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DealerDetailsO’Connor & Drew, P.C.

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In This IssueF & I Compliance:

Crossing Your T’s and Dotting Your I’s

Going, Going, Gone...

Should We Focus on the Future Today?

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Should We Focus on the Future Today?Many dealership owners struggle with focusing on the future as they can get caught up in the daily operations of the automobile dealership. Dealership owners need to be sure they are continuously considering the overall plan and future of the dealership as a whole. Some of the questions that dealership owners need to objectively ask themselves are as follows:

• Whatarethefutureplansfortheautomobiledealership?

• AmIlookingtosellthebusinessorpassthisbusinessdownto futuregenerations?

• Iftheplanisforthebusinesstopassdownthroughgenerations, thenisthereasuccessionplaninplace?

• IftheplanistosellthebusinessandIreceivedanoffertoday, wouldItakeit?

• Whatisthevalueofmydealership?

• Whatistheminimumsellingpriceinorderformetoselltoday?

• WouldIonlysellthefranchiseorwouldIselltherealestatealso?

• IfIweretosellorgiftpartofthebusiness,whatwouldthetax implicationsbe?

• Ifsomethingweretohappentome,whatwouldhappentothe business?

• Isthereaformal,writtenbuy/sellagreementamongstthe shareholders?

• Arelifeinsurancepoliciescurrent?

Succession planning is a popular topic for owners, lately, as automobile dealerships continue to progress. These long-term considerations need to be managed and dealt with appropriately in order to ensure long-term growth for the whole company.

If you have any questions, please contact me directly at 617-471-1120 x 278 or mcosgrove@ocd.com Michael Cosgrove, CPA

Winter 2014 – Volume 18

DealerDetails DealerDetails

As we head into 2014, the automotive industry is facing more challenges than ever. As per unit gross profits continue to diminish on the front end of vehicle sales, the income produced by the finance department has become increasingly important. Many of our dealers’ finance managers generate over $1,000 per unit on the back end of the deal, with some approaching $1,500. In fact, a strong finance department can be the difference between a profitable and a non-profitable store. However, the challenge to maintain such numbers may become more difficult as the Consumer Financial Protection Board (“CFPB”) has intensified its attacks on dealer participation (i.e. the mark up on the interest rate the dealer obtains from the bank for finance customers). If the CFRB succeeds in this endeavor, the banks will be required to pay flat fees, and finance reserve will essentially become extinct. As a result, industry experts recommend that finance income be comprised of 80% product to 20% reserve.

The CFRB has made assertions that there may be ‘disparate impact’ in indirect automotive lending. ‘Disparate Impact’ is a term used to describe discriminatory practices that negatively impact a specific group of buyers based on race, nationality, religion, gender, age, etc. Specifically, it is the claim that dealers charge a different rate to a certain controlled group. In order to combat this type of claim, industry experts recommend that dealers implement the following processes:

•EstablishandDocumentaStandardMarkUpRateor Rate Matrix

• ImplementanElectronicFinanceMenu

•DocumentExceptions

• ImplementaRateModificationForm

Additionally, compliance in the finance department has become increasingly complex. The number of documents required in a deal jacket is voluminous. As a result, there are many issues that potentially could expose the dealer to potential fines and/or lawsuits. Dealers should periodically audit deal jackets, either internally or through an outside vendor, to ensure compliance with the following:

•Allrequiredpaperworkinthedealjacketispresent and agrees to the contract terms.

•Dealjacketchecklistsarecompletedandsigned.

•Thedatelistedonfinanceandleasecontractsmust be the date that the customer signs the paperwork. This can become an issue when customers are required to re-sign the contract after date of delivery due to paperwork errors. The automotive DMS systems typically default to the original contract date. However, back dated contracts are a violation of the Federal Trade Commission’s (FTC) Truth in Lending Act.

• ItisalsoaviolationoftheFTC’sTruthinLendingAct when the numeric values of the terms of the contract do not line up properly on the appropriate lines.

•DealershipsshouldutilizeanelectronicF&Imenu that pre-prints the pricing for the available aftermarket products. It should be time/date stamped and signed by both the finance manager and the customer.

•AsrequiredbytheFTC,signedprivacynotices should be obtained for all finance and lease customers.

•Dealershipsshouldalsodocumentanyevidenceof compliance with the Red Flags Rule in the deal jackets. Dealers should implement a Red Flags checklist, if not done so already. A copy of this checklist should be included in the deal jacket of all finance and lease customers.

Automobile dealerships are also required to prepare written documents related to their policies and procedures for the Safeguards Rule and the Red Flags Rule. Additionally, the Safeguard Rule policy has to be tested periodically and updated accordingly. Many dealerships have not updated their Safeguards Rule Program since it was first written despite changes to policies and procedures and key personnel. The Red Flags Rule requires the compliance officer to report annually the results of its compliance efforts. The dealer principal must sign off on this report.

Frank O’Brien Principal, Automobile Dealership Practice

F & I Compliance: Crossing Your T’s and Dotting Your I’s Going, Going, Gone...

Although at the beginning of the 2013 year Congress permanently extended many expiring tax provisions, several of these tax provisions were only extended temporarily and expired at the end of 2013. While it is possible that some of these provisions will be retroactively extended in 2014, there is less of a sense of urgency this year, as opposed to last year, and some of these expiring provisions, if extended at all, may have to wait as Congress tackles wholesale tax reform.

Included amongst the expiring tax provisions that may affect you and your dealership are:

•10%nonbusinessenergycreditsforqualified improvements and expenditures (lifetime limit was applicable) no longer available

•Abilitytodistributeupto$100,000tax-freefromanIRA ifcontributeddirectlytoqualifiedcharity(althoughnon- taxable, it counted towards required minimum distribution)

•Abilitytodeductstateandlocalsalestaxesinlieuof state income taxes (impacts “snowbirds” that spend more than 6 months in Florida and have established Florida residency)

•Abilitytoexcludefromincomedebtforgivenessincome related to principal residence

•Abilitytoclaim50%bonusdepreciation

•Abilitytoexpenseupto$500,000onpurchaseof Section 179 property (expensing limit in 2014 drops to $25,000)

•Abilitytodepreciatequalifiedleaseholdimprovements, qualifiedrestaurantimprovementsandqualifiedretail improvements using 15 year straight-line depreciation

•RecognitionperiodforSCorporationbuilt-ingainstax reverts back to 10 years from 5 years

•30%creditforcostofanyalternativefuelvehicle refueling property

•40%workopportunitycreditforhiringemployeesare that are members of a targeted group

Some key numbers to keep in mind for 2014 planning...

While the above list sets forth several expiring tax provisions, there are some numbers you should keep in mind for 2014 tax planning including:

•TopFederalincometaxrateremainsat39.6%

•Personalexemptionamount(subjecttophase-out) increases from $3,900 to $3,950

•Taxablewagebaseforsocialsecurityincreasesfrom $113,700 to $117,000

•MedicarePartBmonthlypremiumsremainthesamein 2014 as 2013

•Maximumelectivedeferralfor401(k)plansremainsat $17,500

•MaximumtraditionalandRothIRAcontributionremains at $5,500

•Businessmileageratedropsfrom56.5centspermile to 56 cents per mile

•“Nannytax”thresholdincreasesfrom$1,800of compensation to $1,900

•Annualgifttaxexclusionremainsat$14,000perdonee

•Lifetimeestateandgifttaxexclusionincreasesfrom $5,250,00 to $5,340,000

•Massachusettsincometaxratedropsfrom5.25% to 5.2%

If you have any questions or would like to discuss your compliance issues, feel free to contact Frank O’Brien at fobrien@ocd.com.