Profit Drivers

Profit Drivers

Volume 5 #3

When automotive dealers receive more than $10,000 in cash in one transaction (or two or more related transactions), they are required to file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, with the IRS.

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IRS Criminal Investigation
Automotive Sales Industry Statistics*

If your dealership provides finance and extended service contracts, warranties or other insurance to its customers, there are several issues you need to consider:

Related Finance Companies refer to the self-financing arrangement pursued by some dealerships, new and used, where individuals for whom financing cannot be obtained through normal channels. The customer is required to make payments usually at the dealership’s location.

Dealerships involved in this practice establish a financing entity, typically an S-Corporation, which acts as the financial institution in the dealership’s selling arrangement.

When the vehicle is sold, and it is determined that the customer needs special credit assistance, the dealership writes the note at term (high interest rate) with recourse as the lender. Then the note is sold at significant discount to the entity substantiating the discount by citing high risk.

If you own two entities (regardless of the type of entity) and you own more than 50% of each entity, any loss from the exchange of property between these entities may not be deductible.

Motor vehicle dealers sell two basic types of extended service contracts (also known as mechanical breakdown contracts or multi-year service warranty contracts) for used cars and as a supplement to the standard manufacturers’ warranty for new cars. The first type is between the customer and an unrelated underwriter. The dealership is merely an agent for the underwriter and keeps as profit the difference between the sales price of the contract and the “cost” paid to the underwriter.

The second type is a contract between the customer and the dealer. For this type, the dealer may buy insurance covering his or her risk or be “self-insured.” If the dealer buys insurance, the income and expenses should be reported in the year of receipt; and any prepaid insurance must be amortized over the life of the policy.

The taxpayer can elect to mitigate this situation by Filing Form 3115 to request changes in accounting methods. Revenue Procedures 97-38 and 99-49 explain the filing procedures, which allow taxpayers to report income ratably as they expense the insurance ratably.

If you would like to learn more about these issues, please contact our offices.

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Employer-Provided Cell Phones

Auto dealers frequently provide their employees with cellular telephones for business purposes. This can raise special tax issues because under the Code, cellular telephones are “listed property.” “Listed property” includes items obtained for use in a business but designated by the Code as lending themselves easily to personal use. Hard-wired telephones are not listed property, because they remain in the office at all times and are less susceptible to personal use.
An employer can exclude an employee’s use of an employer-provided cell phone from the employee’s gross income, if the employer has some method of requiring the employee to keep records that distinguish business from personal phone charges. If the employee uses the telephone exclusively for business, all use is excludable from income (as a working condition fringe benefit). The employer must include the value of any personal use of the cell phone in the employee’s wages. Personal use includes individual personal calls, as well as a pro rata share of monthly services charges.
To ensure that an employee’s business use of an employer-provided cell phone is excludable from gross income, the employee should keep a record of each call and its business purpose. If calls are itemized on a monthly statement, the employee should identify each call as personal or business. The employee should submit this information to the employer, who must maintain these records to support the exclusion of the phone use from the employee’s wages. If the employee does not use the cell phone to make personal calls, or has only minimal personal use of the cell phone, the business use of the phone is not taxable to the employee.
We hope this information is helpful. If you have questions or need further assistance in these matters, please contact us.
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Incentive Payments

We are often asked about how to report incentive payments to salespeople in a dealership. Here is a brief summary: Incentive payments received as bonuses, prizes or other incentive awards paid directly by the automotive manufacturer or through the dealer to salespersons are not subject to federal withholding tax (FIT) or federal insurance contribution act (Social Security Tax - FICA). Moreover, these payments are not considered to be self-employment income and are not subject to self-employment tax. These payments are reported as "other income" on their federal income tax return, Form 1040.

Revenue Ruling 70-337 explains that the salespersons are under direct control of the dealership, which performs the hiring and training functions and applies all common law rules at the dealership level. The manufacturer directs payments to the dealership or salesperson based on a sales quota or other sales incentive reached. The ruling also explains that these payments are not considered wages for purposes of FICA. Similarly, no expenses may be taken on Schedule C to offset incentive payment income. Any ordinary and necessary business expenses incurred by salespersons must be reported on Schedule A subject to the 2% AGI limitation. Revenue Ruling 70-337 explains that salespersons are under direct control of the dealership, which performs the hiring and training functions; and all common law rules apply at the dealership level.

Publication 3204 provides a summary of how these payments should be reported. If you would like to receive a copy, please call us.