Using the LIFO inventory system can provide significant tax benefits to you as a dealer, but it can also provide many complications if not adequately used.  A major requirement of LIFO and a crucial stepping-stone is the need for adequate comprehensive records. 

While there are different methods of LIFO for both new and used vehicle inventories, this article will focus on the use of new vehicle LIFO.  IRS Revenue Procedure 97-36 was enacted to provide guidance to dealerships looking to use this form of LIFO.

Under this method, dealers must maintain “complete records” when calculating LIFO values.  Dealerships must also maintain and retain original invoices on new vehicles.  It is in the dealerships best interest to maintain records dating back to the first year the alternative LIFO method was elected for use.

If you do not maintain adequate records what could you face as a dealership you may wonder?  Well, first and foremost it could lead to tax complications.  Adequate records would help you withstand challenges from the IRS and potentially avoid penalties.  Having detailed records also makes it easier to explain to outside parties how you arrived at your LIFO calculation.

How can you maintain adequate records?  There are several different ways you as a dealership can do this.  The easiest way is to keep a copy of these files backed up somewhere within the dealership.  A downfall of this approach is that it can consume large amounts of space that could be used to occupy other items. A second option is that you could keep the records stored off site in the event of a natural disaster to prevent loss of these files.  A third option is to scan the invoices onto your server and back them up on disks or a hard drive of some sort for easy access. 

While there is much more to LIFO that just maintaining adequate records, it is a simple starting point to guide you in the right direction.

Still have questions?  Feel free to contact one of our dealership specialists and we can help guide you through the correct process to help maintain your adequate LIFO valuations. 

December finished up a strong year for 2011 and the table is set for 2012 to be another great year. The average age of vehicles is the highest it has been in years, banks are lending money again, new cars are more affordable than they have ever been, 46% of the population says they intend to purchase a new vehicle within the next year, our population is one of the fastest growing and is the third largest in the world, and almost every manufacturer is creating and building great products. As business continues to improve it is important for dealers to stay focused and not slip back into old habits. Make sure you continue evaluating and improving processes, planning for the future, controlling expenses, and managing inventory levels despite pressure from manufacturers as they continue to ramp up production. Staying focused will ensure continued profitability growth and ensure you get your share of the anticipated 14 million units that will be sold in 2012.

It is interesting to see how new vehicle sales trend from one month to the next. Many analysts try to explain why December sales increased.  In fact, it appears to just be a natural trend. By clicking here you will view a historical comparison of annual new vehicle sales as reported by Automotive News. Please contact Bart Haag or one of our other dealer services team members at (207) 772-1981 if you have any questions.

The IRS recently released the 2012 standard business mileage reimbursement rate, which will be 55.5 cents for all business miles, effective January 1, 2012.  The 2012 standard mileage rate for medical and moving purposes will be 23 cents per mile, effective January 1, 2012.  The 2012 standard mileage rate for charitable purposes is unchanged at the rate of 14 cents per mile.

Generally, Form 1099-MISC must be filed for each person who received at least $600 in non-employee compensation paid in the course of your trade or business.  Payments made to a corporation are generally not required to be reported.  Attorneys’ fees of $600 or more paid in the course of your trade or business must be reported on Form 1099-MISC.  The exemption from reporting payments made to corporations does not apply to legal fees.

Forms W-2 and 1099 should generally be distributed to recipients by January 31, 2012.

Forms W-2 and 1099 should be sent to the government no later than:

Electronic filing                                     April 2, 2012

Paper or magnetic media                     February 29, 2012

We recommend filing government copies on or about their due date (no sooner), so any recipient requested changes can be made without filing corrected Forms W-2 and 1099.

The 2012 wage ceiling for FICA-Social Security tax has increased to $110,100 from $106,800 for 2011.  Just before Christmas, legislation was enacted to maintain the lower 4.2% rate for an employee’s share of Social Security tax until February 29, 2012. The legislation includes a commitment to negotiate a full one-year extension of the lower rate.  The employer’s match remains the same at 6.2%.

The maximum 2012 employee contribution to 401(k), 403(b), and certain 457 plans is $17,000, and for SIMPLE plans the maximum is $11,500.  In addition, participants who are age 50 or over can contribute an additional $5,500 to 401(k), 403(b), and certain 457 plans, and an additional $2,500 to SIMPLE plans.

U.S Manufacturing continues to grow while other parts of the world experienced a slowdown. A recently released Purchasing Managers’ Index (PMI), an indicator compiled monthly from surveys done by the Institute for Supply Management’s (ISM), climbed to 53.9 in December. Any reading above 50 is indicative of an expansion within the manufacturing sector. The PMI index rose due to an increase in new orders-a welcoming sign for manufacturers in the United States.

U.S. manufacturers managed to “shrug off the apparent sharp slowdown in growth in Asia and what looks like a renewed recession in Europe,” wrote Paul Ashworth, chief U.S. economist for Capital Economics, in a market report.

In a recent report from China, the November readings contracted for the first time, to their lowest levels since 2009, but rebounded in December to 50.3. However, with the European zone headed towards a potential recession, exports will continue to look grim for many companies globally.

Despite the negative outlook by countries world wide, U.S. manufacturers continue to remain optimistic and their outlook is positive. With the uptick in manufacturing and with reports showing strong retail sales, there appears to be enough of a reason to be positive about the U.S. economy. However, many economists are beginning to question how long the U.S. can continue to expand when so much of the world appears to be contracting economically.

The bottom line is that the recent economic numbers are encouraging for manufacturers, but we certainly are not out of woods yet. We’ll wait to see if the positive data is reflecting an economy that’s expanding for the long run. 

At the beginning of 2011, far-reaching and onerous new rules were on the horizon regarding 1099-MISC filing requirements.  However, during 2011, those provisions were repealed.  Therefore, in general, the rules that have historically applied for filing Forms 1099-MISC continue to apply to the 2011 forms.

Despite the repeal during 2011, the IRS is paying more attention to Form 1099 compliance.  Questions have been added to 2011 income tax returns asking whether or not 1099 forms are required to be filed and, if so, whether or not the forms have indeed been filed.

As the 1099-MISC filing season approaches, keep in mind Albin, Randall & Bennett can assist you with preparation of those forms.

Cyber theft can happen to anyone. According to Privacy Rights Clearinghouse, cyber hackers have stolen upwards of 13 million records online just this year, containing confidential information such as social security numbers, financial account numbers, and driver’s license information.

Below are a few helpful tips from an article “What you Need to Know About Getting Hacked,” published in Kiplinger’s Personal Finance magazine on how to defend against cyber hacking.

Defend your PC

Install the latest firewall, anti-malware, and antivirus software on your computer. Download any recommended security updates.

Pick unique passwords

It is not only important to pick unique passwords but to also not use the same password for every account. Hackers can exploit using stolen passwords to log into multiple accounts if people have the same password for everything.

A strong password contains both upper and lower case letters, numbers, punctuation marks, and/or symbols. If you’re worried about remembering your unique passwords use a free password management program such as KeePass to securely log all of your passwords.

Take action quickly

If one of your online accounts has been hacked it is important to assume your information has been breached. Quickly cancel compromised cards, and look at any activity that has taken place on these cards. If social security information has been breached then make sure to place a hold on your credit report to prevent any addition lines of credit being opened under your name.

Know what you’re browsing

If you’re typing confidential information online look for https:// in the address bar of the web browser to indicate you are in a secure location. Don’t use public internet to log on to your confidential accounts. Always choose wireless connections that are password protected.

Think before you click

Avoid clicking on pop-ups or downloads that you are unsure of. If you open an email always know who the sender is and determine whether it is from a reputable source.

Using these simple, effective steps will hopefully prevent confidential information from being compromised.

We recently met with a company called Armada Dealer Solutions (ADS). ADS is different because they have a team of people including auditors, technology experts and legal experts (from the law firm Bass, Sox & Mercer) that understand how to interpret state laws and manufacturer protocols and how to efficiently extract data from a dealerhip management system. They start by thoroughly understanding the state franchise laws for each state in which they work. They work with Bass, Sox & Mercer to analyze state laws and then customize their approach according to each states rules and regulations. They then analyze each manufacturer’s protocols and further customize their approach based on manufacturer rules and regulations. Once this is done they access the DMS and download six months of ROs. Their software then goes to work and separates out only those ROs that qualify under state law and the manufacturer’s rules. It then processes the remaining ROs and finds the 100 sequential ROs that optimize the retail reimbursement rate. Throughout the process auditors review the data to identify potential issues and make recommendations for improving processes. Once the optimal 100 ROs are identified, they complete the franchise submissions and put together a complete package of documentation supporting the request. That is then sent to the manufacturer for their review and approval.

Most dealers are currently being reimbursed at a rate of cost + 40%. Using their process, ADS expects to move that to cost + 75-90%. As you can imagine, that is a significant amount of additional net profit. Assuming ADS can obtain the results they expect, an average dealer grossing $100,000 per year on warranty parts sales could expect to increase their net profit somewhere between $80,000 and $115,000 per year.  

Please do not hesitate to call Bart Haag or one of our dealership experts to learn more about Armada Dealer Solutions or this process.

Many dealers are unaware of a profit killer in their parts departments. While it appears they are earning a respectable gross when reviewing their doc, their policies may actually be eroding profit.

Allowing employees to offer discounts to customers can be one such profit killer. However, there is a balance. Afterall, a dealer’s number one priority is taking care of customers. Implementing a good process for discounting will ensure they can do that, and maximize their service department profit. One aspect of a good process is establishing a maximum percentage employees can discount. Anything over this percentage would need approval from the parts manager, GM or even dealer. This will give them the authority to take care of customers, with some accountability. Dealers can and should keep tabs on discounting by reviewing reports produced by their DMS. They can also do periodic audits of the parts department and review a sample of RO’s to make sure policies and procedures are followed.

Another area dealers lose money in the parts deparment is by not periodically reviewing their parts matrix. This needs to be done to ensure a proper markup on its parts sales. Dealers should ensure competitive parts have a more conservative markup while noncompetitive and high volume small parts have a higher markup (ie: the $8 aspirin at a hospital). This will help a dealer maximize profit by keeping customers happy and getting a good mixture of high markup business with average and above-average markup business.

There are lots of other ways to maximize parts department profitability. Please contact Bart Haag  or one of our other dealership specialists to learn how you can earn the most in your dealership.

The end of the year is upon us, and it is time to start thinking about ways YOU can help lower your tax bill.  Determining where you may fall in a tax bracket for next year may be somewhat complicated to figure out, but there are a few factors to consider in preparing for your year-end tax planning.

 1.      Pre-Pay Deductible Expenditures if You Itemize

If you are expecting to be in the same or lower tax bracket next year, pre-pay your expenses.  This way you can claim the deduction in 2011 instead of next year.  A few suggestions include paying your house payment early, some medical expenses, or extra contributions.  These will all help you out.

2.      Alternative Minimum Tax Liability Has Implications

If you are in AMT, you may not want to pre-pay anything.  Currently if you are in AMT, there are certain rules you must follow.  They include:

No write-offs for state/local income and property taxes

Medical expenses must exceed 10% of adjusted gross income (vs. 7.5% for non-AMT itemized deductions)

No miscellaneous itemized deductions

Take time to review and see if you currently fall into AMT to prevent losing some valuable deductions.

 3.      Deduct Sales Taxes on Major Year-End Purchases if You Itemize

If you reside in a state with low or no personal income taxes, you can deduct general state and local sales taxes for 2011.  You can either deduct state and local sales taxes or state and local income taxes – but not both.   The IRS provides tables that allow you to figure out which is in your benefit. 

 4.      Pre-Pay College Tuition

The American Opportunity college credit and the Lifetime Learning higher education credit are available to college students.  You should consider pre-paying college tuition bills that are not due until 2012 in order to claim the benefit in the current year.  Be careful to check and see if you fall within the income limitations of these credits before pre-paying your bill.

 5.      Standard Deduction

If your total itemized deductions are near the standard deduction, group expenses every other year in order to claim extra benefit by itemizing in one year, then take the standard deduction in the following year. This can help you shave some off your tax bill.

These key steps, along with others, can help you lower your tax bill.  Paying careful attention throughout the year, as well as taking some time to review your year-end planning is essential.  Our firm provides services that can further help you plan for year end.  Feel free to contact us today!