2022 Year-End Planning and Tax Strategies for Buy Here – Pay Here Dealers
Throughout 2022, buy here – pay here (BHPH) dealers have continued to see the effects of the COVID-19 pandemic, including the global inventory shortage, altered supply and demand needs, and increasing costs of doing business. In fact, 2022 was more challenging than 2021 for most dealers. As this year draws to a close, here are some year-end planning items BHPH dealers should consider.
Dealers should discuss any tax planning strategies for 2022 with their accountants before the calendar year ends to ensure they 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-end 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 (PPP) loans were forgiven in 2022, this should be considered to determine the impact to basis. Dealers should also consider their PPP loans and their utilization of the Employee Retention Credit (ERC) when projecting taxable income.
Employee Retention Credits
There is still time for dealers to review their eligibility for the ERC and to claim the credits. To claim the ERC, a dealer would need to correct the overreported taxes on a previously filed Form 941 by either filing Form 941-X within three years of the date Form 941 was filed or within two years from the date the tax reported on Form 941 was paid, whichever is later.
As a reminder, the 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 2020. (The ERC is not available for the fourth quarter of 2021.) 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 per eligible quarter who was paid qualified wages.
Captive Insurance Companies
Captive insurance companies continue to be a buzzword around the BHPH industry. Small captive insurance companies have many tax advantages due to Section 831(b) of the U.S tax code. Captive insurance companies can also be a viable way to increase net worth if managed and set up correctly. Operators should discuss the potential tax savings and the pros and cons of setting up captive insurance companies with their accountants. It is important to be educated on the captive insurance company and whether setting up the company makes sense for the operator’s circumstances.
If you need help navigating your dealership’s year-end planning, please be sure to reach out to your tax advisor or contact us to ensure that you are maximizing planning opportunities.
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