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2004 year-end Income tax/ Accounting checklist for dealers

November 23, 2010
BY MICHAEL SILVER AND CO., WOODWARD & ASSOCIATES, P.C., CPAS

1. Keep accounting records open at the end of December in order to: • Record December finance chargebacks. • Maximize LIFO deductions. Record all new vehicles that were in-transit at the end of 2004 as vehicle purchases in 2004 by keeping the new vehicle purchase journal open the first few days of 2005. • Record all 2004 expenses including advertising, interest, utilities, telephone, gasoline, data processing, insurance, property taxes, etc. • Account for all missing documents. • Obtain a proper cutoff for vehicle sales. If any vehicle deal is not 100 percent completed in 2004, then treat it as a 2005 vehicle sale. • Make sure all miscellaneous inventories are adjusted to actual including labor inventory, sublet, gasoil- grease, body shop materials, etc. • Reconcile, when possible, all balance sheet accounts before closing the year. 2. Review bank reconciliations for checks that are not expected to clear. Those checks should be voided and reissued. Funds owed to payees who cannot be located may be considered unclaimed property, and you may be required to remit the funds to the state. Before reissuing a check to a vendor, be sure it has not been paid with a subsequent billing. 3. Make sure that a reasonable estimate of your LIFO adjustment for the year is on all versions of your 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 there is not a separate LIFO cost of sales account. 4. If you are not on LIFO for used vehicles, adjust all of your used vehicles to the lower of cost or current wholesale market value at year-end. You may want to consider adopting USED VEHICLE LIFO since there have been modest increases in the value of used vehicles during the year. Consult your tax advisor to determine the benefit of adopting used vehicle LIFO and required procedures for the election. 5. Compare your actual parts inventory to the accounting parts inventory and make any adjustments where appropriate. Review the parts inventory summary with year-end balances along with an aging of the inventory. Have your parts manager determine which parts should be considered worthless. Subject to your review, dispose of these parts by year-end and make the appropriate entry in your accounting parts inventory. 6. If you have any building repair or maintenance items such as painting, etc. that needs to be done in the next few months, try to have these performed by the end of 2004. 7. Review current year fixed asset additions to determine if the costs should be capitalized or expensed. Generally, assets with significant value and a useful life beyond a year should be capitalized and depreciated. Consider accelerating your purchase of capital assets to take advantage of the additional 50 percent bonus depreciation. This bonus is available for assets purchased on or before Dec. 31, 2004, with a depreciable life of 20 years or less. In addition, the 2004 Sec. 179 expensing election is $102,000. 8. Carefully review prepaid assets. Expense all items in these accounts that are not prepaid balances at year- end. 9. Review all past due accounts receivable and write off those receivables that are uncollectible. 10. Make sure all payroll tax and sales tax payable accounts equal the actual amount of the applicable taxes paid during 2005 for the 2004 fourth quarter and year-end filings. 11. Make sure you have records of your 2004 meal and entertainment expenses on file. Travel expenses and the cost of the employee holiday party should not be included in this amount because these expenses are not subject to the 50 percent deduction limit. 12. Form 8300 must be filed if you receive cash in excess of $10,000 from a customer. Cash includes certain cashier's checks, money orders and traveler's checks. Make sure you have properly filed the form for each transaction and notified the customer of the filing. 13. A Form 1099-MISC must be issued to all individuals (not corporations) who received $600 or more during 2004 for the payment of services, awards, commissions, rent, or other fees. Review all of the non-employees to see if they would be considered employees for payroll tax purposes. 14. The IRS has automatic change procedures related to the method of accounting for trade discounts such as interest assistance that could provide a tax deferral if adopted. Consult you tax advisor for feasibility and procedures. 15. Make sure that all wages and commissions paid in 2005 for 2004 services have been accrued in 2004. However, since the wages related to these services will be included in the first 2005 payroll , they will not be included in the 2004 W-2s. 16. If you are taxed as a "C" corporation, make sure you pay any salaries, commissions or bonuses to stockholders (generally greater than 50 percent owners) and related parties before year end otherwise the amounts will not be deductible. 17. Accrued interest on loans to or from shareholders and other parties should be paid before year-end. Unpaid interest on these loans is not deductible until paid. Also, an IRS Form 1099 must be issued for interest paid. 18. Review procedures for the use of demonstrators to insure you comply with the current IRS regulations. • All individuals who are provided a demo to drive should sign a written demonstrator policy agreement. • There are two IRS approved methods that can be used for full-time salespeople. The first provides them with tax-free use of the demos. This method is fairly complicated and restrictive. The second method, used by most dealers, is the partial exclusion method. Under this method, an amount is added to wages on a monthly basis. The IRS has provided daily income amounts based on the value of the vehicle. For a vehicle valued at $25,000, the daily inclusion is $6. Under this method, employees are not required to maintain logs. • For non full-time salespeople and other individuals, the annual lease value method is used. An income inclusion is based on personal use mileage and the IRS annual lease table. The IRS requires that logs be maintained in order to verify business vs. personal use of the vehicle. • The income inclusion is to be added to each employee's W-2. Non-employee family member inclusion amounts must be also be included in the employee's W-2. Shareholders not on the payroll and non-employees must be issued a Form 1099 MISC for the income. 19. If you or the dealership own stocks that have unrealized losses, consider discussing with your tax or investment professional the benefit of selling them by the end of the year. 20. If you make gifts to relatives each year for estate tax purposes, make the payment by the end of the year. 21. Make sure all required personal and corporate income tax deposits for 2004 have been paid. Review your personal income tax withholding to insure adequate amounts are withheld. 22. New for 2004 personal returns, you will be allowed to deduct the greater of sales tax paid during year or state income taxes paid. Under the old law, only income tax was deductible and you would have paid your projected state tax liability before year end in order to benefit from the deduction. However, under the new law, if you made significant purchases that are subject to sales tax, you will want to compare which tax gives you the greatest benefit. 23. If you plan to make any charitable contributions, consider making them in 2004 to receive a current year deduction. Payments by credit card are deductible on the day they are made even if the payment to the credit card company occurs on a later date. The IRS requires written acknowledgment for each contribution in excess of $250. 24. If the dealership has a section 125 plan (cafeteria plan), make sure 2005 election forms are completed by the employees before the first 2005 payroll. Remember, stockholders owning more than 2 percent in "S" corporations (LLCs, etc.) are not eligible to participate. 25. W-2s for "S" Corporation shareholders should include income for health insurance premiums paid by the corporation. This amount is not subject to Federal FICA tax. 26. Maximize your retirement plan contributions. The limit for 2004 is $41,000 to profit sharing plans, net of any regular 401(k) plan contributions. The regular contribution limit for 401(k) plans is $13,000. If you are age 50 or older, there also is a $3,000 "catch up" contribution that can be made to a 401(k) plan, in addition to these limits.

 

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