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Greet year's end with . . . year-end tax planning

November 23, 2010
BY STEPHEN P. BEDELL, CPA CROWE CHIZEK AND CO. LLC

As 2003 comes to a close, now is the time to start preparing for year-end. Here are some areas to consider. Electing LIFO. Consider electing the LIFO method of valuing inventories. During inflationary periods, dealers who elect LIFO realize significant tax savings. Currently on Used-Vehicle LIFO. Consider switching to the Used-Vehicle Alternative LIFO method that has been approved by the IRS. It follows many of the same principles we have applied for years and, better yet, it provides an insurance policy upon an IRS audit. Parts LIFO. The IRS will now accept a dealer's use of replacement cost for parts. They have agreed to accept the industry practice of valuing parts inventory based on replacement cost as stated in a year-end price list. It is important to maintain the year-end price tape for substantiation purposes. LIFO Estimate. If you use the LIFO method of inventory valuation or are considering it for 2003, your 12th month factory statement or any year-end statement must include an estimate of your current year's LIFO adjustment. This requirement is known as LIFO conformity. Used Car Write Downs. If you do not utilize the LIFO method for your used-vehicle inventory, consider making an adjustment to the lower of cost or market before yearend and take an additional tax deduction on your 2003 return. Disposal of Obsolete Parts. Consider disposing obsolete parts. If parts cannot be returned or no credit is available, they should be donated or scrapped. If donated or scrapped, a deduction is available equal to the inventoried cost of the parts. Advertising Costs. If they are included in the price of the vehicle, you may be entitled to take an advanced deduction. (Word of caution - Any changes made in your method of accounting will require Form 3115 to be filed.) Interest Assistance. If you receive floor plan assistance from a manufacturer, you can defer the income by reducing the cost of the vehicles in inventory. Income will be recognized when the vehicles are sold. (Word of caution - Any changes made in your method of accounting will require Form 3115 to be filed.) Unicap (263A). Dealerships meeting specific criteria in the areas of offsite storage, parts wholesale and inventory purchasing may be able to eliminate or greatly reduce the Unicap (263A) reported on their tax return. (Word of caution - Any changes made in your method of accounting will require Form 3115 to be filed.) Uncollectible Receivables. Dealerships should review their receivables prior to year-end and write off those deemed uncollectible. Expensing Assets. There is a Section 179 election that allows taxpayers to expense, rather than depreciate, up to $100,000 of the cost of personal property (new or used) purchased and placed in service during the 2003 tax year. Computer Software. Some off-the-shelf computer software now qualifies as a Section 179 expense, which may allow for the entire cost to be written off in the current year. 30% Bonus Depreciation. Taxpayers are entitled to take an additional first-year depreciation deduction equal to 30 percent of the adjusted basis of qualified property. Qualified property includes newly purchased tangible personal property and leasehold improvements with recovery periods of 20 years or less. (The purchase of used property does not qualify.) 50% Bonus Depreciation. An alternate to the 30 percent depreciation bonus. Taxpayers are entitled to take an additional first-year depreciation deduction equal to 50 percent of the adjusted basis of qualified property acquired subsequent to May 5, 2003. Qualified property includes newly purchased tangible personal property and leasehold improvement s with recovery periods of 20 years or less. (The purchase of used property does not qualify.) Business Automobiles. Need a replacement? Faster write-offs for heavy sports utility vehicles (SUVs). An SUV with a gross (loaded) vehicle weight greater than 6,000 pounds is not subject to the annual depreciation and expensing caps for passenger automobiles. With the increase in Section 179 expense, you may be eligible to write off the entire cost in the current year. Cost Segregation Study. A study should be considered for any buildings and related properties that are constructed or purchased and placed into service in 2003. Coupled with the 30 percent and 50 percent depreciation bonuses, a study can provide a significant deferral of tax dollars through the acceleration of depreciation expense. Building Maintenance. Maintenance to your buildings such as painting, sealing floors and roof repairs should be completed before year-end in order to take the deduction. Meals and Entertainment. While businesses are generally limited to a 50 percent deduction for these types of expenses, the cost of company picnics and the annual office party during the holiday season can be completely written off. Saturday lunches may be 100 percent deductible. Travel Expenses. Since travel is still deductible in full, we recommend maintaining a separate account for travel expenses. Shareholder Related Expenses. Dealerships should pay expenses owed to any shareholder of an S Corporation or to shareholders who own more than 50 percent of a C Corporation before the end of the dealership's tax year in order to deduct the expenses. Shareholder Tax Basis in S Corporation Stock. Basis in S Corporation stock and debt is important because this limits the amount of corporate loss that may be deducted by shareholders. Contributions of capital or loans to the corporation may be necessary in a loss year in order to deduct those losses at the shareholder level. Bonuses. If you anticipate paying bonuses based on yearend results, they must be paid out within 2 1/2 months after year-end in order to take the deduction on your 2003 tax return. Annual Gift Exclusion. The federal tax law allows an individual to give up to $11,000 tax-free each year ($22,000 if gift splitting with a spouse) to as many other individuals (e.g. children, grandchildren or any other person) as the individual chooses in 2003. Unlimited Gift Exclusion. In addition to the annual exclusion, there is an unlimited exclusion for tuition and medical bills if paid directly to a qualified educational organization and/or a provider of health care. Net Operating Losses. Losses that arise in 2003, both corporate and personal, can be carried back five years instead of the standard two years. Acceleration of Income Tax Rate Cuts. Under the new law, the rate reductions scheduled to take effect in 2006 are now effective for 2003 and beyond. The top four tax rates for 2003 are 35 percent, 33 percent, 28 percent, and 25 perc ent. Capital Gains. The maximum capital gain rate decreases 5 percent, from 20 percent to 15 percent. (The maximum rate for lower-income taxpayers is 5 percent.) These new rates are effective for sales and exchanges (and payments received on installment sales) subsequent to May 5, 2003. The lower rates apply only to the sale of assets held for more than one year. Dividends. Qualifying dividends will be taxed at a maximum rate of 15 percent. (Lower-income taxpayers may be subject to a 5 percent rate.) Unlike the new capital gains rate, the effective date is retroactive to Jan. 1, 2003. Before 2003, dividends received by an individual were taxed at ordinary income tax rates, which for some taxpayers were as high at 38.6 percent. Self-Employed Health Insurance. The amount of health insurance premiums paid by a partner or greater than 2 percent S-Corporation shareholder are now 100 percent deductible, up from 70 percent in 2002. Child Tax Credit. For each qualifying child under the age of 17 at the close of the year, the maximum credit claimed is $1,000 per child. (The credit is phased out for upperincome taxpayers.) A $400 increase compared to the prior year. Alternative Minimum Tax (AMT) Relief. The accelerated tax benefits may push more taxpayers into AMT. To help alleviate some of the tax burden, Congress increased the AMT exemptions to $40,250 and $58,000 for single and married filing joint taxpayers, respectively. For more information on tax planning for your dealership, contact Ted Cesarz of Crowe Chizek at 630-574-1627 or at tcesarz@crowechizek.com This article is published with the understanding that the author is not rendering legal, accounting or other professional advice or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.

 

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