An employer can deduct the cost of furnishing meals to employees if the expense is considered ordinary and necessary. In general, the deduction for meals is limited to 50%; however, there are circumstances that allow the full amount to be deducted as a de minimis fringe benefit.

To qualify for this treatment, these certain conditions must be met:

• Provided on the employer’s premises
• Provided for the employer’s convenience

The first condition is fairly cut and dry. However the second condition lends itself to more interpretation and your CPA should be consulted if you need any guidance. Dealerships that provide lunches to employees on Saturdays should be able to meet both of these conditions and deduct the full amount.

Because there is a distinction in the treatment of the different types of meals, it is important that they are accounted for in separate and identifiable trial balance accounts so the appropriate tax applications may be applied. 

Edward Hooper, CPA

Members of an effective team possess the right competencies and work together interdependently to achieve both individual and team goals. Keep in mind though that you can have a team full of talented people that just simply do not work well together, which is probably affecting their performance in some way. That’s why it’s important to not only look to hire people with talent, but to also consider other characteristics. Ultimately, you want team players who understand how important the team concept is to the overall success of your dealership, so it might be a good idea to incorporate certain types of questions in your interviewing process. Questions such as,

• Do you feel diversity is a good thing?

• What type of role do you see yourself playing at our dealership?

• How do you feel about the team concept?

Diversity among team members can be a strength, as opposed to a barrier to team chemistry. If team members embrace the different viewpoints and bases of knowledge, it will foster growth. Also, teams with members who tend to participate in both role-making and role-taking are effective because members are willing to take initiative and to accept their roles on the team. Role-making occurs when a team member impulsively takes responsibility for tasks, while role-taking occurs when members accept responsibility for tasks that others want them to perform. Essentially, this behavior implies acceptance of the team concept.

These are some things to consider when hiring employees. It’s also a good idea to look for these characteristics during standard probationary periods. 

Joe Goodmiller

This session focused on failed internal controls within dealerships. Those dealers that do not have good internal controls can be open to fraud. Some of the high risk areas where fraud can occur include cash, parts, and payroll. Fraud related to cash disbursements can consist of fictitious vendors that are setup with an employee’s address, personal credit card payments, mortgage payments coming out of lien payoff accounts, and personal expenses being treated as business expenses. Cash receipts fraud can include skimming of cash or Paypal accounts setup to sell parts that are not controlled by the accounting department. Parts fraud can consist of employees stealing parts, vendor kickbacks, cost adjustments, open parts tickets where dates have easily been changed to prevent aging of the ticket, and selling dirty cores for cash or scrap metal from the body shop for cash. Payroll fraud can consist of pay plan manipulation, hourly rate discrepancies, ghost employees, flag hour adjustments, expense reimbursements, or withholdings not being transmitted.

The opportunities to commit these types of fraud can obviously be reduced with an increased focus on internal controls. The tone at the top is important and a zero tolerance policy by upper management will be reflected in employee’s activities and attitudes. Good hiring practices should be followed to ensure competent employees are hired. Management can also consider a whistleblower hotline. Forty percent of fraud is caught with a whistleblower hotline (hotlines may be less than $1,000 a year to implement and sustain). Finally, effective internal controls consist of formal processes and a segregation of duties for approvals, authorization and verifications of transactions, along with mandatory monthly general ledger reconciliations and physical security of assets. 

If you are interested in additional details on controls that should be established within your dealership and/or a CPA Tune-up that one of our dealership professionals can perform on your dealership, please do not hesitate to reach out to us and we would be more than happy to help!

Brian Campbell, CPA

In my 25 years of experience, I have found that most dealerships overlook their fixed asset inventory.  This inventory is usually kept by the dealership’s accountant and additions and deletions are made on an annual basis. I have some clients who keep their own schedule in an excel version and those who actually schedule the accounts in their Reynolds and Reynolds or ADP computer systems.

The most important aspect of maintaining and updating the fixed asset schedule is to have proper descriptions and locations of the individual assets. If the descriptions are not accurate, the physical inventory becomes very difficult when deciding whether the asset is still present and active.

Fixed assets should be removed from the schedule when they are fully depreciated and no longer in use.  If they are sold or abandoned before they are fully depreciated, they should also be removed and a resulting gain or loss should be recorded on the books.

I suggest starting with the fixed asset listing and comparing it to the fixed assets in the various departments. You will find some assets that are not listed, which means they were most likely expensed when they were purchased. I recommend doing this inventory every three years at a minimum and, remember; the more detailed the descriptions of the assets, the easier it will be to perform the asset inventory.

Kane Lavin, CPA

Repairs will either fall under the category of items that are immediately expensed or ones that need to be capitalized.  Depending on the cost of the repair, the difference between them could have a big impact on your bottom line and tax liability. On one hand, a repair that is expensed will impact the current year.  On the other hand, a repair that is capitalized will need to be recovered over the life of the asset through depreciation, which could be as long as 39 years!

How do you know how to treat the repair?  There is guidance from IRS Regulation Section 1.162-4 that states:  “The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinary efficient operating condition, may be deducted as an expense… Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, shall be capitalized and depreciated…”  There are also several tax court cases that address the issue since interpreting the regulations can fall into a large gray area. 

Because facts and circumstances will determine whether a repair must be capitalized, it is very important to discuss these types of issues with a CPA.  Often, there is a very fine line.

Edward Hooper, CPA

“The Nuts and Bolts of Fixed Operations” was a breakout session that focused on understanding the proper operation of fixed operations departments, communicating more effectively with fixed operations managers, exposing the thought process and motivation of fixed department managers, and how to improve profitability in fixed operations departments.

To start out, we discussed that if our parts, service, or collision centers are a mess, then we are losing money on lost warranty parts, producing sloppy paperwork, and possibly incurring increased workers compensation costs.  In other words, it pays to have a clean and organized facility.  If you are a CFO or controller at a dealership, get out from behind your desk and go explore your facility and talk with employees in other departments. We need to be involved in all areas of our dealership. Sitting behind your desk all day crunching numbers will not help you uncover problems in other parts of the dealership.  A clean and organized parts, service, or collision center will lead to better controls in that department, a lower amount of obsolete/slow moving items, special orders parts will be kept to a minimum, local “emergency” purchases will be kept to a minimum, and, best of all, we will have a profitable department.

We also discussed performing physical inventory counts on our parts departments.  We should be performing cycle counts on a daily, weekly and monthly basis. This will help ensure inventory stays accurate, will speed up annual or semi-annual counts of all inventory items, and will help locate misplaced parts.  If our parts manager is negative towards performing cycle inventory counts, this could be an indication of a potential problem.

Finally, we moved into discussing the service department and the fact that it is the most valuable department to the complete dealership.  It influences repeat customers, helps our dealerships reputation. The profit potential is substantial in your service department and can have the greatest gross profit with the least amount of expense.  The gross profit on labor in our service department should be 70+%.  If we are not achieving a 70% gross profit, then the service manager’s staff is not upselling enough repair work or the cost of sales on labor is not correct.  Maintenance work is considered “c” grade low skill work and should have a fixed cost of labor.  Routine maintenance work should lead to upsells of repair work with higher effective labor rates.

As you can see, we should be devoting as much attention to our fixed operations departments as we should our new and used sales departments. By being involved with these departments and being proactive in improving controls and processes within these departments, we can increase overall profitability of our dealerships.

Brian Campbell, CPA

What are the practical consequences of the IRS determining an activity to be a hobby rather than a for-profit business venture? Under the so-called hobby loss rules, you’re able to claim those deductions that are available whether or not the enterprise is engaged in for profit (i.e. real estate taxes). However, your deductions for business-type expenses (i.e. rent, insurance, advertising, etc.) are limited to the excess of your gross income from the hobby over those expenses that are deductible whether or not the enterprise is engaged in for profit. Deductible hobby expenses are claimed on Schedule A of Form 1040 as miscellaneous itemized deductions subject to a 2%-of-AGI “floor.” By contrast, a for-profit business enterprise is allowed to deduct all ordinary and necessary expenses on Schedule C, even if they exceed income from the enterprise.

There are two ways to avoid the hobby loss rules. The first way is to show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing, or racing horses). The second way is to run the venture in such a way as to show that you intend to make a profit rather than operate it as a mere hobby. The IRS regulations say that the hobby loss rules won’t apply if the facts and circumstances show that you have a profit-making objective in mind.

How can you prove that you have a profit-making objective? In general, you can do so by running the new venture in a businesslike manner. More specifically, the IRS and the courts will look to the following factors: how you run the activity (do you have a separate business checking account and maintain a set of financial statements, etc.); your expertise in the area (and your advisers’ expertise); the time and effort you expend in the enterprise; whether there’s an expectation that the assets used in the activity will increase in value; your success in carrying on other similar or dissimilar activities; your history of income or loss in the activity; the amount of occasional profits (if any) that are earned; your financial status (do you have other significant sources of income); and whether the activity involves elements of personal pleasure or recreation. 

The classic “hobby loss” situation involves a successful businessperson (i.e. auto dealer) or professional (doctor, attorney, etc.) who is involved in a sideline horse-breeding business or farm. By characterizing what would normally be considered a hobby activity as a for-profit business venture, these individuals attempt to lower their income tax liability by deducting the hobby expenses against other ordinary income.  As a result, the IRS has stepped up the audits of Schedule C and F filers looking for these kinds of misreporting.   

If you are involved in an activity such as this or are contemplating starting one, you would be well advised to consult with your tax professional to make sure you have a clear understanding of the hobby loss rules and what steps you can take to avoid them.

Wendell Peters, CPA

This list can seem overwhelming because of all the other things you have to do at year-end, such as quarterly payroll reports, year-end payroll reports, W-2s, and dealing with closing out your computer system for the year.

In order to make this go a little easier each year, here are a few tips to be better prepared.

• Update the twelve month income and expense items on a monthly basis so you only have one month to do at year-end.
• Create a folder for the accountants and add items to it as you come across them each month during the year; items such as new lease agreements, copies of invoices of large fixed asset purchases, and any new debt agreements.
• Make sure the items requested by your accountant are ready upon their arrival to do the field work, as this can slow up the process and cost you money in the long run.
• Whenever possible, have the requested documents in electronic form available for your accountant, as this is usually their preference.

These tips should make year-end go a littler smoother and allow you to get ready in a more efficient manner.

Kane Lavin, CPA

The keynote speakers were Erich Merkle, Auto Industry Analyst for Ford Motor Company, Tom Gilman, President & CEO for TD Auto Finance, and Bob Carter, Group Vice President & General Manager for Toyota Motor Sales, USA, Inc.  All three of these speakers seemed to have the same general message, the future in the auto dealership industry was bright and that industry sales will continue to improve.  Total US auto sales for 2011 are projected to come in over 12 million units sold which is up from 10.4 million in 2009 and 11.6 million in 2010, and the projection is for this to continue to increase into 2012.  With credit availability improving, exciting new cars being manufactured by both US and foreign auto makers, and the affordability of new cars, it seems everyone agrees that the auto industry will continue in a positive direction.

A few of the breakout sessions that I attended included The Nuts and Bolts of Fixed Operations, Internal Controls: Preventing and Detecting the Dreaded “F” Word (that “F” word would be failure for those wondering), Lean Selling and Automotive Benchmarking with a Simple Approach for Auditor, Accountant and Management.

In my subsequent blogs over the next few weeks and months, I will go into more detail on what was discussed in the breakout sessions and how we can apply some of the things learned to our dealerships to help improve operations or to monitor current operations to determine if there are any areas that might need additional focus.

Brian Campbell, CPA

I have a few clients that use an outside service to analyze their rebates on an annual basis.
The company reviews the rebate programs, looks at rejected claims and helps the Dealership apply for rebates and incentives that were missed.  In almost all cases the use of this type of outside service has paid for itself in the amount of rebates and incentives recovered from the analysis.

This type of self-audit can also catch people who are purposely applying for rebates they are not entitled to and are only trying to increase gross in order to increase their commissions.  The manufacturers are not consistent when they do their rebate audits, therefore it can be a long time between audits.  The use of an outside service to monitor this area of the Dealership is a useful tool to keep employees working in the right direction.

Kane Lavin, CPA