There is no better place for automotive accountants and CFOs to pack in CPE credits, networking, good food, and fun than at the AICPA Dealership Conference. The CPAs at Withum always look forward to this event in Las Vegas in October after deadlines have settled. It’s a chance for us to get together with our industry contacts, clients, and other accounting firms to discuss hot topics for the current year and the upcoming year. We highly recommend the event to our clients, bank contacts, and other accounting firms. The event is always packed with beneficial information; this year was no different. Luckily, there were six of us who attended, so we were effectively able to get the most out of the event by splitting up. Please see our recap below.
Economic Updates and Outlook
A topic of conversation amongst all industry experts is whether or not the recession will ever come. Dealers have continued to thrive on pent-up demand and elevated gross profit coming out of the pandemic. Still, several leading economic indicators tell a different story of things to come.
Consumer spending is weakening, with average discretionary expenditures dipping below the average as we come out of the third quarter of 2023. Dealers have seen inventory start to pile onto lots, and the trend ties directly into elevated interest rates, which the Fed has committed to keeping high in the hope of a soft landing. While they are signaling to let off the gas on interest rate hikes, they have been tentative about how quickly they will come down.
National GDP is expected to dip for three straight quarters starting with the final quarter of 2023, and the trends show that it is likely to last through Q2 of 2024. While the prediction was that “winter is coming” at the time, it remains the case at the time of this writing. We have seen early reports of a slowdown from our dealers in December and January, with sales numbers down across the board.
Employment remains strong but is weakening. Both job growth and jobless claims have returned to pre-COVID levels.
Inflation indexes are down from the peak levels of 7.1% but are still too high for comfort, with the latest coming in around 3.9% for the personal consumption index and 3.5% for the core index (removes food and energy).
All in all, consumer behavior and trends are the show’s highlight. Consumer indicators like wages, retail sales, default rates, and credit card delinquencies remain strong, but cracks are beginning to show as average consumer debt rises. Other factors like average weekly deposits, student loan debt restarting, and auto insurance increases are starting to show that consumers will have less money for discretionary spending and, thus, less to put down.
Fraud Prevention, Detection, and Investigations in Dealerships Presentation Recap
The call all CPAs dread from clients is this call. While professional skepticism is part of our professional code of conduct, many clients and businesses lack the proper controls and procedures to truly safeguard against fraud. Here is what we know:
- All three sides of the triangle must exist to establish fraud (pressure, opportunity, rationalization); the only thing you have power over is OPPORTUNITY. The same areas that we talk about all the time were talked about in reference to the sales department.
- Key theft
- Identity theft
- Wire fraud
- Fuel theft
- Most of us have focused on fraud that injured the dealer. For example, the controller stole ¾ of a million dollars over a 15-year period, sales deposits made in cash “disappear,” and there are open ROs all over the place that were allegedly paid for in cash. What we don’t always consider but we have seen in our practice more and more is fraud in the service department. This is presenting itself in the following ways:
- Time fraud in the service department — dispatcher should monitor.
- Vehicles being repaired where the repair is worth more than the vehicle, so work is done. Then, the vehicle is abandoned, leaving the dealership with a vehicle they can do nothing with since the time and effort necessary to get a garageman’s lien is not always a great use of resources - it should require partial payment upfront.
- Service customers are not returning loaners on time or at all — the service manager will need to monitor this.
- Items being stolen from a customer’s vehicle — utilize RO disclosure.
- Some best practices:
- Ask for additional identification before accepting credit card payment
- Do not manually key in credit card numbers; always swipe
- Verify shipping addresses and company names before sending merchandise or vehicle registrations
- Limit the number of people who have access to petty cash
- Keep keys locked at all times – no keys lying around on the podium or sales desk.
- Keep only one key on each fob
- Install Driver’s license scanning devices
- Ask specific questions to customers when completing a credit app to make sure you are talking to the person you think you are talking to.
- Complete remote document signing with a company like Maverick Signings or a bank or notary service.
- Don’t email wire instructions
- Maintain separate accounts for wires
- Track fuel purchases
- Monitor fuel in vehicles for siphoning
- Always have two people count cash
- Consider using a smart safe
- Utilize Positive Pay
- Refunds are issued to customers from accounts with low balances.
- New Vendors require approval.
- Physical address
- Signed W-9
- Compare vendor addresses with those of current and former employees.
- Require your team to take vacation time.
- Journal entry approval
Tax Updates for Dealers
Always a well-attended session is the tax update, where accountants and CFOs alike look to kick tax planning into gear for the upcoming year. There are a few new topics for the year that deserve attention.
Inflation Reduction Act
Electric Vehicles § Section 45W- Qualified Commercial Clean Vehicle § Safe harbor for incremental cost– for street vehicles (except PHEV, and with certain specifications), taxpayers can depend on cost analysis published by DOE classifications § Section 30D- New Clean Vehicle credit § Released on March 31, 2023, REG-120080-22 includes § §1.30D-1 Credit for new clean vehicles § §1.30D-2 Definitions § §1.30D-3 Critical mineral and battery component requirements § §1.30D-4 Special rules.
The topics above deserve mentioning as they all relate to the influx of EVs that are coming onto lots in the coming months. While many dealers are taking advantage of the demand in urban areas, the key is in the details that severely limit the qualification of many vehicles based on battery and mineral component requirement. EV leasing has risen and become popular over the last year.
Dealers will also have the opportunity to transfer the Credit at the time of sale in 2024, which we have started to see. However, consumer demand for EVs has been slowing, and so has the number of vehicles that qualify for Credit.
Legislation Update
As we have seen many times by the time we write this article, the pending legislation has morphed and changed several times. Included in the newest tax package are the following:
- Employee Retention Credit Elimination: With every tax relief bill comes costs. This one is proposed to be offset by eliminating the ability to make an Employee Retention Credit claim after January 31, 2024. The ability to make Employee Retention Credit claims is currently scheduled to expire as of April 15, 2025. Potential ERC claims should be submitted as soon as possible.
- Extension of Allowance for Depreciation, Amortization, or Depletion in Determining the Limitation on Business Interest (Section 163(j)): Under the Tax Cuts and Jobs Act, the ability to deduct business interest expense was limited to 30% of adjusted taxable income. For taxable years beginning after December 31, 2021, adjusted taxable income is significantly reduced as taxpayers are required to include depreciation and amortization deductions, thereby severely decreasing the amount of deductible interest expense.
The framework still limits the ability to deduct business interest expense based on 30% of adjusted taxable income; however, adjusted taxable income would be calculated before depreciation and amortization deductions. The framework would extend the increased adjusted taxable income base to earnings before interest, taxes, depreciation, and amortization (EBITDA) for taxable years beginning after December 31, 2023, and before through January 1, 2026. - Extension of 100 Percent Bonus Depreciation: Bonus depreciation was reduced to 80% for qualified property placed into service after December 31, 2022, and to 60% for qualified property placed into service after December 31, 2023.
The framework would extend 100 percent bonus depreciation for qualified property placed in service after December 31, 2022, and before January 1, 2026. For property placed in service after December 31, 2025, and before January 1, 2027, bonus depreciation would remain at 20%.
The framework also proposes an increase in Internal Revenue Code Section 179 expensing for qualified property. For the 2023 taxable year, a 179 expense of $1.16 million is allowed but decreased for every dollar of qualified property placed in service during the taxable year that exceeded $2.89 million. The framework would increase the limitations to authorize $1.29 million of 179 expenses for the 2023 taxable year, which would not be reduced until qualified property for the year exceeds $3.22 million.
The bill has not passed the senate and is not expected to pass until after the current recess. Tax practitioners are likely weighing the potential of extensions because of the high belief that this bill will pass with retroactive measures. While this can be a headache for those looking to file on time, the potential benefits of sidestepping amended tax returns is worth the thought.
Authors: Phil Craft, CPA | [email protected] and Michele D’Antonio | [email protected]
Contact Us
For more information on this topic, contact Withum’s Dealership Services Team.
