Kick Your Tax Savings into High Gear – Sponsored by Capstan
Bonus Depreciation:
- Under TCJA, 100% bonus depreciation is in play through 2022. This phases out by 20% every year after 2022 down to 20% in 2026.
- Cost segregation studies break down 39-year property into smaller buckets of 5-year, 7-year, and 15-year property which are bonus-eligible.
- In order to claim bonus depreciation, floor plan debt financing must be considered. An entity with a 3-year annual average of gross receipts more than $26M is eligible for bonus as long as floor plan interest is less than 30% of EBITDA. (50% for 2020)
- An entity must test annually to see if they are eligible to take bonus depreciation.
Qualified Improvement Property (QIP):
- Defined as any improvement to an interior portion of a building which is nonresidential real property, as long as the improvement was placed-in-service after the date the building was first placed-in-service by any taxpayer.
- Exclusions include building enlargement, elevators, escalators, and internal structural framework of the building.
- CARES Act retroactively corrects the recovery period of QIP to 15-year. This means QIP placed-in-service on or after 1/1/2018 will be treated as 15-year property under the TCJA and as such is eligible for bonus depreciation. This allows some entities to revisit past tax returns where they elected out of taking bonus depreciation.
Section 179 Expensing:
- Beginning in 2018, assets qualifying for QIP are eligible for 179 expensing
- TCJA expanded Section 179 expensing for non-residential building systems placed-in-service after 1/1/2018.
- Section 179 election cannot place a taxpayer into a loss situation and must be taken in the year the work is placed-in-service.
Energy Incentives:
- The Consolidated Appropriations Act was signed into law on December 27, 2020, which extended energy incentives. The EP Act/179D was extended permanently so that properties placed-in-service any time after 1/1/2006 are eligible for the deduction.
State of the Profession from the AICPA
- The role of the finance professional in the dealership world is undergoing a major change, requiring a shifting of skills and mindsets from a technical and automated focus to a more human and social-skill focus.
- Companies that outperformed their peers during COVID-19 focused on specific areas such as innovation, partnerships, sense of purpose and mission, employees, and leadership.
- Automation and outsourcing of many tasks are reshaping the role of audit and advisory. This will require accounting professionals to focus on other skills in the next 5-10 years such as customer service, communication, strategic thinking, technology, and business growth.
A&A Update
- ASU 2021-03
- Under ASC 350-20 a private company must identify and evaluate goodwill triggering events when they occur to determine whether it is more likely than not the fair value of a reporting entity is less than carrying value.
- If it is more likely than not that goodwill is impaired, entity must test for goodwill impairment using the triggering date as date of measurement.
- ASU 2021-03 allows for triggering of events at the end of the reporting period.
- ASU 2021-01
- Due to concern over reliability of LIBOR and other Interbank Offer Rates, central banks have recommended placing Interbank Offer Rates with transaction-based rates.
- This will impact interest rates used for discounting cash flows, computing variation margin settlements, and calculating price alignment interest.
- Paycheck Protection Program – GAAP Accounting
- Accounted for as Debt (ASC 470)
- Receipt of PPP Funds is treated as a cash inflow from financing activities. Forgiveness of PPP funds is disclosed as a supplemental noncash activity
- Debt is extinguished when debtor pays the creditor or debtor is legally released.
- When debt is extinguished, the amount forgiven is included in the income statement as a gain upon debt extinguishment
- Accounted for as a grant (ASC 958-605 or IAS 20)
- Receipt of PPP funds treated as either cash-flow from operating activities or inflow from financing activities. Forgiveness of PPP funds is disclosed as a supplemental noncash activity
- Accounted for as income-related grant and initially recognized as deferred income liability.
- Income statement impact of forgiveness may be presented separately or be offset against related expenses.
- Leases – Topic 842
- Most significant accounting pronouncement for dealerships in a long time
- Effective for fiscal years beginning after December 15, 2021.
- Requires both finance and operating leases be recognized on the balance sheet
- Best to begin adoption early, take a project management approach, and be on the look-out for any type of lease as they are very prevalent and can be overlooked.
- SAS No. 134 – Auditor’s Report Changes
- Changes auditor’s report in that the opinion and basis for opinion come first
- Added language related to going concern. There is now a general management responsibility related to going concern, not only when there is a substantial doubt conclusion.
- Changes in communication with those charged with governance. This includes communicating about significant risks identified by the auditor.
- SAS No. 135 – Related Parties
- Enhances requirements to identify previously unidentified or undisclosed related parties and assess the risk.
- SSARS No. 25
- Requires assessment of materiality to be used in the review of financial statements.
- Accountant can report a qualified or adverse conclusion.
- Accounted for as Debt (ASC 470)
Tax Update Planning & Compliance for the CFO and Tax Practitioner
- Employee Retention Tax Credit (ERTC)
- Originally enacted under the CARES Act. Expanded under Consolidated Appropriations Act and the American Rescue Plan Act.
- Eligibility
- 2020
- Employers whose business was fully or partially shut down due to emergency orders. The suspended operations need to be “more than nominal” portion of the whole business’ operationsOR
- Employers who had at least a 50% reduction in gross receipts for the current calendar year compared to the same calendar quarter in 2019.
- 2021
- Employers whose business was fully or partially shut down due to emergency orders. The suspended operations need to be “more than nominal” portion of the whole business’ operationsOR
- Employers who had at least a 20% reduction in gross receipts for the current calendar year compared to the same calendar quarter in 2019.
- 2020
- Credit is claimed on an employer’s original Form 941. Those who did not claim the credit on the original Form 941 can amend using Form 941-X
- PPP Recipients are eligible for the ERTC under the Consolidated Appropriations Act, but wages used in PPP forgiveness are not eligible to be used for ERTC calculations
- Work Opportunity Tax Credit (WOTC)
- Waged-based credit available to employers who hire individuals who may be facing barriers to employment and qualify under a specified target group
- Target groups include veteran target groups, convicted felons, those that claim food stamps and other government assistance, and other groups.
- The average credit per qualified employee is about $1,900.
- This is a one-time credit per certified new hire
- Other credits
- Paid Leave Credit for vaccines. This is equal to the sick/family leave paid for COVID. The credit is limited to $511 per day up to $5,000.
- Retirement Plan Startup Tax Credit. Can claim a tax credit for up to $5,000 for three years for the cost of starting a SEP, Simple IRA, or qualified plan.
- IRS Exam Activity and Trends
- IRS has “renewed” as Commissioner Rettig wants IRS audits to “touch every neighborhood”
- The IRS has announced it will increase efforts to visit high-income taxpayers who have failed in prior years to timely file one or more returns.
- IRS continues to see delays due to COVID-19 including delays in live phone support, processing paper returns, and answering mail from taxpayers.
Tax Update from Capitol Hill
- Build Back Better Act – at the time of this conference, the Build Back Better Act proposal included many tax updates including changes to the corporate tax rate, increases to individual marginal tax brackets, and changes to the capital gains rate.
- On November 3rd, the Build Back Better Act was revised and a lot of the tax provisions from the initial draft were removed. This bill is still in negotiations as of the drafting of this article.
- The current version of the bill includes the following key tax provisions:
- Increase in the maximum state and local income tax (SALT) deduction to $72,500 (36,250 for estates/trusts or married filing separately) up from $10,000 through 2031 for tax years beginning after December 31, 2020.
- Impose new surtax for high income individuals, estates and trusts. Surcharge equals the sum of 5% of income above $10 million plus 3% of income above $25 million for years beginning after December 31, 2021.
- Imposes a 15% minimum tax on adjusted financial statement income (AFSI) of large corporations with AFSI over $1 billion for tax years beginning after December 31, 2022.
- Limits special exclusion rates of 75% and 100% for gains realized from sale of qualified small business stock for taxpayers with income equal to or exceeding $400,000. The baseline 50% exclusion remains available to all eligible taxpayers.
- Expands the net investment income tax to cover net investment income derived in the ordinary course of a trade/business for individual taxpayers with taxable income greater than $500,000 for married filing joint filers ($400,000 for single) as well as for trust and estates for tax years beginning after December 31, 2021
- Permanently limits excess business losses of noncorporate taxpayers for tax years beginning after December 31, 2020. Disallowed losses may be carried forward to the next tax year.
- Provides new vehicle tax credits available for plug-in electric drive motor vehicles
How to Compare and Evaluate Reinsurance Programs
- There are several profit participation programs available to dealers
- Self-Insured – only makes sense for public groups key
- Dealer- Owned Warranty Company (DOWC) – only makes sense if the dealer’s annual premium flow is over $2.4 Million cap and no ability/desire to share ownership with business partner(s) and/or children over 21.
- Controlled Foreign Corporation (CFC) -Reinsurance – The best choice for 90% of dealers
- Controlled Foreign Corporation (CFC)
- This program gives owners the opportunity to take out loans without taking a taxable distribution.
- In the past, these loans have held up to the IRS. However, there is a need for proper documentation to make sure that the loan is a legitimate arm’s length transaction
- A CFC allows for control in that the dealer can choose which institution to invest money into and how the money is invested.
Drivers of Today’s Active Buy/Sell Market and Record Blue Sky Values
- The first half of 2021 has seen historically high dealership earnings. Low supply in inventory and high demand has led to large profits and record gross profits. This coupled with the anticipation of tax increases has led to a huge increase in buy/sell activity.
- Historically the number of US dealership owners has declined by about half every 40 years or so.
- The top 50 private dealership groups own 8.1% of US new vehicle dealerships. This is a 20.9% increase since 2014. Kerrigan advisors expects their market share to increase over the next decade as dealership groups sell.
- Blue sky valuation is based on an average of pre-pandemic and post pandemic earnings, taking out any PPP funding.
- Kerrigan believes blue sky values will continue to rise in 2022. One of the biggest drivers of blue-sky multiples is location.
- Toyota, Honda, and Subaru have the highest multiples of non-luxury dealers in the second quarter of 2021. Porsche, Mercedes, and Lexus have the highest multiples of luxury dealers in the second quarter of 2021.
Rob Campbell and Jen Moylan, Withum – Controller Top Tips for 2021
Remote selling, buying, and working
- Make sure the phrase “Know your customer” doesn’t just fly out the door
- Make sure either a notary (arranged by the dealership) or a salesperson is with the customer for required signatures for your jurisdiction
- Deals must have all stipulations collected and approved by management prior to vehicle delivery. This includes incentives
- Driver’s license verification software/apps
Removing controls to make the system easier
- You must coach compliance, not expect it out of no where
- Pair new hires with employees who are good teachers
- Perform normal Form 8300 compliance checks, look for odd receipts, and review daily deposits
Continuous accounting to reduce month-end crash
- Review variance reports, exceptions, and activity
- Look for bottlenecks when closing the month
- Automate when possible
- Divide schedules up in the office
- Perform intercompany reconciliations mid-month
Increase cross training
- Create a list of duties and who is trained on them in case someone is out for extended periods of time.
- Determine if the most experienced is really the best teacher/coach
- Rate people on duties – have been trained, can do, expert, trainer
- Continuously rotate jobs to keep skills up while also finding out who can and cannot do what
- Lower the workload of trainees whilst they are being trained
Expenses are increasing – be prepared to cut
- Have a list of immediate vendor terminations as (if) grosses start to fall
- While your store has the ability, now is the time to consider long-term money savings such as LED lights, solar, etc.
- Continue to monitor expenses with trend reviews and vendor analysis
The Electrification of Auto Retail
- KPMG estimated that the top 10 automakers (and Tesla) have announced $200 billion in electric vehicle investments in 2021. Most manufactures have introduced, or will be introducing, at least one electric vehicle (EV) model over the next three years.
- There are some growing pains that come with electric vehicles. Many OEM’s have had to deal with recalls, and Tesla has had to deal with litigation and investigations.
- OEMs aggressive pursuit of EV is driven by Tesla and other publicly traded EV manufacturers.
- The costs to “electrify” a dealership can be hefty. EV chargers can cost upwards of $180K. There are also special tools and heavy-duty forklifts needed to service some of these vehicles.
- The infrastructure needed for the charging stations and batteries is also complicated. Power cables for certain chargers must be buried and cooled, and it is recommended that a quarantine area is set-up for battery storage.
- EV’s estimated to only make up 8.3% of the total car population by 2030, meaning that it will be a long time before EV’s dominate service departments.
Automotive Ventures – Auto Intel Report October 2021
- The way vehicles are manufactured is already changing. Ford moving towards build-to order manufacturing and away from dealer lots packed with cars. GM is weighing option to stock EV cars at regional lots and follow in Amazon’s path.
- Customers are looking for a better and more convenient way to buy cars. This means online ordering and delivery of vehicles without customers ever stepping on the dealership lot.
- Manufacturers continue with ambitious plans to expand EVs and reduce emissions. Mercedes, Volvo, and others have given themselves deadlines to go “all electric”. However, it appears these deadlines may be too ambitious.
- Reduced number of components in EV’s will lead to less frequent service visits with a lot of software updates done “over-the-air” for these vehicles.
Author: Vincent Banek | [email protected]
