Pub. 3 2014 Issue 2

24 San Diego Dealer Service Loaner Vehicles: Profit Contributor or Profit Drain? By Scott Swearingen, CPA, Partner, Sid Tobiason, CPA, Partner, and Alex Tran, CPA, Manager, Moss Adams LLP HIDDEN COSTS We’ve all rented cars while on business or vacation and wondered how they could be in such bad shape given their lowmileage. Generally dealership loaner vehicles aren’t quite as abused, but they do take more wear than customer-owned or demo units—meaning you should review your dealership’s depreciation methods regularly. While the treatment of loaner vehicles on dealership statements may vary, dealers typically use one of four methods for depreciation. Most often it’s the depreciation method specified by the manufacturer—usually a fixedmonthly percentage of the vehicle cost. Others use the straight-line method, typically over five years, or their income tax method. Others take the monthly deduction they feel is appropriate or that reflects previous experience. Many of these methods don’t mirror or keep up with the true depreci- ated value of loaner fleets. When loaners are converted to used vehicles, there’s either a significant catch-up adjustment (typically downward) to actual cash value (ACV), which is recorded to the profit and loss statement (P&L)—or the used vehicle department absorbs the loss. For larger fleets, the amounts can be significant, and either way the dealership suffers. Your goal should be tominimize the ACV adjustment upon transfer and accurately capture the true cost of the loaner in the P&L during its loaner life by taking a more realistic monthly depreciation amount. Historical adjustments are a great place to start: If you’re typically taking ACV hits, your depreciation is likely insufficient; if your ACVs end up higher than the carrying amounts, your methods are too aggressive. FEDERAL INCOME TAX DEPREC I AT ION Asmentioned above, there are a number of ways dealerships depreciate loaner fleets. But none of these methods establish the tax treatment of loaner vehicles. Federal tax law has special rules for depreciation of vehicles, often referred to as the luxury auto depreciation rules. These rules apply to vehicles purchased by businesses to use for their own transportation needs, and they generally severely limit the tax deduction that can be taken on vehicles. Loaner vehicles, however, normally don’t fall under the luxury auto depreciation rules. Instead, loaner vehicles can generally be depreciated over three years using acceleratedmethods—and they qualify for Section 179 depreciation. Still, this beneficial income tax treatment isn’t without limits: There still are some tax hurdles your dealership will need to address. Loaner programs must be part of a dealership’s economic business activity. This allows the loaner business to be grouped with the operating business. The resulting combination of accelerated depreciationmethods and a short depreciation life can yield significant tax deductions. When a dealership replaces a loaner vehicle, it usually transfers it to used inventory. This should be done without a markup for federal tax C ustomers love the convenience of loaner vehicles when they bring their cars in for service. However, in a world where we’re constantly measuring the pros and cons, is such a fleet profitable for a dealership, even with a manufacturer subsidy? Consider these accounting and tax issues—which can be measured—when weighing the benefits of maintaining such a fleet.