As higher tax rates and the further implementation of the Affordable Care Act are realities under the current tax law, it is more important than ever for dealers to take a close look at their compliance and how certain elements of their income tax return are handled. The IRS is allowing changes and elections to be made in the current year that will have a direct impact on your tax liability. Careful understanding of the activities reported on your return and your level of participation are critical factors to consider.
To help taxpayers plan for these changes, the Baker Tilly national tax practice has published its 2014 year-end tax planning letter, discussing various tax provisions that are expiring, the status of tax reform, the impact of the Affordable Care Act, and the latest changes in state and federal tax.
It also looks to Capitol Hill, taking into consideration the possible actions of the lame duck Congress.
Further, Baker Tilly’s dealership services team of tax professionals compiled a list of dealer-specific tax considerations below. Please keep in mind that your goal should be to maximize your long-term wealth and profitability; decisions on tax policy are secondary considerations to this goal.
New rates for 2015
Motor vehicle dealers’ plate tax
- The motor vehicle dealers’ measure of use tax increased to $152 for 2015. Wisconsin-licensed motor vehicle dealers are permitted to report use tax on a certain dollar amount per plate per month for the use of motor vehicles assigned to certain employees and dealership owners.
- Effective Jan. 1, 2015, the amount of gross receipts subject to use tax rises to $152 from $149 per plate per month. Note: The use of tax per plate per month is now $152. Rather, $152 is multiplied by the use tax rate applicable at your dealership (5 percent, 5.1 percent, 5.5 percent, etc.).
For dealers and employees who use their personal vehicles for business purposes, the optional standard mileage rate is 56 cents per mile for 2014. The 2015 rate is 57.5 cents per mile. The optional rate for use of an automobile as a charitable contribution is 14 cents per mile for 2014 and 2015; the rate for medical and moving is 23.5 cents per mile for 2014 and 23 cents per mile for 2015.
Repair and maintenance
New regulations relating to repair and maintenance costs are effective for the 2014 tax year. This has created an opportunity to deduct repair and maintenance costs that historically would have been treated as capital improvements and depreciated over longer recovery periods. Deductible repairs include costs incurred to keep the business in normal operating condition and facilities looking fresh. Auto dealers are more likely to be able to deduct repair and maintenance expenses as they often undergo reimaging or remodel projects. Examples of deductible repairs include the following:
- Interior and exterior painting
- Replacing and repairing damaged windows
- Cosmetic updates to flooring and ceiling tiles
- Replacing and repairing portions of heating and air conditioning systems
- Replacing and repairing portions of plumbing and restroom fixtures
- Repaving and sealing parking lots
Deductible costs do not include costs to replace major components or substantial structural parts of a unit of property or amounts that result in a betterment, restoration, or change in use of a unit of property. Dealership owners should review their previously capitalized expenditures related to building and land improvement property to take advantage of the new repair and maintenance regulations and to ensure the correct methods of accounting are being followed.
Net investment income
The Affordable Care Act added a 3.8 percent income tax on net investment income beginning in 2013. The 3.8 percent tax applies when a taxpayer's income is greater than $200,000 for single taxpayers and $250,000 for joint taxpayers. Net investment income includes interest, dividends, capital gains/losses, passive rental income, and income/losses passing through from investments in which you do not actively participate. But certain investment income can be excluded from the 3.8 percent tax and are common issues among dealerships. Self-charged interest exists when a pass-through entity reports interest expenses related to a partner or shareholder loan. The related interest income reported on the individual taxpayer's return can be excluded from net investment income for the pro rata amount of interest expense reported by the pass-through entity to the respective individual. Self-charged rent presents a similar situation in being excluded from net investment income. Make sure these items are being properly excluded, if applicable, from net investment income when calculating your 3.8 percent tax.
Grouping related activities
You may be able to group related pass-through activities together on your individual income tax return for purposes of the passive activity limitations and to reduce your net investment income tax. As a result of the net investment income tax regulations, individuals should review their groupings and consider changes, if allowed. For example, many dealerships have a separate legal entity which holds its real estate. However, you should be aware that the grouping of activities is subject to complex rules, and a taxpayer’s ability to regroup is limited. Further, even if you have never grouped activities in prior years, you are still subject to the regrouping rules.
Grouping real estate with the operations of the dealership may reduce certain taxes on your individual tax return. Losses from activities in which you regularly participate (nonpassive activities) typically are deductible. Losses from activities in which you do not regularly participate (passive activities) typically are only deductible when you have income from other passive activities. For example, rental real estate is a passive activity, and losses from rental real estate generally are not deductible due to passive activity limitations. However, by grouping the real estate entity with the active dealership, the combined activity would be considered nonpassive and all losses would be allowed (assuming that you “materially participate” in the dealership). Please note that the grouping rental real estate with trade or business activities is subject to substantial restrictions. All activities should be evaluated to determine if regrouping is advantageous and permissible.
Treatment of upgrade image support payments
Based on the memorandum issued by the IRS Office of Chief Counsel on May 9, 2014, payments received from automobile manufacturers to dealerships for the purpose of upgrading their facilities are to be included in the dealerships’ gross income. It was noted that these payments were being handled inconsistently by dealerships in the past. Some dealerships would classify these payments as a non-shareholder contribution, others would omit the payments from income and instead reduce the basis in constructed assets, and some would adjust the purchase price of vehicles by the amount of the payments. This memorandum represents the IRS’s interpretation of how existing tax law should be applied regarding these payments. Please seek advice from your tax advisor regarding the handling of these payments, in light of this newly published memorandum.
Inventory on LIFO
Make sure that a reasonable estimate of your LIFO adjustment for the year is on all versions of your December financial statement. A dealership will meet the conformity requirements and will not be in violation if it makes an actual or estimated adjustment to its LIFO reserve through cost of sales or other income. The adjustment may be on the twelfth-month factory statement or thirteenth-month statement, if the latter is issued before the January statement.
The IRS allows auto dealerships to use a single, combined LIFO pool for all new vehicles, eliminating the requirement of using a separate pool for cars and light duty trucks. Speak with your tax advisor on whether changing to a single LIFO pool would be to your advantage. A request to change to the single-pool method is an automatic change and may be filed at the same time as your tax return.
Inventory not on LIFO
Used vehicles: Adjust your used vehicles to current average wholesale market value by the end of the year. Evaluate the tax-deferred benefits of electing used car LIFO.
Parts: Compare your actual parts inventory to the accounting parts inventory and make any adjustments where appropriate. Donate or scrap obsolete parts by year-end if they cannot be returned for credit.