2021 Year-End Planning and Tax Strategies for Buy Here – Pay Here Dealers
Throughout 2021, buy here – pay here (BHPH) dealers have continued to navigate the effects of the COVID-19 pandemic, including the global inventory shortage, altered supply and demand needs, and ever-changing government regulations. In light of another unique year, here are some items BHPH dealers should consider before the year comes to a close.
Last In, First Out (LIFO)
LIFO is an inventory accounting method that assumes the most recently purchased items are sold first. Companies that use this method are typically those with large inventories, such as retailers or auto dealerships. In periods of rising prices, LIFO can lower net income by showing higher costs, which, in turn, can reduce taxable income.
To use this method, an election must be made on the business’s tax return. The tax law also requires conformity with the company’s internal financial statements. During 2021, supply chain issues and increasing demand increased used vehicle costs; therefore, electing LIFO to take advantage of the rising costs could be advantageous.
Employee Retention Credits
The employee retention credit (ERC), created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, is a refundable payroll tax credit available to business taxpayers who meet either of the following requirements:
- The taxpayer had their business fully or partially suspended.
- The taxpayer had a drop in gross revenue for quarters in 2020 and/or 2021 in comparison to those same quarters in 2019.
The ERC is available for all quarters of 2020 and for the first, second, and third quarters of 2021. (The ERC is not available for the fourth quarter of 2021 due to recent legislation). If any one quarter in 2020 had a 50% decline in gross revenue compared to that same quarter in 2019, a business could qualify under the gross revenue test. For the 2021 ERC, however, if any one quarter had a decline of 20% in gross revenue compared to that same quarter in 2019, a business could qualify for these credits. Once a business qualifies, it is eligible for a credit of up to $7,000 per employee who was paid qualified wages per eligible quarter.
Any tax planning strategies for 2021 should be considered and discussed with your accountants before the calendar year ends to ensure you do not miss any opportunities. Most BHPH companies have a two-entity structure – a dealership and a finance entity – and both entities typically file tax returns as S corporations. It’s important that the shareholders’ basis is reviewed before the year ends to make sure there are no basis deficits, which would prevent the deduction of losses, if applicable. Shareholders of S corporations need a stock or loan basis in order to deduct the associated business losses on their personal tax filings. If one entity has a profit, the other entity has a loss, and there is not sufficient basis in the entity with a loss, then the shareholder will be unable to use the loss to offset the profits from the other entity.
BHPH companies should also review overhead and shared expenses between the two companies and determine the allocation as appropriate. If any Paycheck Protection Program loans were forgiven in 2021, this should be considered to determine impact to basis in addition to normal year-end planning items.
Keeping you updated on COVID-19 and its impact on businesses and individuals.