Optimize your dealership’s financial and tax positions.
The end of 2020 is fast approaching. There are so many money-related things the owners and managers of used car dealerships need to take care of in order to optimize their financial and tax positions. Use our ULTIMATE checklist to help keep you organized so you don’t forget anything or miss any lucrative opportunities.
Check your bank records.
Complete and check the reconciliations for all your business bank accounts. See if you have any outstanding checks that could cause you accounting or tax issues in 2020 or 2021 if they’re cashed unexpectedly.
Also, if you have too much cash on hand, which is possible because 2020 has been a good year for many used car dealers, see if it makes sense to move the money into short term investments or some type of interest bearing account. If you’re not sure, consult with your broker or financial advisor.
Review your accounts receivable.
Conduct a detailed review of all your accounts receivable schedules for all parts of your business. Plan to write off any account balances that you’re sure you won’t be able to collect. Also, check your reserve for uncollectable accounts to make certain you have enough cash set aside to cover any bills that you’re still actively pursuing but may not be able to collect on. As a final step, look into whether you have properly accounted for chargebacks from finance companies by recording them as deductions to finance income.
Conduct a year end inventory.
Do a physical count of your inventory across all departments before the end of the year. Compare the results of your physical inventory to your accounting records and spreadsheets. Investigate any differences between the actual count and your records. Make the appropriate adjustments to ensure the accounting documents reflect reality. Also, look into whether you have a theft problem or other issue and correct it. Develop policies and procedures that you implement in the new year to prevent it from happening again.
Do you use the lower of cost or market method to value your used vehicles? If so, and if it makes sense, write down your inventory at year-end to market value. It allows you to enjoy the tax advantages of vehicle depreciation. Also find out whether it’s a smart move to wholesale any old units to take advantage of potential loss deductions. Return any older parts that are still eligible for factory return programs. If you have unusable non-returnable parts, gift them to a school or other education program or scrap them to earn a tax deduction.
As a final step, check your work-in-process account to see if the balance at year end is reasonable when compared with the open repair order report. This is an example of an account that is often overlooked and can get out of control if not reviewed regularly.
Update the recorded value of your inventory.
Does your dealership use the last in first out (LIFO) accounting method? If so, include a reasonable adjusted estimate on all your December 2020 financial statements. Remember that records that capture LIFO data and information must be retained permanently, so make arrangement for how and where you plan to store them.
Review your prepaid expense accounts with an expert.
Tax law allows business owners who prepay certain expenses for a period beginning in the current tax year to expense the entire amount rather than spreading it over two years. The expenses can include things like rent, insurance, advertising, license fees and maintenance contracts. Consult your tax adviser on the technicalities of this issue before year end if it’s something you do. It’s a hard thing to get right. It’s easy to make mistakes that could raise major red flags with the IRS.
Plan for depreciation.
Pull together detailed information about any fixed assets you bought during 2020. Include complete descriptions, the date the items went into service and the purchase price. Check with your accountant on how you can appropriately depreciate them to optimize your tax position.
Review the fixed asset listing for your dealership before the end of the year. Any items that were sold or otherwise disposed of during 2020 should be removed from the listing. If you added any facilities this year, consider separating the costs between building and equipment components. You could earn a shorter recovery period and enjoy a quicker write off.
Are you thinking about buying a non real estate tangible fixed asset and you have not already reached your IRS Section 179 limit? Consider making the purchase before the end of the year to maximize the available tax deduction. If you’re not familiar with Section 179, discuss it with your accountant or tax adviser to find out how it could benefit your dealership, especially if it’s a new or growing operation.
Review your accounts and notes payable.
Before the end of the year, check out any payable over 30 days old and see if you can get it resolved before December 31. Look out for overpayments and request refunds from vendors if you find any.
Also, have your accountant reconcile the floor plan schedule to the financing source statement and look into any differences between the two.
If it helps with your tax situation, expense interest for December before year end instead of in January when it will actually be paid. Your tax advisor will let you know if this is a smart move for you.
Make sure you reconcile the factory parts statement to the general ledger balance before the cut-off date. The parts statement cut-off is often NOT at the end of the month.
As a final step, check up on old customer deposits. If the customer cannot be located, the deposits may need to be remitted to your state.
Maximize your accruals.
Do you pay taxes on an accrued basis? Then take advantage of all possible tax deductions by accruing any expenses that relate to 2020, but will not be paid until 2021. These include things like:
- Advertising and marketing costs
- Commissions, salaries and wages
- Finance reserve chargebacks
- Interest expenses
- Insurance premiums
- Payroll taxes
- Professional fees
- Property taxes
- Utility payments.
If you prepare your taxes on a cash basis, find out if it makes sense to pay some or all of your bills due in January 2021 by December 31, 2020 to make the most of your 2020 tax deduction.
Pay bonuses to stockholders and other related parties by December 31 to obtain a current year tax deduction.
Review payroll related tax records.
Check W-2, W-3, 941 and other payroll tax forms and records for accuracy and completeness. Also, make certain that totals on these forms agree with one another. This will help prevent raising red flags at the Internal Revenue Service. If you have any doubts or questions, check with your tax expert or accountant.
Compare payroll tax liability balances on your general ledger to your fourth quarter 2020 payroll tax returns. If there are any differences, take time to figure out why. Record any variances as current period expenses.
The holidays are a busy time for most people. Make sure that your sales, use and withholding tax returns are filed on time and that you take advantage of all possible legal credits and discounts. There could be many tax credits available, depending on the state or states you do business in. These include the dealer supplemental discount, bad debts credits, gas and fuel credits and more. Consult with your tax pro to make sure you’re aware of all that apply to your business situation.
Check your W-9s and plan for your 1099s.
Make certain you have a W-9 form on file for each person who is required to receive a form 1099. Check that each includes a name, address and taxpayer identification number.
Plan ahead so you’re ready in January to issue 1099s for:
- Interest payments to individuals
- Rent payments to individuals
- Payments for services to non-employees other than corporations that total $600 or more during the year 2020, including payments to legal professionals.
Review your Form 8300 situation.
Be sure that an IRS Form 8300 has been filed for all cash transactions over $10,000, and that all of the customers involved in those transactions have been properly notified. Failure to do so can result in significant penalties.
Check your demo documents.
Review your vehicle demonstrator policy to see that it’s current and meets IRS guidelines. Make sure all employees who use a demo vehicle during the year are charged the appropriate amount of income on their W-2.
The end of the year is a particularly busy time for most people. It can be even more so for used car dealership owners and managers. Using this checklist will help relieve some of the worry and allow you to rest assured that you’re not forgetting anything important and that you’re taking steps to optimize your financial position.