2020 Year-End Considerations for Buy Here – Pay Here Dealers
The global outbreak of the novel coronavirus has created many challenges for buy here – pay here (BHPH) operators to navigate during 2020. They’ve had to pivot in the face of temporary closures, government regulations, and altered consumer demands in order to persevere through these difficult times. Given this extraordinary year, here are some items you should consider before turning the calendar to 2021.
Payroll Protection Program
The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the Paycheck Protection Program (PPP) with the goal of preventing unemployment and small business failure due to the losses caused by the COVID-19 pandemic.
The PPP is intended to provide loans to businesses under certain eligibility criteria to guarantee eight weeks of payroll and other costs to help them remain viable and allow their workers to pay their bills. The CARES Act allows the PPP loans to be forgiven if the funds were used on eligible costs. Since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. If a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible whether the business has filed for forgiveness or not. In light of this, taxpayers will need to revisit estimated tax payments for 2020. While there is still anticipation that Congress will act to render the eligible expenses deductible, this ruling culminates a series of IRS pronouncements placing additional burdens on PPP borrowers.
Reinsurance companies for BHPH owners are typically in the form of collateral protection insurance programs and warranty. 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 (adjusted for inflation), it can make an election to be taxed on investment income only.
The tax savings of the reinsurance company has diminished due to the lower tax rates of the Tax Cuts and Jobs Act. However, the change in administration and the increase in debt due to the stimulus money issued during the pandemic could result in an increase in taxes going forward. It’s important to understand the current cost/tax-benefit analysis of these reinsurance companies. Further, it’s vital for owners or potential owners of reinsurance companies to understand their exit strategy options and the tax ramifications that go along with each strategy. Business owners should discuss these considerations with their tax advisors.
All tax planning strategies for 2021 should be considered and discussed with your accountants now before the calendar year ends. Most BHPH companies have two separate entities – a dealership entity and a finance entity. These entities typically file tax returns as S corporations for tax purposes. It’s important for shareholders’ basis to be reviewed before year-end to ensure they’re not in a basis deficit and unable to deduct losses (if applicable). Shareholders of S corporations must have a stock or loan basis to deduct losses on their personal returns. The dealership company could show a loss while the finance company shows a profit, but if the shareholders do not have basis in their dealership company, they will not be able to use that loss to offset income from the finance company. Reviewing overhead and shared expenses between the companies and making sure they’re allocated appropriately is a good year-end tax planning exercise. The PPP loan and potential non-deductible expenses should also be considered in addition to the normal year-end tax planning items.
If you need help navigating the tax impact of your PPP loan or need assistance with year-end planning, our buy here – pay here professionals are here to help. Contact your KSM advisor or complete this form to get started.
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