Three Tax Planning Strategies for Dealers for 2009

With 2009 coming to a close, there are some unique issues that automobile dealers may need to  consider in this year’s tax planning. These items are as follows:

LIFO reserves - Many dealers currently have low new vehicle inventories.  This could have a dramatic impact on your LIFO  calculation.  Inventories are low for several reasons including: the cash for clunkers program, Chrysler and GM franchise terminations, reduced production levels by manufacturers, and soft consumer demand for new vehicles.  Dealers with lower inventories may recapture a significant portion of their LIFO reserve.   LIFO calculations are typically performed with software applications that can easily provide estimates at various inventory levels.  This can help you estimate your 2009 taxable income (loss).  Terminated dealers that have no surviving  brands in that entity will have to recapture the entire LIFO reserve as their new iventory is sold off.  There has been some discussion in Congress that would allow terminated Chrysler and GM dealers to spread the LIFO recapture over four years.

Termination payments - General Motors termination funds should be considered goodwill and qualifies for capital gain treatment.  The current federal capital gain rate is 15%.  That rate is scheduled to expire at the end of 2010.  Some fear that the current administration will attempt to amend the law and increase the rate in 2010 before its scheduled expiration. 

Alert your tax preparer of the amount of your termination payment so that you can take advantage of the lower capital gain rate.   Most dealers have received 25% of the payments in 2009 and will receive the remaining 75% in 2010.  A dealer may have to elect the “installment sale” method to defer the 2010 payment to the 2010 tax year.  Without this election a dealer could be forced to report all of the income in 2009 since the contract was finalized in 2009.  Dealers with concerns that the capital gain rate will increase in 2010 may choose to report all of the income in 2009.  Dealers must remember to offset the income against any goodwill that currently resides on their books.  This would be appropriate for stores that had purchased the franchise from another dealer. 

Expensing capital assets - Dealers who  purchased equipment and certain other fixed assets in 2009 can elect to expense up to $250,000 of these assets under  section 179.  Dealers can not use this election to create a loss.  Fifty percent bonus depreciation is also available on newly acquired tangible personal property.

For additional information regarding the automobile industry or Downey & Company, please email Paul McGovern at pmcgovern@downeycocpa.com.