Now that 2015 has passed, it’s time refresh your tax filing smarts. As we all know, it’s important to be cautious when filing taxes. Nobody wants to get audited or hit with thousands of dollars in IRS fines.
Here are some automotive tax tips to keep in mind when filing taxes for your dealership this year.
- For every transaction over $10,000 in cash, your business must complete Form 8300. There are some extra rules that apply as well, including:This kind of transaction can count even if it is split between 2 or more transactions.
- Separate transactions that total to $10,000 occurring over a 24 hour period require this form if the transaction is related to a series of others.
Increased Business Expensing due to PATH Act
In December 2015, President Obama signed the PATH Act into law. One of the tax provisions approved was the increased Section 179 expensing that businesses across the board can claim on their taxes. The expense limit was raised to $500,000 (the limit was previously a mere $25,000).
Car dealers can list computers, office furniture and even GPS tracker devices and software as business expenses. For more details about the PATH Act, click here to check out our previous blog.
Dealership Accounting Methods
As you probably know, you must maintain an inventory in order to show your business income when the purchase or sale of a vehicle produces income.
A great thing about accounting for dealerships is that there is dealer discretion when choosing an accounting method. You have to properly stick to one method at a time though, and if you decide to change it, you’ll have to submit an IRS form to change your accounting method.
These are the several accounting methods to choose from when valuating your car inventory.
- 1. Lower of Cost or Market (LCM)
This accounting method is the most commonly used and values vehicles at acquisition cost unless the fair market value of the vehicle drops. In cases where the market value of your used vehicle decreases, you’ll be able to recognize the difference in the initial purchase cost and the current lower market value as a loss during year-end. However, you won’t be able to elect this method of valuation if you haven’t been using it consistently or if you haven’t filed a request for accounting method change. It’s best practice to cherry-pick each vehicle when using LCM, since it’s the most conservative way to evaluate.
In cases where there is no actual market or an inactive market on the vehicle, you’ll have to use the nearest fair market value around the time of your inventory date. If need be, you can also reference a group of purchase transactions made by you or others as the vehicle’s market value.
- 2. First In, First Out (FIFO)
This accounting method assumes that the vehicles you purchased at the beginning are already sold, and those particular vehicles that are still in inventory are matched with the same purchase cost at the end of the year.
- Last In, First Out (LIFO)
LIFO assumes that whatever vehicle you purchased last are removed from the inventory first. Items in your closing inventory are then considered to be acquired in that same tax year. This method is a little more complex since it has two ways of pricing.
1. Dollar-Value Method
Vehicles are grouped into several pools according to the different kinds of vehicles in the inventory.
2. Simplified Dollar Method
Vehicles are grouped according to government price indexes. Then the annual change prices for those vehicles are determined from the price index. Only businesses with under $5 million in gross receipts for the last 3 tax years are eligible to choose this method.
Need an easier way to manage your inventory?
When it comes to tax season, vehicle inventory management is key to accurate tax filing and cutting down on tax confusion. And while you might know that our GoldStar GPS tracking for car dealers helps locate cars and ensure on-time payments, it can also help you easily manage your inventory records.
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