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Review the following checklist and consult a member of Boyer & Ritter’s Dealership Services Group if you have questions or need assistance.
1.Shareholder Related Expenses - Salaries and other payments such as interest on loans owed to any shareholders of an S corporation, or to shareholders of a C corporation owning more than 50 percent of the company’s stock, must be paid by year-end to be deductible in 2011. This includes expenses owed to individuals related to the shareholder.
2. Inventories
- -- UNICAP - In November 2010, the IRS released Revenue Procedure 2010-44. This Revenue Procedure offers dealer's significant relief to many of the issues raised during IRS UNICAP audits by filing Form 3115, Application for Change in Accounting Method. If you did not take advantage of this opportunity last year, we strongly encourage all eligible dealers to elect the safe harbor relief provided by the Revenue Procedure. Failure to do so, could subject the dealership to significant UNICAP adjustments.
Revenue Procedure 2010-44 also provided dealers with an opportunity to expense versus capitalize certain costs associated with internal repair orders. If you did not make that election last year, consider making it this year. If you did make the election, please prepare a schedule of all internal repair orders associated with in stock new and used vehicle units at year-end.
-- LIFO - Record 2011 LIFO Estimate - Make sure that a reasonable estimate of the LIFO adjustment for the year is included on all versions of the December financial statement. There are no exceptions. The best place to charge the LIFO estimate is to cost of sales in a cost account that has no other activity. If you still have cars and trucks in separate LIFO pools, analyze the tax impact of electing to combine them into one vehicle pool.
-- Trade Discounts - For each of your manufacturers summarize any trade discount programs offered (advertising, interest, etc.) and document how the payment is recorded on your books. Determine if more tax efficient treatment exists.
-- Inventory not on LIFO
Used Vehicles - If not on LIFO, review the recorded value of all used vehicles and adjust to the lower of recorded cost or current wholesale market value as of the end of the year, taking into consideration the mileage and condition. Remember to retain the used vehicle guide.
Parts - Compare the actual parts inventory to the accounting parts inventory and make appropriate adjustments. Have your parts manager determine which parts are worthless. Subject to your review, donate or scrap these parts before year end if they cannot be returned for credit. Have the parts manager give you a copy of his parts inventory summary, showing the dollar amount of parts in inventory at year end along with the aging of the inventory.
Miscellaneous Inventories - Adjust all to actual, including labor inventory, sublet, gas-oil-grease, body shop materials, etc.
3. Try to keep the accounting records open at the end of December.
- -- Maximize LIFO deductions by recording all new vehicles that were built and received in 2011, as vehicle purchases in 2011, by keeping the new vehicle purchase journal open the first few days of 2012.
- -- Record all 2011 expenses in 2011, by keeping your accounts payable journal open, to include advertising, interest, utilities, telephone, gasoline, data processing, insurance, property taxes, etc.
- -- Account for all missing documents.
- -- If any vehicle deal is not completed in 2011, then treat it as a 2012 vehicle sale.
- -- Where possible, reconcile all balance sheet accounts, before closing the year end.
4. Demonstrators - The IRS Revenue Procedure 2001-56 provides guidance for taxation of the personal use of a demonstrator vehicle provided by dealers to their employees. The Revenue Procedure gives the following methods to determine the amount taxable to the employees:
- -- Simplified Full Exclusion Method - Provides complete exclusion from taxation for the use of a demonstrator vehicle for qualified salespersons.
- -- Simplified Out/In Method - Provides simplified record keeping requirements for the Full Simplified Exclusion Method for qualified salespersons.
- -- Partial Exclusion Method - This method allows of partial taxation of an auto demonstrator vehicle with limited record keeping requirements for qualified salespersons.
- -- Simplified Full Inclusion Method - This method allows the dealership to use the Annual Lease Value Tables issued by the IRS, to determine the taxable value of the demonstrator based on the average selling price of the dealership’s vehicles for the prior year or the value of the vehicle actually used by the employee. The value of the vehicle provided cannot be reduced for business use.
5. Fixed Assets
-- Review your fixed asset purchases - Expense all items where appropriate. If a large amount of small tools were purchased, which collectively was a large cost, but individually was a small cost, consider expensing these purchases rather than capitalizing them. Also, review capitalized items to ensure that none are actually repairs. Repairs are items which do not materially add value to the value of the property, does not appreciably prolong the life of the property, and does not adapt the property to a new or different use.
-- Bonus depreciation - The Small Business Jobs Act of 2010 provides for bonus depreciation equal to 100% of the adjusted basis of qualified property. In order for property to qualify, it generally must be new property with a MACRS life of twenty (20) years or less and acquired and placed in service in the 2010 calendar year.
-- Section 179 Expense - You may deduct (rather than depreciate) the cost of certain assets placed in service in 2011 up to a maximum limit of $500,000. Note that this election phases out once the qualified fixed asset additions for the year exceed $2,000,000. The phase out is dollar for dollar, so this opportunity is eliminated once fixed asset additions equal $2,500,000.
-- SUV Deduction - The expense deduction is capped at $25,000 for SUV’s with loaded weights in excess of 6,000 pounds. The remaining cost is eligible for depreciation over a five-year period.
-- Like Kind Exchange - If you will be disposing of property and acquiring new property, consider a like kind exchange to defer the gain.
-- Cost Segregation Study - If you have recently acquired a building or completed new construction within the last 5 years, consider a cost segregation study to take advantage of shorter tax lives for certain costs.
6. Prepare 1099’s - Prepare a 1099-MISC, which is required, for all non-employees who received over $600 in 2011. Other payments that require a 1099-MISC include rent, and prizes and awards given to contest winners. A 1099-INT must be prepared when interest is paid to individuals, including owners.
7. Cafeteria Plans (Section 125 Plan) - If the dealership has a Section 125 Plan, verify that all participants are eligible. S corporation stockholders who own two percent (2%) or more of stock are not eligible to participate. Partners in a partnership and LLC owners, regardless of ownership percentage, are also ineligible.
8. S Corporation Insurance Premiums - Health, disability and life insurance premiums paid by an S-corporation on behalf of a shareholder, owning more than 2 percent of the corporation’s stock, are taxable fringe benefits. The amount paid on behalf of the shareholder must be included on the shareholder’s W-2 as wages. Health and disability insurance are not subject to Social Security or Medicare tax. Health, disability and life insurance are not subject to Pennsylvania and local income taxes.
9. Group Term Life Insurance - Employer provided group term life insurance with a value of $50,000 or less is a tax-free benefit if not discriminatory. The value in excess of $50,000 is federal taxable income and must be reported on Form W-2. The taxable cost may be determined using the IRS Uniform Premium Table.
10. S Corporation Loan Basis - If an S Corporation shareholder has lent money to the Corporation, not evidenced by a separate written document (open account debt), recent regulations limit the amount of “open account debt” that can be used as basis to recognize current year tax losses. The regulations may also impact the taxability of the repayment of the “open account debt.” The “open account debt” should be reviewed for compliance with the new regulations.
11. Additional Considerations
-- Bad Debts - Review all past due accounts receivable, and write off those for which all collection efforts have failed and are deemed uncollectible.
-- Prepaid Expenses - Carefully review prepaid assets and expense all items in this account that do not provide a benefit in 2012.
-- Accrued Wages and Commissions - Verify that all wages and commissions, which were paid in 2012 for 2011 services, have been accrued in 2011.
-- Accrued Payroll and Sales Taxes - Make sure the payroll tax and sales tax payable accounts equal the actual amount of all taxes paid in 2012 with the 2011 fourth quarter and year-end tax returns.
-- Repairs and maintenance - If building repairs or maintenance items such as painting may be conducted in early 2012, try to have them completed by the end of 2011.
-- Meals and Entertainment - Have a schedule of meals and entertainment expenses for the year. Exclude travel expenses and the employee holiday party, as these expenses are 100% deductible.
-- Charitable Contributions - Consider making any charitable contributions planned for early 2012 in 2011 to take the deduction now.
-- Unrealized Losses - If the dealer or the dealership own investments that have unrealized losses, consider the tax benefit of selling them in 2011.
-- Cash Reporting - Before January 31, 2012 notify all customers who had an IRS form 8300 filed for them in 2011.
-- Income Tax Deposits - Make all required personal and corporation income tax deposits for 2011, and verify that your personal income tax withholding is adequate.
-- Nonqualified Deferred Compensation Plans - If the dealership has nonqualified deferred compensation plans, review the plans for compliance with the recent tax law changes.
-- Employer Owned Life Insurance - If the dealership has employer owned life insurance issued after August 17, 2008, the policy should be reviewed for compliance with the recent tax law changes.
-- 401(k) Plan – Accrue any year-end match or profit sharing plan contributions that will be made before the tax return is filed. Also, determine whether or not an audit is needed for the 401(k) plan.
-- Unclaimed Property – Review schedules and reconciliations for unclaimed property and make required reporting and payment to the state. .
Download a copy of the 2011 Year End Checklist.
Questions? Contact B&R's Dealership Services Group at 717-761-7210.
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