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Year-End Planning for Buy Here – Pay Here Operators

Posted 6:00 PM by

Note: This article originally appeared in The Showroom.

As the calendar turns to December, it is time to consider year-end planning opportunities and issues. While this article primarily addresses tax planning, there are other items to consider as well.

Tax Planning

The tax planning process for this year end has been made more challenging by the major tax change legislation on the horizon. At the time of this writing, the U.S. Senate is still working on its version of a tax bill with the Joint Committee reconciliations to follow. As tax professionals work with their clients this month, many planning opportunities can still be advised with a fair amount of certainty. Following are some of these tax-related items, most of which are geared for Buy Here – Pay Here (BHPH) operators that employ a related finance company (RFC).

Expense Allocations

It is not uncommon for BHPH operators to record expenses on the dealership entity’s books without giving much thought to what extent the RFC should share in those expenses. As a result, the dealership’s net income can suffer, and the RFC will show more profit than it probably should. Some expense items that should be shared between the two entities include:

  • Policy repairs
  • All forms of advertising
  • Rent and other occupancy costs
  • Salary and benefits for shared employees
  • IT-related costs

Shareholder Stock or Loan Basis

As an extension of the possible dilemma referred to above, if either of the two operating entities will show a tax loss, it is important to determine if the shareholders have sufficient basis in their stock or have made loans to the corporation in order to deduct those losses on their personal returns. One nasty outcome to avoid is where a tax loss from the dealership entity is not deductible against taxable income reported by the RFC. Stock basis can be increased by making capital contributions. Shareholders can also create basis for losses by loaning money to the corporation. As a word of caution – these transactions should be executed by the exchange of cash (as opposed to journal entries), which means they need to happen prior to Dec. 31. Also – be aware that a shareholder does not receive basis for guaranteeing debt of the corporation.

Overall Deductions

It appears likely that any new tax legislation will include an overall lowering of tax rates and possibly a significant reduction in the tax rate imposed on trade or business income. While the details are still in flux, it seems safe to say that deductions will be more tax beneficial in 2017 than in subsequent years. BHPH operators should consider the following:

  • Carefully review receivable portfolio for delinquency and accounts that should be charged off. Remember – bad debt expense is only deductible in the year that a receivable is determined to be uncollectible. Reserves or allowances do not give rise to tax deductions.
  • Consider accelerating any repair and maintenance expenses.
  • Consider accelerating the purchase of equipment and other fixed assets that qualify for the first-year depreciation allowance or bonus depreciation.
  • Consider accelerating charitable giving commitments.
  • Consider prepaying certain expenses that would be amortized within the next 12 months.

State and Local Tax Payments

The alternative minimum tax has always made it tricky to maximize the benefit of state tax payments on one’s federal tax return. There are provisions in the proposed tax bill that would eliminate the deductibility of state and local tax payments beginning in 2018. If that change occurs, there is a strong likelihood that most taxpayers will want to estimate their 2017 state tax liabilities and pay any remaining balances prior to Dec. 31. The same might also be true for property taxes in states where the tax payment dates straddle the calendar year end.

Other Year-End Concerns

Many BHPH operators have line-of-credit facilities that come with loan covenants. These covenants should be reviewed and tested prior to year-end. If it appears you might be in danger of failing any covenants, it is possible that corrective action can be taken prior to year-end.

If your lender requires that you have an audit or review of your year-end financial statements, begin preparing for that process now. Work with your CPA to get field work scheduled and start reviewing your balance sheet accounts to reconcile them to the appropriate detail information. The better prepared you are – the lower the cost of the audit or review will be. In addition, the process will go much smoother and your lender will receive the report needed much quicker.

About Katz, Sapper & Miller
KSM is a nationally recognized consulting, tax, and audit firm. Through our deep experience across multiple disciplines and industries, we leverage emerging technologies, combined with our people’s differing perspectives, ingenuity, and creativity, to help our clients solve their most difficult challenges.

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