers.
• The financial burden was severely straining many dealers' resources (cash flow) and in some cases persuading dealers to leave the business (close or sell).
• It is surprising to many that no hard evidence existed on the return on investment (ROI). The manufacturers based their investment decisions on opinions, assessments and anecdotes—which in many ways guide massive spending.
• Amid a body of 17,000 dealerships, the differing views are as diverse as the dealers themselves.

Examples include:

1. If a factory wants a $2 million facelift, it is easier for large-volume metropolitan dealers than for low-volume dealers. This is also a concern when incentives (manufacturers paying part of the cost) disproportionally help some dealers but not others.
2. Dealers who want to retire don't see a need for this investment, whereas younger dealers may be able to justify the costs.
3. Luxury dealers may be more willing to make large expenditures than those with high-volume and less expensive brands.
4. There is widespread concern among dealers that "If we build, expand and remodel will they request a change in another two to five years?"

The report's findings include:

• The view of consumers on the dealerships, although the sample was small, was "indifferent and unimpressed" about the improvements.
• One expert noted that "unreasonably high future volume forecasts can lead to costly overbuilding by dealers, and as events in the last decade have demonstrated frequent changes in forecasts can result in costly waste."
• Dealers feel that with the requirement to use factory-selected vendors they are spending 20 percent to 30 percent more than if they used their own contractors and other vendors.
• Once a dealer finds out how much it will spend of its factory image program, it also needs to determine what other costs offset potential sales gains. For example, the renovations could result in higher real estate taxes, higher tangible taxes, increased insurance premiums and added costs for facility maintenance.

The NADA report does not provide a "silver bullet" solution to the issue. But it does bring up many questions for factories and dealers to discuss openly before a dealer is "pushed" to make investments to an extent that might not be in its best interest.

When your dealership is preparing for a factory-mandated investment program, our accountants and consultants at MBAF can do a break-even analysis on cost and expenses to determine the number of vehicles you need to sell to offset the expenditures.

We can provide advice on cost segregation and determine which fixed assets might be eligible for accelerated depreciation, and advice on other tax savings strategies that might be available on purchases and on work performed during a factory image upgrade.

To contact Ira Silver, email isilver@mbafcpa.com or call 1-800-239-1474

The potential for low-cost exposure is the most attractive aspect of social media for automotive dealerships and other businesses. Exposure of the negative kind, however, is also the greatest potential downside.

A prime example is a disgruntled past customer who uses social media as a public forum to share his or her negative views. Unfortunately these comments can reach your potential future customers.

Overall the pros of using social media outweigh the potential cons, as illustrated below.

The design and content of your social media page may determine whether it generates sales, or leads to bad publicity and other problems. An informative, user-friendly social media site with photos and other details on vehicles in inventory can prompt the on-line visitor to come to your dealership. Even the number of "Likes" for dealership promotions and products can be an encouraging testimonial for potential buyers.

Many dealers use service and product give-aways such as free oil changes or iPads promotions to encourage users to "Like" their page. It is similar to a radio station giving away concert tickets to the 20th caller.

Some dealers are also using YouTube to provide virtual-tour walkthroughs for vehicles. They post videos in which the sales person opens the doors, shows the interior and accessories, and answers some of the potential buyer's basic questions. All that is left is for the social media user to come to the showroom.

It is important to remember that social media is for fun, and that users are seeking information that is not a hard sell. If you use your profile updates to advertise your product or service too directly, some users will quickly remove themselves from your page.

A good strategy is to post social media updates about events such as family days when you have free food and contests for visitors. You can also post news about your dealership and some basic questions and answers about your vehicle line.

You can use social media for special events like sales, but only sparingly. Keep in mind that the social media user already has an interest in your dealership and doesn't necessarily need a hard-sell TV or radio-like ad.

Several studies have pointed to a large numbers of vehicle buyers using social media in their research and in communications about their buying experience. Last October, for instance, Dealer.com released results of a survey of approximately 2,000 consumers who had recently purchased a new vehicle or were planning to purchase one within the next 12 months. Highlights of the study include the following:

• 38 percent of new vehicle shoppers said they used or will use social media to research their next vehicle purchase.
• Of those who used Facebook, 41 percent said they saw a post that caused them to add a brand or model to their consideration. In addition, 28 percent said they saw a posting that caused them to add a dealership to their consideration.
• Approximately 25 percent of buyers use social media post-purchase to broadcast their purchase and ownership experience. This number jumps to 33 percent for those loyal to a particular brand, and 37 percent for those loyal to a dealership.
• Of those who were loyal to a brand, 44 percent are very or somewhat likely to recommend that brand to their social networks. Among those loyal to a dealership, that number is 47 percent.

Several dealerships have told us that they have had similar positive experiences with their Facebook and other social media pages. At MBAF we can provide you with additional information that can help you determine how your dealership might best utilize social media.

To contact Manny Alvarez, email malvarez@mbafcpa.com or call 1-800-239-1474.

• Ed Blum
• CPA, Principal
• eblum@mbafcpa.com
• (303) 381-2550

So there you are, sitting in your office in early December, still feeling a little stuffed from the Thanksgiving dinner, and you have this nagging feeling that there are a few things you need to do – things that you have not really focused on yet. Then it hits you heavy, like the dry mashed potatoes you had a few days ago: you have not addressed your year-end planning. Several weeks ago you had a long phone call with your CPA, and so you dig out your notes from that conversation. You started taking notes during your conversations with him a few years back. After all, he throws out so much information that if you did not keep a record, you would not remember half of it. You then take out your note pad (or your IPad2) and go to work on the following:

Depreciation

When you spoke to your CPA, he indicated that for property placed in service prior to January 1, 2012, it is possible to deduct 100% of the cost of new property (not used before by anyone). You remember that such 100% deduction applies to almost all property, including computer software, except for buildings and some improvements, but also remember him saying that in some cases, building improvements also qualify. There was some remodeling done at the dealership this year and you replaced a bunch of furniture, so you make a note to ask him about this a bit more. You also chuckle, because if you had proposed this to the CPA a few years ago, he would have lectured you on being so aggressive about deductions. Now it’s the law.

The one thing that sticks to your mind is what he said about the fact that this might not be as good at it seems. He indicated that the deduction of 100% in the first year is basically an interest free loan from the Government since one normally gets to deduct such costs over time. As a result, this does not save you taxes over the life of the property; it only gets you the tax benefits quicker. You make a note to review the equipment you purchased to see when they will be delivered to the dealership so you can have them placed in service and working prior to year end.

Inventory Levels

You have been on the LIFO method for your new and used cars and trucks, as well as parts. To avoid some of the issues that have come up in the past, you make a note to yourself to sit with the Parts Manager to ensure that he knows how to run the LIFO pad parts report. If that is not run correctly or if it is not run close to December 31st, we could have a tough time giving the information to the CPA to compute the parts LIFO adjustment.

You then turn your attention to the inventory you project to have on hand at the end of the year, knowing that this inventory level is the most important variable to make sure that there are no unpleasant LIFO surprises, such as picking up phantom income from "eating into a few old layers." You also recall how glad you are that the CPA recommended that you combine your car and truck LIFO pools into one computation, which allows you to more easily gauge what level you need. You note that the projected level for this year end is significantly higher than in prior years, so this will likely result in an increase in the LIFO reserve. You then make a note to yourself to get together shortly after year-end with the CPA so you can project the LIFO impact and book this estimate on your December statement.

Bonus Computations and Payments

Just a few days ago the CPA called you and let you know of a new Revenue Ruling issued by the IRS. The CPA indicated that Revenue Ruling 2011-29 allows an employer using an accrual method of accounting to take a deduction in the current year for a fixed amount of bonuses payable to a group of employees even though the employer does not know which employees will receive a bonus or the amount of any particular bonus until after the end of the taxable year. In other words, the entire amount of the bonus pool will be paid to employees in the following year (prior to March 15th), but at the end of the current year the employer doesn't yet know which particular employees will receive any bonus, or how much.

It has been a decent year - not one of the best, but a few of your employees have really worked hard. Although you have pay-plans for your managers, you wonder if this sort of plan might encourage the employees without a pay-plan to give that extra effort. You have always believed that the "carrot" works better than the "stick" and like the idea of being able to review the results from each department regarding how much each individual contributed to their success before you make the decision on what bonus each employee should receive. You decide to call your attorney and CPA to discuss how to best put this type of plan in place. You are sure that the announcement of a plan like this will boost morale and improve your results for 2012. You better do it soon, however, since this all has to be in place before the end of the year.

Gifts to Children

2008, 2009 and 2010 were brutal years. 2011 was sort of "OK," although the beginning of the year was a little better than the summer months, when for a few weeks everything seem to have stopped. At least now, things are becoming somewhat predictable. Perhaps we are getting to the place where we have reached a "new normal," as opposed to the years prior to 2007, when everything seemed to be booming. It would be great if dealerships would get back to the point when they were selling at 7 to 10 times earnings for blue-sky, but you are content that at least they have gotten back to selling around the historical 4 times earnings that was in place for much of your career. Also, your banker has stopped avoiding your calls, now that dealership values are a bit more stable and they are actually lending money again.

One thing that the CPA stressed to you is that this is a very good time to think about transferring some of the ownership of the dealership to your kids. Bob is now 28 and Bonnie is now 25, and although they will always be your kids, they are not so small anymore. Sooner than you are willing to admit, they will be running this place. Also, being the owner’s son is good, but you know that Bob doesn’t want to live under your shadow; he would like to start his own dealership. You know that Bob is getting to the place where you might want to support him with that goal. One thing that the CPA mentioned comes to mind: through 2012, if Congress doesn’t change it before that, the lifetime Gift and Estate tax exemption is $5 million per person. The CPA also mentioned that the discounts that have been used for Estate purposes are a bit under attack, and they may not be allowed in the next few years. He said that although it’s impossible to predict if that will ever happen, at least we know what the rules are today.

You have a "gut" feeling that in a few years, the multiples and your results will improve, which will continue to make your dealership more valuable. That feeling, combined with the fact that the value of the dealership facility that you also own will likely go up, means that you will have a sizable estate when that day comes. The CPA has indicated to you that there are a number of ways to gift a good portion of the dealership, without giving up control. He also indicated that your wife and you can "split-gifts" and that you could give your kids as much as $10 million. After 2012, it’s downright unpredictable what the rules might be, but with the deficits in place, it’s hard to imagine that the tax climate will be better.

Life has been good to you, and you recall the discussion with your wife where you both agreed how pleased you were to reach that point in your life that you had already accumulated enough funds to be able to afford a decent retirement. You also recall how this realization had changed your perspective with regard to both charitable giving and transfers to your kids. You have those shares of Apple stock your Dad gave you that are now worth quite a bit, and you want to donate the money to the Homeless Youth Center.

Ultimately, you decide that you will ask your CPA how to implement a transfer plan for your kids and some to the Center. You expect that it will likely take more than just a few meetings with your CPA and attorney, but look forward to the peace of mind of knowing that if something happens to you, there will be an orderly transition of ownership, and that all those you leave behind will be taken care of.

You then review your notes. You have certainly made some work for yourself, but now that uneasy feeling has gone away and you have a plan. It is good to know that the most important decision left for the day is where to go for lunch.

To contact Ed Blum, email eblum@mbafcpa.com or call 1-800-239-1474.

• Ira Silver
• CPA, Principal
• isilver@mbafcpa.com
• (407) 237-3600

Many auto dealerships have big marketing budgets. They use these funds to bombard the local airwaves with slogans designed to establish their brand identities with the public and, of course, to boost their sales.

Consider these messages: "Customer for Life;" "Home of Unparalleled Luxury;" and "Experience the (Your Dealership's Name) Difference."

While they develop ad campaigns, what are dealerships doing to train and encourage employees to live up to these sorts of lofty slogans? What are they doing to ensure that people truly accept these sound bites as their brand and image?

The task on the inside of the dealership is to create "Brand Integrity," a newly popular phrase for the internal mind-set that a business must embrace in order to attain its desired brand identity with the public.

Meeting internal and external branding goals depends first and foremost on the reputation that sales and service personnel have built with customers and with prospects.

Many dealerships realize that reputation starts on the inside. Thus, they have become more pro-active on internal branding by establishing programs of "dos and don'ts" for employees in their dealings with the public. These programs range from classes to basic handbooks, and they are designed to help employees know and understand the purpose of the company and to empower them to do whatever it takes to serve the customer.

A brand integrity program should have measurable targets and incentives, so that employees can see that it works. As part of the program, a "plan for every customer" should be developed. The key rules for each customer should be:

• Have a standard and sincere way to tell every customer "thank you" for the opportunity to sell him or her a vehicle or to repair a vehicle.
• Never lie to a customer. Violation of this rule should be a cause for firing.
• Listen to the customer's needs. Don't try to oversell.
• For sales or service, deliver the car to the customer's home or office, if necessary. Make sure they know that you will e-mail or text them that "the car is ready."

Dealerships should emphasize that employees cannot commit any of the following mistakes with customers: rudeness: slow resolution of problems: lack of product knowledge. When these mistakes are made, the result is almost always "no sale," and in many cases disgruntled non-buyers will tell family and friends to not buy a vehicle from the dealership. Through social media, that bad publicity can be multiplied several times over as customers use Facebook and Twitter to spread the word about a negative experience, and thus hurt the dealership's identity.

The concept that branding starts from within was the focus of a presentation by management strategist Gregg Lederman at the recent CPA Auto Dealer Consultants Association (CADCA) convention in Chicago. Lederman is the author of Achieve Brand Integrity: Ten Truths You Must Know to Enhance Employee Performance and Increase Company Profits. At the CADCA event, he explained that brand development starts with the task of defining an experience that you expect customers to have. From this point, you can build a positive spirit among dealership employees to achieve that level of brand integrity through dealings with customers.

The process includes pre-determined financial rewards which are based on revenue growth and which can be attributed to processes that employees follow in a brand integrity program—such as rules for making follow-up calls. The key, Lederman said, is for employees to have a mind-set of "what is the desired outcome of the customer and what are the obstacles that might prevent the outcome?"

He said employees should develop a list of "wants" for each potential sale as if they were that customer and make sure that they "out-behave the customer."

Employees must do all they can to make the customer feel that the dealership and its services are special, Lederman added. Not every dealership or other business has the resources of a Ritz-Carlton. But he said that businesses can use Ritz-Carlton as an example for employees to build brand integrity that revolves around service.

The Ritz-Carlton Hotel Co.'s brand statement is: "Let Us Stay With You."

Lederman cited Ritz-Carlton research showing that 68 percent of its guests say they really can't afford to stay there, but they are treated so well that they stay anyway, and plan to return.

On its Web site, Ritz-Carlton notes that it requires employees to perform "Three Steps of Service":

• A warm and sincere greeting, Use the guest's name,
• Anticipation and fulfillment of every guest's needs,
• Fond fare-well. Give a warm good-bye and use the guest's name.

The Ritz-Carlton steps of service reflect the definition of "integrity" in Webster's New World Dictionary. That definition states, "the quality or state of being of sound moral principle; uprightness, honesty, and sincerity." For a hotel, auto dealership or other business, reminding employees constantly to live up to this definition is key to successfully building brand integrity.

Integrity can be vital in the often-contentious processes of selling a vehicle and of negotiating repairs and other services.

The sales person or service advisor who is upright, honest and sincere can often overcome that contentiousness and other obstacles to achieve the sale of a vehicle or services.

That result can help turn a slogan like "Customer for Life" into a reality.

To contact Ira Silver, email isilver@mbafcpa.com or call 1-800-239-1474.

• Marc S. Dickler
• CPA, Principal
• mdickler@mbafcpa.com
• (410) 902-8898

The earthquake and tsunami that struck Japan on March 11, 2011 are driving home the lesson that auto dealerships must have financial and operational plans for dealing with shortages of vehicles and parts following natural disasters, whether they occur on-site or thousands of miles away.

The charts in this article, which detail vehicle sales data, demonstrate the extent of the tsunami’s impact on U.S dealerships that sell Japanese brands.

An analysis of the data and an overview of some post-tsunami sales strategies provide guidance on how dealerships can react to slowdowns in shipments of vehicles and parts from overseas, or from plants in the United States that might temporarily halt or reduce production following floods, earthquakes or other natural disasters.

Our review of the dealership market indicates that even amid the uncertainties and the periods of shortages of new vehicles, some Japanese-make dealerships have been able to keep profits at 2010 levels or even post some increases.

In some cases, dealerships did that through increased sales of pre-owned vehicles. Dealerships that had large inventories of pre-owned vehicles benefited from the still-strong demand for certain late models, amid the slow economic recovery, and from buyers who could not find their preferred new models. Because of that demand, dealerships were able to raise prices on popular late model vehicles. However, dealers should be aware that inventories of used vehicles or demand for them might not be as strong during the months following future natural disasters in Asia, Europe or the United States.

Even though their new vehicle sales totals have been lower, some Japanese-make dealerships have been able to increase their new vehicle profits this year through price increases that buyers were able to accept. Many of those dealerships have been gradually able to increase sales of new vehicles since late summer, several months after manufacturers’ began increasing their outputs at plants in Japan and the United States.

But in November, Toyota and Honda were warning about another slowdown after flooding in Thailand shut down their parts producing plants in that country. That occurrence is a vivid reminder for U.S. dealerships to factor the possibility of natural disasters into their budgeting and into planning for inventories and parts.

As the data in the sales charts demonstrates, there was a lag effect after the March tsunami, and this sales pattern could be repeated following other major disasters. The numbers are from the National Automobile Dealerships Association (NADA) and are based on data from Ward's Auto.

The impact of the slowdown in vehicle shipments began hitting U.S. dealerships in May. Sales of Japanese-make vehicles were 322,637 in May 2011 — a 22 percent decline from 416,679 in May 2010. Sales for the May to July period were 18 percent lower in 2011 than in 2010. Unfortunately, Japanese-make dealers felt their heaviest consequences of the tsunami during the industry’s busiest sales season.

Sales of Japanese vehicles have been slowly rising since August amid a gradual rebound in production and in shipments to the United States. Those sales were approximately 4,000 higher in October 2011 than in October 2010. The minimal increase came during a month when total vehicle sales were 1,017,332 compared with 946,586 in October 2010.

Year-to-date through October, sales of Japanese-make vehicles were only about 10,000 less than in 2010. However, the Japanese segment of the U.S. market fell from 39 percent to 35 percent during a period when total sales were up 10 percent year-to-date.

The next sales slowdown of this magnitude could result from a disaster in South Korea, Germany or in the U.S. heartland. Thus, the disruptions that Japanese-make dealerships experienced this year should be a reminder for all dealerships to have financial contingency plans in place and, to the extent possible, plans for managing inventories in the event of a natural disaster.

To contact Marc S. Dickler, email mdickler@mbafcpa.com or call 1-800-239-1474.

• Daniel Flugrath
• CPA/CFP, Principal
• dflugrath@mbafcpa.com
• (305) 373-5500

• Donald Levin
• CPA, Director
  
• dlevin@mbafcpa.com
• (407) 237-3600

A review of 2011’s economic events and a look at the uncertainties that lie ahead indicate why auto dealerships should get an early start on their year-end tax planning.

Some important tax incentives are in effect only for the 2011 tax year. Some other incentives that are available in 2011 and 2012 could be phased out or eliminated by Congress. With the clock ticking, September 2011 is an ideal month to review the tax incentives that are available now and determine how your dealership and other entities can utilize them.

As dealerships start their tax planning they will be looking back at a year when consumers and businesses have been dealing with an ongoing weak recovery.

Sales of new light vehicles were up 11 percent through July 2011 compared with July 2010, according to Ward’s Auto. Sales continued to recover from 2008-2009 levels even though the shipment of parts and vehicles from Japan was slowed following the tsunami that struck that country in March 2011. As Japan continues to rebuild, there is reason for optimism on the pace of sales of Japanese vehicles.

But any positive feelings are tempered because dealerships are facing wider concerns about the U.S. and international economies.

In The Tax Relief, Unemployment Insurance and Job Creation Act of 2010, President Obama and Congress extended many of President Bush's earlier tax changes through 2012 - including a maximum individual income tax rate of 35 percent.

However, tax increases could be considered under the Budget Control Act of 2011 . President Obama signed that bill into law on August 2, 2011 after Congress resolved its dispute over temporarily increasing the federal government’s debt limit.

Amid these uncertainties, dealerships continue to seek ways to minimize tax obligations to the IRS and to obtain extensions and deferrals on tax payments. Dealerships that do not expect to be profitable in 2011 continue to seek additional ways to return to profitability through streamlining operations as well as by offering additional services or products, based upon demand and expected profit margins.

Here are details on some of the important tax incentives - broken out by areas of operations - that are available in the 2011 tax year (in some cases just for one year):

INVENTORIES

A motor vehicle dealership may treat an entire sales facility from which it routinely conducts on-site sales to retail customers, including any vehicle lot that is routinely visited by retail customers, as a retail sales facility.

By making this election, dealers will not be required to capitalize handling and storage costs incurred at such a facility, as those costs relate to the deemed retail sales facility.

In order to take advantage of this treatment, a dealership will need to elect the safe harbor provisions outlined by the IRS automatic election in Revenue Procedure 2010-44 and prepare a Form 3115 http://www.irs.gov/pub/irs-pdf/f3115.pdf (Application for Change in Accounting Method).

During August, Congress was reviewing President Obama’s proposed budget for fiscal 2012 which begins on October 1, 2011. The proposal calls for the LIFO (Last In, First Out) method of accounting for inventories to be repealed for the tax year beginning in 2013.

Taxpayers that currently use the LIFO method would be required to write up their beginning LIFO inventory to its FIFO (First In, First Out) value in the first taxable year beginning after December 31, 2011. The LIFO reserve would then be included in income over the following ten years beginning after December 31, 2012.

Many dealerships receive floorplan assistance from manufacturers. Accounting for the assistance as a reduction in cost of the vehicles on books of the dealership can reduce inventory costs of new vehicles, which in turn allows for the deferral of portions of such assistance that pertain to ending new vehicle inventory.

DEPRECIATION AND FIXED ASSETS

The Small Business Jobs Act of 2010 allows for 100 percent bonus depreciation in 2011 and 50 percent in 2012. The Act also allows for expensing of Qualified Leasehold Improvements to the lesser of $250,000 or taxable Income. This provision is not currently available in 2012. If your dealership is undergoing renovations, you will want to consider this option for your 2011 taxes.

For 2011, the maximum Section 179 expensing amount of $500,000, with a phase-out level of $2 million, will be in effect. For tax years beginning in 2012, a small business taxpayer will be allowed to write off up to $125,000 (indexed for inflation) of capital expenditures subject to a phase-out once capital expenditures exceed $500,000 (indexed for inflation).

Implementing a cost segregation study may help to generate additional cash flow from depreciation deductions. A significant portion of a dealership's real estate could be classified as personal property and depreciated over shorter lives, usually 5 to15 years rather than 39 years.

Planning should be done to ensure the deductibility of additional depreciation from cost segregation and to minimize limitations when these losses are treated from passive activities.

Taxpayers that are not insolvent or bankrupt may be able to elect to exclude from gross income the discharge of qualified real property business debt which comes about from a debt workout agreement with a lender or by changing terms of an existing financing agreement.

If the terms of an existing debt are materially modified in kind or extent, the debtor will be treated as having exchanged the original debt for new debt which will likely, according to the IRS, create debt forgiveness. The cost of excluding the debt discharge is to reduce the depreciable tax basis of the real property that secures the debt.

Dealerships have incentives to make energy efficient changes in their buildings. In general, the expenditures made for energy efficiency are immediately deductible and the cash savings from the investment over time may make the initial investment worthwhile.

COMPENSATION

The December 2010 Tax Act provides for a reduction of two percent in the Social Security Tax (SST) for 2011. The SST provision is not currently available for 2012. Thus, dealerships should consider whether bonuses should be paid out in 2011 to take advantage of this savings.

Incentive payments received as bonuses, prizes or other incentive awards paid directly by the automotive manufacturer or through the dealer to sales persons are not subject to federal withholding tax or federal or state unemployment tax. These payments are not considered self-employment income and are therefore not subject to self-employment tax. Incentive payments should be reported as "other income" on federal tax returns.

Salaries to S Corporation shareholders who perform significant services to their dealerships should, in general, be equal or greater than the salary paid the highest non-shareholder. Any amount in excess of reasonable compensation could be treated as a distribution to an S Corporation shareholder free of Medicare tax. Dealers should keep in mind that distributions to shareholders must be in proportion to their ownership percentages.

If a dealership operates as an S Corporation or as a Partnership, it is critical that the tax basis is sufficient to deduct losses and that distributions do not exceed the basis in these entities that can trigger reportable gain. Basis can be increased by contributing cash or other assets to the partnership or S Corporation. Special rules apply for S Corporation loans from shareholders, which are repaid shortly after year end.

Choosing the proper business entity is a vital part of long-range tax planning.

ESTATE PLANNING

Tax-related matters on estate planning remain important for many dealerships this year because valuations have remained depressed. Therefore, gifting of fractional interests is a strategy that can be considered for transferring interests of a dealership to the next generation of family members in light of current circumstances.

For 2011 and 2012, the 2010 Tax Relief Act reduced the top rate on the Estate Tax and on the Gift Tax to 35 percent. It also increased the exemptions to $5 million for 2011 with a further increase for inflation in 2012. But unless Congress extends those changes, the top rates will be 55 percent and the exemptions will be $1 million beginning in 2013.

Because of this uncertainty, it is worthwhile to consider 2011 as a year for making one-time gifts to family members. The prospect of more changes in these two taxes makes it very important to have a proper estate plan to ensure that the needs of intended beneficiaries are met.

The information in this article is based on tax laws that were in effect as of mid August 2011.

To take full advantage of these tax-saving strategies, as well as others not listed above, dealers should act now. An MBAF-ERE tax advisor can help navigate the winding tax road ahead, helping to reduce tax liability - and to achieve real business growth.

To contact Daniel Flugrath, email dflugrath@mbafcpa.com; to contact Donald Levin, email dlevin@mbafcpa.com; or call 1-800-239-1474.

• Daniel Flugrath
• CPA/CFP
• Principal
• dflugrath@mbafcpa.com
• (305) 373-5500

By taking the following steps, dealerships could achieve savings on their 2011 tax returns:

To contact Daniel Flugrath, e-mail dflugrath@mbafcpa.com, or call 1-800-239-1474.