By Joan B. Kaye, Senior Vice President and Relationship Manager, Key Private Bank
The 2017 tax bill, also known as the Tax Cuts and Jobs Act (TCIA), shifted Tax Code as we know it.
Auto dealers, among other business owners, were faced with sweeping changes impacting everything from tax strategy to succession planning to inventory management.
It’s been nearly two years since changes took effect, but that doesn’t mean auto dealer owners should let those shifts fade in the rear-view mirror. This summer is the perfect time for dealership owners to pop the hood, look at how their tax strategy has performed since 2017 and chart a roadmap to get the most mileage out of their tax plan in 2019 and beyond.
Here are six ways auto dealers can refurbish their tax strategy to speed toward a more profitable future:
1. Refuel Retirement Plans
Qualified retirement plans can be a powerful way to defer dealership income and lower current tax liabilities. Dealership owners who already have these plans should use this summer as an opportunity to ensure they are on track to fully fund their contributions in 2019.
Dealership owners who do not have these plans should consider implementing one after a review of the potential benefits and tax savings. Along with defined contribution plans, dealership owners could consider fueling their retirement engine with defined benefit plans, cash balance plans, or a combination of the two. Deductible contributions to these plans might dwarf the limits of IRAs, 401(k)s, or other defined contribution plans.
To attract and retain talent, dealership owners can also use nonqualified deferred compensation plans. While there is no current deduction when the plan is funded, tax can be deferred on the growth of the assets that fund the plan by using cash value life insurance.
2. Pump the Gas with Cash
The TCJA expanded the ability for business owners to use the cash method of accounting. Any entity with a three-year average annual gross receipt of $25 million or less can use the cash method, regardless of whether the purchase, production or sale of merchandise—e.g., cars, motorcycles, or trucks—is an income-producing factor.
The cash method of accounting may be more attractive to auto dealership owners due to its simplicity and flexibility in managing the amount of taxable income reported in a tax year. To ensure green lights ahead, auto dealer owners should identify actionable opportunities for filing accounting method changes with the IRS.
3. Create Multiple “Lanes” of Income
Owners of family-run auto dealerships, in particular, can take advantage of ways to shift income to lower overall taxes. Paying reasonable salaries to family members for providing bona-fide services reduces the amount of business income. A child’s earned income could be taxed at the low-bracket rate of 10% (on taxable income of up to $9,700 for 2019). The salary would also be earned income, allowing children to establish and fuel a Roth IRA or retirement plan.
Closely-held dealership owners who wish to shift some ownership, but not management or control, can divide the ownership into voting and non-voting interests and only gift the non-voting interests.
4. Drive Faster with New Deductions
For tax years 2018 through 2025, a new pass-through business income deduction is available equal to 20% of qualified business income from partnerships, S corporations, and sole proprietorships. In late 2018, the IRS issued guidance on some previously proposed strategies thought to be able to maximize the use of the deduction.
For dealerships that are considered to operate in specified service trade or that are expected to exceed the income thresholds, owners cannot spin-off various business functions into separate entities (that would be considered to operate in a non-specified service trade or business) and be eligible for the full Qualified Business Income (QBI) deduction.
Proceed with caution in setting up trusts for children or others who are separately taxed to own interests in dealerships that qualify for the deduction where parents would otherwise not qualify due to their income levels or other factors. Such trusts may not be respected for purposes of the Section 199A deduction.
5. To Speed Up, Set the Record Straight
Dealership owners should ensure they have adequate substantiation for expenses such as travel miles, business meals, etc. These include daily logs, actual receipts and other substantiation records. Business meals continue to be 50% deductible.
Keep in mind that a business meal must be substantiated—identifying time, place, amount and business purposes—and it cannot be lavish or extravagant under the circumstances and the taxpayer (or an employee of the taxpayer) must be present in furnishing such food or beverages.
Because of the TCJA, entertainment expenses, even if associated with the active conduct of a trade or business, are no longer deductible.
6. Turn Over the Wheel – While Minimizing Tax
When looking to retire or sell the company, auto dealer owners should harness the horsepower of the increased tax exemption for passing on the business. With the increased Federal Estate Tax Exemption to $11,180,000 for individuals or $22,360,000 for married couples, dealership owners (especially owners of family-run dealerships) should take advantage of passing on the business without incurring estate or gift tax.
They call it the “summer slump.” But for auto dealers, the upcoming sunny months offer the chance rev the engine with a well-oiled tax strategy, so that they can speed faster than ever toward a successful future.
Joan B. Kaye is senior vice president and relationship manager with Key Private Bank. She can be reached at Joan_B_Kaye@KeyBank.com or 1-516-660-9851.
This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice. KeyBank is Member FDIC. KeyCorp. © 2019 CFMA #190603-593933
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