By Tara Thomas, Senior Tax Manager, DHG Dealerships
Facility upgrades remain a tax compliance hot button for dealers nationwide – particularly as a large portion of manufacturers encourage them through factory facility programs and vehicle allocations to help dealers meet their specific design requirements, have enough space to accommodate a designated number of vehicles in the showroom, and more.
Factory facility programs are designed to provide assistance and defray a portion of the upgrade costs and variability between different dealership programs; however, the respective tax treatment is often still nuanced from dealership to dealership.
Understanding where and how facility assistance is recorded can make a difference during a buy-sell deal. Is the assistance recorded as income? If so, you will want to isolate it from regular operating income to accurately calculate multiples on gross revenue or properly review historical revenue for that store.
Or, is the assistance recorded as a reduction to cost basis of fixed assets? If so, you will want to know which assets have been reduced in the event you are using the net book values to determine the purchase price of fixed assets being sold.
Proper tax treatment of factory facility programs is important, as the programs typically involve significant sums of money.
Understanding cash receipt timing is essential. Will it be received while the project is ongoing, or will it be received at the end after everything is completed and placed in service? The answer is in the fine print of the factory facility program. If cash receipt timing spans across two or more tax years (especially where tax rate changes might occur), dealers should consider the related impact and discuss it accordingly with their tax advisor when negotiating with a manufacturer.
Agreement contingencies can greatly differ between programs and their existence should be strongly considered prior to implementing facility upgrades. That said, it’s important to keep in mind that contingencies do not necessarily allow dealers to defer recognition of income until the end of a project.
Determining whether money must be repaid to the manufacturer if the dealer does not meet project requirements is a good place to start at the beginning end of a project; and typically, if facility funds are forfeited after a project for any reason, the dealer can take a deduction from income for the amount of funds paid back to the manufacturer.
A dose of guidance…
Is the project money taxable? Is it non-taxable? Is there a non-shareholder contribution to capital? Is there a reduction of basis in the newly acquired assets? Given such uncertainties (reflected by the historical inconsistent tax treatment of programs among dealers), the IRS developed specific guidance in 2014, called General Legal Advice Memorandum (GLAM) 2014-004.
GLAM 2014-004 was published in 2014 and addressed 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.
For each of the fact patterns stated above, the IRS concluded that payments are to be considered a part of the dealership’s gross income and are taxable. However, it’s important to note that GLAM 2014-004 cannot be used or cited as precedent for any other taxpayer. Nonetheless, it provides insight into how the IRS might conclude in an exam if the dealership exhibited fact patterns similar to those detailed in the memorandum.
Factory facility upgrades will remain a complicated topic of interest in the dealership world, and they’re not likely to go away. While access to factory facility programs helps to defray upgrade costs, the tax treatment surrounding the programs should not be overlooked or oversimplified.
In addition to thoroughly studying and understanding the nuanced details within the program, dealers should leverage GLAM 2014-004 to understand its impact to their tax position. Of course, having a trusted tax advisor in tow will make a material difference in minimizing the confusion of a factory facility program’s tax treatment.
DHG ranks among the top 20 public accounting firms nationwide. DHG Dealerships serves more than 1,500 rooftops across all 50 states, representing dealerships of all sizes.
Tara Thomas, senior tax manager at DHG Dealerships, has more than eight years of tax experience, which includes assisting clients with tax planning, research and general tax compliance. She can be reached at 404.343.7909 or firstname.lastname@example.org.