Auto dealerships have undoubtedly experienced yet another turbulent year of ups and downs. Union strikes, continued supply chain issues, and changing legislation have made it difficult for companies to navigate these turbulent times.
With the auto industry facing a barrage of changes on multiple fronts, we have outlined several year-end planning considerations and reminders to help you focus on taking full advantage of available tax benefits.
In 2023, we saw an uptick in sale tax compliance issues and audits. Before the year closes, consider reviewing your out-of-state sales and annual volume of transactions. Each state and local jurisdiction has specific rules and their own complicated tax laws, so be sure to engage your tax advisor to discuss your specific state and local sales and use tax needs.
Dealerships should review whether they are correctly applying both state sales tax rates and local tax rates or surcharges and determine the proper tax base reductions for discounts, trade-ins, rebates, and incentives from manufacturers and retail dealers.
Dealerships should review warranty sales to customers as the sales taxability can vary by state and type. In general, mandatory warranties are subject to sales tax and optional warranties are exempt. Dealerships should also ensure they have appropriate exemption certificates and documentation for exempt transactions, including sales to governments and nonprofits and vehicles removed from the state of sale, and roll stock exemptions for specific vehicles used in interstate commerce.
Finally, dealerships should maximize other sales tax exemptions, including bad debt deductions for repossessed vehicles, and apply lesser-known exemptions such as manufacturing exemptions for original warranty work.
Dealerships that purchase and sell specific types of heavy trucks and trailers should confirm accurate determination and reporting of the federal 12% retail excise tax, which applies to the first sale or use of the heavy truck or trailer after production, manufacture, or importation into the United States. Affected dealerships should review exemptions claimed for resale and export to ensure the proper timing of issuing or receiving exemption documentation. If dealerships purchase or sell remanufactured heavy trucks, also known as glider kits or trucks, they should examine whether the 12% retail excise tax was previously paid or could apply to their situation.
Many states are increasing their unclaimed property compliance efforts by sending letters to companies that have not filed reports or are suspected of underreporting escheat liabilities.
Be sure to have unclaimed property policies and procedures in place to maintain compliance with state escheatment laws and regulations. All organizations should establish robust annual filing processes, including due diligence efforts to mitigate penalties, interest, and audit risks. A holder’s failure to timely report and remit all its unclaimed property can result in the imposition of penalties, interest, and fees, and each state is authorized to conduct audits to ensure that businesses comply with its laws.
At the time of publication, Congress has not passed the long-awaited Supply Chain Disruptions Relief Act to relieve dealerships that experienced significant recapture on the last-in, first-out (LIFO) method of accounting for inventory. Fortunately, inventory levels have been increasing, smoothing the effect of the recapture experienced in 2020 and 2021.
If your company is on LIFO, we recommend working with your tax advisor to compute a LIFO estimate using estimated current-year inventory to approximate the impact the LIFO adjustment will have on current-year taxable income.
Clean Energy and Vehicle Credits
New, qualified plug-in electric or fuel cell vehicles placed in service in tax year 2023 or after may be eligible for a clean vehicle tax credit worth up to $7,500. Used, qualified electric or fuel cell vehicle purchased in tax year 2023 for $25,000 or less may be eligible for a credit equal to 30% of the sale price, up to $4,000.
Sellers or dealers of these vehicles must register with the IRS’ online energy credits portal to report required information about qualifying clean vehicle sales. Reports are due to the IRS by January 15 of the year following the purchase; the reports for eligible vehicles sold in 2023 are due to the IRS by January 15, 2024. Failure to timely file will result in the purchaser’s losing the credit, which could create reputational risk for the seller or dealer.
More information on the credits can be found in our related insight article, INSERT BDO INSIGHT **Key Provisions of the Inflation Reduction Act Impacting Auto Dealerships**.
Bonus Depreciation and Cost-Segregation Studies
Bonus depreciation provides an opportunity to accelerate depreciation deductions in the year a taxpayer places eligible property in service. It has been phased down to 80% for calendar year 2023 and will decrease to 60% for 2024.
Consider performing a cost-segregation study of investments in buildings or renovations of real property to accelerate taxable deductions, claim qualifying bonus depreciation, and identify other discretionary incentives to reduce or defer a mixture of taxes. Organizations can use BDO’s Cost Segregation Calculator to estimate the potential benefits of performing a study.
Interest Expense Limitations
As of 2022, depreciation and amortization are no longer addbacks for determining the interest expense limitation. That could potentially impose a limitation of business interest expense.
Further, if a dealership has floor plan financing interest and is subject to the 30% business interest limitation, it is precluded from taking any bonus depreciation in that tax year.
Consult with your tax advisor to explore ways to take full advantage of deductions, particularly in a year with significant capital improvements.
The Federal Trade Commission (FTC) Safeguards Rule, part of the Gramm-Leach-Bliley Act, became effective June 9, 2023. While enacted to protect the privacy and security of consumers’ nonpublic personal information on file with financial institutions, the rule also presents unique challenges for auto dealerships. As discussed in the BDO Digital insight about the new FTC Safeguard Rule, the rule requires covered businesses to develop, implement, and maintain comprehensive information security programs to protect customer data. Key requirements for dealerships include designating information security coordinators, performing risk assessments, developing and implementing safeguards, conducting regular monitoring and testing, training employees, and overseeing service providers.
Noncompliance with the Safeguards Rule can lead to operational disruption and legal consequences, including fines and penalties, so it is critical for dealerships to comply. If your dealership requires guidance in compliance with the Safeguards Rule, BDO can help you become compliant and prepared for an FTC audit.
Comprehensive tax planning is essential for dealership success. BDO’s 2023 Year-End Tax Planning Guide is a useful resource that can assist you in understanding the current landscape and develop tax planning strategies for year-end and beyond.
Our auto dealerships tax team consultants are available to work with you to plan for your specific business tax needs and objectives. Contact us today to set up a consultation.