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NADA advocacy leads to significant UNICAP tax ruling

December 10, 2010
Dramatic IRS turnaround a 'huge victory' for dealers

By Ray Scarpelli Sr., Metro Chicago NADA Director

McLEAN, Va. - Advocacy by the NADA has led to a significant UNICAP tax ruling, resolving several contentious and potentially very costly income tax issues that have arisen over the past five years. The IRS ruling simplifies uniform capitalization methods of accounting, and the dramatic turnaround by the IRS is a huge victory for dealers.
   
The new accounting methods, outlined in IRS Revenue Procedure 2010-44, generally authorize car and truck dealers to treat their main sales facility as a "retail" facility and therefore permit them to forego having to capitalize (instead of expense) certain costs associated with their inventories.
   
"Effectively, activities that occur at the dealer's main sales facility where they conduct on-site retail sales will be considered retail in nature," says Paul Metrey, NADA chief regulatory counsel (Financial Services, Privacy, and Tax). "Because of these new "safe harbors," dealers who change to the new methods will not have to capitalize handling and storage costs related to those activities."
   
Forrest McConnell, chairman of the NADA's Regulatory Affairs committee, called the revenue procedure a "dramatic change" in the way the IRS had applied the UNICAP rules to franchised dealers in recent years, when many audited dealers saw the IRS propose a significant and unexpected increase to their taxable income.
   
"Because of the availability of these new accounting methods, dealers no longer will be exposed to burdensome income tax requirements that have arisen during IRS audits of dealerships over the past five years," McConnell said. "The NADA's extraordinary engagement on this issue benefits all franchised car and truck dealers by making it easier - and potentially much less costly - to comply."
   
NADA advocacy on behalf of dealers started in early 2006, when IRS auditors began to take the position that dealers were undercapitalizing their inventory costs, despite the fact that numerous dealers had received prior IRS approval of their inventory accounting methods. In September 2007, the IRS issued a technical advice memorandum to a franchised dealer that supported many of the new positions being taken by IRS auditors. Two years later, the IRS issued a field directive that "encouraged" dealers to change their UNICAP accounting methods to conform to the TAM by Dec. 31, 2010.
   
During this time, the NADA engaged the IRS and Treasury on a number of fronts. This included sending a Dec. 1, 2009, letter to senior Treasury and IRS officials that criticized the 2009 field directive and requested a meeting to explore a less burdensome and simpler UNICAP approach for franchised dealers. The NADA request prompted three meetings with the IRS and Treasury between May and July 2010 in which a NADA-assembled group of dealers, accountants, and attorneys advanced the need for safe harbor accounting methods for dealers.
   
This effort ultimately led to the IRS's creation of the safe harbor accounting methods in Revenue Procedure 2010-44.
   
Metrey urges dealers to consult their tax professionals concerning the new revenue procedure. Furthermore, NADA has posted a helpful set of frequently asked questions about the new UNICAP "safe harbor" methods at www.nada.org/regulations. 
   
Strong Used Market Boosts November Sales
   
A strong market for used cars and trucks boosted sales for a number of large dealer groups in November, according to data compiled by NADA Guide Book.
   
Data suggest consumers are gravitating toward more affordable used vehicles when replacing their worn out cars and trucks, and the tight supply of late-model used models is keeping prices high.
   
"This has also stimulated more interest from dealerships in retailing older, high-mileage vehicles that previously would have been sent to auctions," said Jonathan Banks, executive auto analyst for NADA Guide Book.
   
However, Banks predicts the heightened prices dealers are fetching for used vehicles may eventually push many consumers to consider buying new. And with production of many new models ramping up, manufacturers may be tempted to introduce incentives.
   
Still, several indicators in October pointed to a healthy auto industry going into 2011. New-car sales in October rose to an annualized rate of 12.2 million units, helped by a 16 percent increase in retail sales year-over-year. National unemployment remains a concern, Banks said, but that could change as the economy improves over the coming months.
   
"Manufacturers are posting strong profits and starting to commit to investments that will bring back jobs and diversify vehicle offerings," Banks says. "Moreover, we're seeing manufacturers embrace flexible production schedules to ensure that production stays in line with demand."
   
Since 1933, the NADA Guide Book has been the leading provider of market-reflective vehicle valuation products, services and information.
 

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