by Dave Wiggins, CliftonLarsonAllen LLP
Summary — Tax rates will likely fall under Trump’s presidency. Keep that in mind as you craft advantageous tax strategies for your dealership and your family.
This December comes on the heels of Donald Trump’s election to president, and that likely means some significant changes are coming that will affect both your business and personal tax planning.
Possible Trump administration tax changes
During his campaign, Trump pledged several tax policy changes. It’s still too early to know if all of these will come to fruition. You might consider taking deductions this year or deferring income to 2017.
Here is what Trump said his administration would change or eliminate:
- Reduce the seven individual tax bracket rates down to just three: 12 percent, 25 percent, and 33 percent (down from 39.6 percent).
- Eliminate income tax for singles who earn less than $25,000 annually and for married couples filing jointly who earn less than $50,000 annually.
- Cut top corporate tax rates from 35 percent to 15 percent.
- Change capital gain taxes to 0 percent, 15 percent, and 20 percent (down from 23.8 percent).
- Eliminate estate taxes.
- Eliminate the alternative minimum tax (AMT).
- Eliminate Obamacare and the 3.8 percent net investment income tax (NIIT).
- Close tax loopholes for the wealthy.
W-3/W-2 and 1099 preparation
IRS forms W-3, W-2, and 1099-MISC with non-employee compensation are all due to both the recipient and the government by January 31, 2017. Failing to file just one required form will likely cost your dealership $500.
New vehicle inventory planning and LIFO
Many dealerships use the last-in, first-out (LIFO) inventory accounting method for significant tax benefits. Work with your advisors on estimating inventory levels to determine potential LIFO adjustments before year-end. This should help you to avoid some unpleasant surprises.
Used vehicle write-downs to market and LIFO
If your dealership is not determining used vehicle inventory using LIFO, you may be able to reduce your used vehicle inventories from cost value to market value (if the market value is less).
Dealers not using LIFO, or who revoked LIFO more than five years ago, may receive benefit this year. Remember, LIFO generally reduces income by the rate of inflation; 5 percent inflation could reduce taxable income by 5 percent of your used vehicle inventory value.
S corporation or partnership losses
If you own an interest in an S corporation, you may need to increase your tax basis in the entity so you can deduct a current-year tax loss against other income.
Section 179 expense and bonus depreciation
For 2016, the Section 179 first-year expense deduction is at $500,000. Additionally, 50 percent bonus depreciation is still in effect for tax year 2016. This is not subject to taxable income limitations, unlike Section 179 depreciation.
Self-rental income
Do you lease real estate to your own business entity? If so, the passive activity loss rules present a significant threat. If your Form 1040 has a mix of positive and negative net income amounts among your rental activities, the passive loss risk needs to be carefully assessed. Grouping rules may allow you to offset your rental losses with your dealership profits to avoid disallowance of the losses
Officer note payable repayments
If your dealership or another business has generated tax losses in the past, review current-year loan repayments made to shareholders. If prior-year losses have been taken based on money borrowed from shareholders, the repayment of such loans may create taxable income to the shareholder in the year of repayment. Review your loan activity in 2016 and consult with a tax advisor to determine if an unwelcome tax surprise may result.
Cost segregation of buildings or improvements
Any building acquisition, construction project, or renovation which costs more than $500,000 can usually defer tax liabilities and provide a cash flow benefit through some form of a cost segregation study.
Expense dealership repairs
Dealerships may now expense items that cost less than $2,500.
Parts inventory adjustments
Consider writing off obsolete inventories before year-end.
Receivable write-offs
Review customer accounts receivable to determine which uncollectible factory incentives, rebates, and other receivables can be written off.
Meals and entertainment expenses
Such expenses should be reviewed by dealership personnel to determine meals and entertainment that may be 100 percent deductible.
Review January expenses and other chargebacks
With the significant tax rates many dealers will face this year, you will want to review all January and February invoices to find those that can be deducted in 2016.
Maximize contributions to your 401(k) and other retirement plans
Contact your retirement plan administrator to determine if you can contribute additional funds to these accounts.
Our dealership industry tax practitioners can work with you to develop a strategic tax plan and make sense of complex regulations and rules.
CliftonLarsonAllen LLP offers wealth advisory, outsourcing, and public accounting services to help clients succeed personally and professionally.
Dave Wiggins, CPA, principal with CLA’s dealership practice, specializes in federal and state taxation with the unique perspective of those specific strategies that apply to dealerships, finance companies and their owners. He can be reached at david.wiggins@CLAconnect.com or 314-925-4316.
