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In an atmosphere of uncertainty for dealerships, there are key tax planning items that dealers should be considering now.

Tax Strategies for Dealerships: Plan Now for Big Changes in 2013

  • 9/6/2012

Tax Strategies for Dealerships: Plan Now for Big Changes in 2013

by Dave Wiggins

Not many dealers are thinking about their year-end or tax planning strategies at this time of year. In fact, most dealers are just focusing on making money. In a typical year, it isn’t until November or later that thoughts turn to tax planning. But this is not a typical year.

More significant tax law changes are set to take effect on January 1, 2013, than we have seen in decades. Getting an early start on tax planning can leave you with more options for 2012 and beyond.

Considering election year politics and the unwillingness of both political parties to compromise, it is extremely unlikely that Congress will stop the coming changes, or that the president would approve any attempts to do so.

In this atmosphere of uncertainty, here are some of the key planning items that you should be considering:

Dividend planning for reinsurance companies

Dividends received by individuals from corporations, including reinsurance companies that are treated as corporations under current tax law, are taxed as “qualified dividends” at the capital gains rate of 15 percent. Beginning January 1, 2013, all dividends will be taxed as ordinary income at ordinary income tax rates, which could be as high as 39.5 percent. The effective marginal rate may be even higher due to the effects of deduction phase-outs and the new net investment income tax, which could add another 3.8 percentage points. For some dealers, it may make sense to take out excess cash or excess reserves at the lower 2012 rates.

Real estate and equipment purchases

Based on tax law changes enacted in 2010, the major incentives to purchase fixed assets will not be extended for 2013 and beyond.

  • Bonus depreciation allows businesses to write off 50 percent of most new equipment purchases made in 2012. Therefore, if you purchase a new computer system and software, or a new SUV or tow truck, you can write off half of the cost this year. The balance is written off using the normal depreciation rules. A dealer in the top tax brackets could realize up to 40 percent tax savings for federal and state income taxes from the 50 percent write-off of the purchase price.
  • The Section 179 expense election will also allow you to expense up to $139,000 of new or used equipment purchases for years beginning in 2012. This amount drops to $25,000 for years beginning after 2012.
  • Cost segregation studies are detailed analyses of improvements or new construction that separate shorter-lived assets (such as carpet and equipment components) from a building. These assets may then qualify for bonus depreciation or shorter depreciation lives. The benefit of a cost segregation study is magnified this year by the generous bonus depreciation and Section 179 expensing discussed earlier. If you are considering building or renovations, start discussions now as many contractors have backlogs due to the bonus depreciation tax rules expiring this year.

Estate planning

The estate tax and gift tax exemption is currently at $5.12 million, but is scheduled to fall to $1 million on January 1, 2013. If you have a large estate you should consider gifts or other estate tax transfer strategies this year to avoid less favorable tax laws next year. Planning should start now as estate planners and valuation firms have heavy workloads due to planning for pre-2013 transfers.  

Income and expense recognition

  • Consider shifting income to 2012 and deductions to 2013 — With the pending increases in individual tax rates, consider changing traditional planning strategies by looking at accelerating income into 2012 and deferring deductions where possible to 2013. This may require advance planning with vendors and/or the manufacturers to place expenditures in the correct period.
  • LIFO (Last In, First Out) — With the long build-out cycles that take place for manufacturers at this time of year, many dealers will want to work now on projecting their inventory levels and mixes to maximize possible benefits. New vehicle orders often have to be placed by September in order to be in inventory by year end.
  • Recognize capital gains in 2012 — If you have securities you may want to sell in the next year or two, consider recognizing capital gains this year rather than in 2013 or 2014. Since many people may be utilizing this strategy, the stock markets may prove very volatile near year end. Also remember that you can sell stocks and buy them back immediately if you still want to own the stock. The gain will be taxable in 2012, and you will still own the stock in the future.
  • Notes receivable — Buy here, pay here dealers should review their current delinquent customers. If an account is uncollectable, consider writing off the note balance as bad debt. Such write-offs should follow your customary procedures and should be done throughout the year as accounts are determined to be uncollectable. You should not just write off accounts as part of year-end entries. If you do, you may attract the attention of the IRS.

This list does not include all of the tax strategies you and your dealership should consider, but it does provide some common planning solutions available to most dealerships. Remember, tax strategies should coincide with sound business decision making. You should not make a business decision solely based on tax reduction. If you do, you may be spending a dollar to save 35 cents.

The earlier you start planning, the more opportunities you may have available, not to mention that it will make your holiday season that much more relaxing and enjoyable

Dave Wiggins, Dealership Principal or 314-925-4316