Authored by Daniel Gillen
On April 26, 2017 the Trump administration released an outline of the main changes they plan to implement through comprehensive tax reform legislation. While details are sparse, one core feature of the proposal is a reduction in tax rates for both businesses and individuals. Tax rate reductions were also a core feature of the tax reform “blueprint” published by the House of Representatives in 2016. Whatever form the final tax reform legislation takes, it is likely that a reduction of tax rates will be implemented.1
Traditional tax planning techniques often focus on accelerating deductions and/or deferring income. In the context of a large-scale rate reduction, such techniques provide an even greater benefit by deducting expenses in an earlier, higher-rate year and/or recognizing income in a later, lower-rate year.
A changing-rate environment therefore presents an opportunity for a review of tax accounting methods to determine if there are any method changes that will result in a significant one-time reduction in taxable income. Some common accounting method changes and elections that may apply to dealerships include:
- Deferring income related to qualifying trade discounts on inventory purchases2
- Deducting advertising charges included on vehicle invoices
- Using various safe-harbor methods for dealerships under Rev. Proc. 2010-44 to reduce capitalized inventory costs under the Section 263A “UNICAP” rules
- Changing from erroneous depreciation methods to accelerate cost recovery deductions
- Cost segregation studies can be performed to identify components of new or existing buildings that may qualify for shorter recovery periods
- Deducting repair and maintenance expenditures that have been improperly capitalized
- Using the 12-month rule and recurring item exception to accelerate deductions for “payment liabilities” (e.g., insurance premiums, property taxes, etc.)
- Deducting incurred but not reported (“IBNR”) medical expense accruals for self-insured taxpayers
- Deducting 70 percent of eligible “success-based fees” in connection with applicable asset acquisitions3
Even in instances where an accounting method change would not result in an acceleration of deductions or deferral of income, a change from an improper method to a proper method may be advantageous. When an accounting method change is properly filed, an unfavorable adjustment to taxable income is generally recognized over four tax years, and the taxpayer generally receives audit protection. In the absence of a properly filed method change, the IRS could force the taxpayer to recognize the entire adjustment in a single tax year, at potentially higher tax rates.
Many of the changes discussed above may be made under automatic method change procedures (due on or before the due date of the tax return for the year of the change, including extensions, no user fee required). Others may require advance consent (due on or before the last day of the tax year, and requires a user fee).
For more information on this topic, or to learn how Baker Tilly dealership specialists can help, contact our team.
1The planning techniques discussed in this article assume that any rate decreases will be effective no earlier than January 1, 2018.
2Qualifying trade discounts generally include (but are not limited to) factory interest credits and advertising assistance. Certain other manufacturer incentives may also be eligible.
3This is technically an election, rather than an accounting method change, and must be made with a timely filed original tax return. An accounting method change cannot be made to deduct success-based fees paid or incurred in a prior tax year.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.