A partner addressed a receptive Arkansas Automobile Dealers Association on current federal income opportunities available to car dealers and dealerships.
We've been advising clients to take advantage of such opportunities for years. While much of this was new information for most of the dealers in attendance, they know that tax savings and deferrals mean more cash. And cash is “king.” The following are crowning points that I hope are used in your kingdom, er, dealership.
Accelerated depreciation
- 30% bonus depreciation for personal property acquired or under contract by Sept. 10, 2004.
- New tangible personal property only with limited exceptions
- Certain leaseholds qualify
- Not subject to the alternative minimum tax
- Not subject to the same phase outs as the Section 179 deduction
- Elect out required
Class 57.0 assets
- Used for “distributive trades and businesses” such as automobile dealerships
- Reduced depreciation life to five years for qualifying property
- Applicable to property specific to the business and used in the selling function
- Furniture in dealer's office would not qualify
- Furniture in salesperson's closing office would qualify
- Lot lighting would
- Parts bins and shop equipment would
- May file a change in accounting method to catch up since date of acquisition.
Cost Segregation Studies
- An engineering study to segregate property in a real estate project eligible for quicker depreciation (including 30% bonus depreciation if acquired during the correct period)
- Can be used for real estate you construct or purchase
- Benefit is calculated by calculating the interest earned on the tax money saved over the longer alternative life of the asset vs. the cost of the study
- Cost of the study is typically $8,000 - $20,000
- Assets reclassified are subject to ordinary income recapture upon sale
- However, these assets are typically the ones that are worth less at time of sale
- Proper documentation is extremely important in case of examination
- IRS has consistently lost in cases on this topic
- Can file a change in accounting method to catch up since date of acquisition
Other Miscellaneous Opportunities
- Gifting limits have increased to $11K ($22K with gift-splitting) annually per donee
- The 2001 tax act had many provisions related to retirement plan contributions
- Roth IRA or Regular IRA
- If the AGI is between $64K and $150K and both are participants in a qualified plan, then the Roth is allowed but not the regular IRA
- If the AGI is more than $160K and neither party is an active participant in a qualified plan, then only the regular IRA is allowed
- A regular IRA is favored when tax rates are greater in the year of contribution than the year of withdrawal. A Roth IRA is favored when the opposite occurs, contributions are desired after 70 1/2, withdrawals are neither required nor desired.
- Higher limits are in place for SEP contributions and 401(k) contributions…take advantage of them.
- 2003 Personal estimated tax payments' safe harbor provisions have been reduced from 112% to 110% of the prior year tax
- Tax case allowing expensing (rather than capitalization) of roof re-decking that should be reviewed by your tax professional
You truly have a white knight if your tax advisor has already approached you with these opportunities.
Don Ray is a senior member of the George B. Jones Dealer Services division of Dixcon Odom, a national accounting and consulting group for dealers. He's at 901-684-5643 and [email protected].
