2020 Tax Considerations for Buy Here – Pay Here Dealers
This article originally appeared in The Showroom.
Another year has begun, and taxes are on the minds of many. But instead of thinking only about filing a tax return, what should buy here – pay here dealers be considering in 2020? Here are a few financial and operational issues to consider – as well as their tax implications.
Businesses with average gross receipts for the preceding three tax years of $26 million or less can elect to change their method of accounting for inventory. This change would allow expensing of inventory and would generate a significant deduction in the year of change.
As part of the requirements for this election, the taxpayer must use the same accounting method on its applicable financial statements (AFS). AFS can generally be thought of as any financial statements provided to third-party users or government agencies.
Most BHPH operators that do not have AFS and are under the $26 million gross receipts test should consider electing to expense their inventory to receive a significant deduction in the year of change.
For BHPH owners, reinsurance companies typically involve collateral protection insurance and warranties. The entities are formed to take advantage of favorable tax treatments for small insurers. Section 831(b) of the U.S. tax code states that if a company is a property and casualty insurer and writes less than $2.3M in annual premiums, it can make an election to be taxed on investment income only.
Because of this, some BHPH operators have formed reinsurance companies over the years. However, the tax savings the reinsurance company structure once offered has diminished due to the lower tax rates of the Tax Cuts and Jobs Act (TCJA). Operators who have an existing reinsurance company or who are considering forming a new reinsurance company should consider a cost/savings analysis. It is important for owners or potential owners of reinsurance companies to understand their exit strategy options and the tax ramifications that go along with each strategy. It is not too early for owners of reinsurance companies to begin discussing exit strategies for their reinsurance company with their tax advisor.
BHPH Company Structure
Most BHPH operators have a dealership company and a separate finance company. Despite its complexity, the two-company structure has allowed them to take advantage of accelerated deductions for federal income tax purposes. However, the TCJA has allowed operators with less than $26 million in gross receipts to consider a one-company structure under the cash method of accounting. The simplicity of a one-company structure over a two-company structure could be enticing for smaller operators as they determine their BHPH company structure. If a BHPH operator decides to switch to a one-company structure under the cash method, it is recommended to use careful planning and advice from your tax advisor.
Keeping you updated on COVID-19 and its impact on businesses and individuals.