By Terri Harris, DHG Dealerships
Aligning with last month’s accounting tips for demonstration and used vehicle treatment are two other IRS-compliance hot buttons: Factory facility programs and cash reporting. Given the nuanced nature of facility upgrades and the strict regulatory requirements surrounding cash transactions, these are two areas to which IRS examiners pay close attention.
So how are they treated from a tax perspective? Of course, the answer differs from dealership to dealership; nonetheless, awareness is key. As dealers keep these areas in tip top shape, they not only mitigate IRS exam risks, but they also enable the presentation of a well-run dealership to potential buyers should a “for sale” sign be on the horizon.
Factory facility programs
Factory facility programs intend to incentivize dealerships to upgrade facilities and defray a portion of the dealership’s upgrade costs. They are contingent upon meeting specific program requirements, which differ across manufacturers.
Proper tax treatment of these programs can be confusing. Is it non-taxable? Is there a non-shareholder contribution to capital? What about current taxable income or reduction of the basis in the newly acquired assets? The list goes on. The amount of inconsistent treatment by dealerships propelled even more uncertainty in IRS examinations; thus, more specific guidance was needed. Cue General Legal Advice Memorandum (GLAM) 2014-004.
The GLAM was published in 2014 and addresses 3 fact patterns based on real manufacturer programs (see the GLAM for a full description of each plan): Under the program agreement:
- The dealership receives payments equal to a percentage of the project’s construction costs, half at the beginning and half upon completion.
- The dealership may receive payments if it completes certain improvements to the facility, upgrades website and certain software and conducts training for certain employees. The dealership receives payments quarterly.
- The program provides for two distinct types of payments: (1) payments based on an amount for each vehicle sold during the program, and (2) formula-determined payment based on the expected improvement costs.
Given these facts, as established by GLAM 2014-004, the IRS concluded that payments are to be considered a part of the dealership’s gross income and are taxable. That said, it’s important to note that the GLAM stipulates that the document cannot be used or cited as precedent. Nonetheless, it provides insight into what the IRS would conclude in an exam if the dealership exhibited fact patterns akin to those detailed in the memorandum.
Although the GLAM was not widely praised across the industry, the reality is that there remains inconsistent treatment by both dealers and examiners. Regardless, it is beneficial to the dealership to understand that the GLAM represents the IRS’ position based on provided facts.
Cash reporting – Form 8300
Although cash reporting requirements apply to many types of businesses, dealerships often receive payments in excess of $10,000 and must comply with related filing requirements. Specifically, a dealership must complete a Form 8300 every time it receives $10,000 or more in cash in a single or related transaction. A Form 8300, jointly issued by the IRS and Financial Crimes Enforcement Network (FinCEN), is partly used to identify transactions and individuals that may evade taxes and profit from criminal activities.
With such strict regulations surrounding cash reporting, dealerships should employ a cash reporting process to help ensure compliance.
Cash reporting requirements can be complex and confusing. For more information requirements for dealerships, the IRS has published a Question and Answer document, which can be found here.
In closing
In addition to demo and used vehicles (circling back to the first column), checking the factory facility programs and cash reporting boxes off your list of improvement areas will only bolster the operational success of your dealership. Whether or not an IRS exam is on your plate (or in your future), proactively remedying any doubt regarding factory facility matters and cash reporting compliance will help keep your dealership running smoothly and appealing to potential buyers.
Terri Harris is National Tax Liaison with DHG Dealerships. She can be reached at 1-901-259-3629 or terri.harris@dhgllp.com .
