Pub. 3 2014 Issue 2

Fall 2014 25 When opportunity presents itself, will you be ready? WWW.MOSSADAMS.COM/AUTOMOT I VE Accounting, auditing, and consulting services offered through Moss Adams LLP. Strategic advisory and investment banking services offered through Moss Adams Capital LLC. Whether you’re looking to merge, sell your dealership, or acquire one, having the right navigator can make all the difference. We’ve helped thousands of businesses protect value, evaluate strategic alternatives, and prepare for the unexpected. Put our knowledge to work for you. purposes. The dealership doesn’t need to record the gain on sale of the loaner until the used car department actually sells it. To continue to defer the gain, the dealer can use like-kind exchange treatment on the replacement of loaner vehicles. This tax treatment requires the use of a third-party facilitator and fairly complex depreciation accounting, but the benefits can be significant enough to justify it in large loaner programs. Note that the tax treatment is typically different than the treatment required under generally accepted accounting principles (GAAP). C A L I F O R N I A S A L E S A N D U S E T A X TREATMENT For purposes of sales and use tax, California has unique rules related to the purchase, lease, and utilization of loaner vehicles. Depending on the facts and circumstances unique to your situation, the tax may be a direct liability of the dealer, a liability of the customer using the loaner vehicle, or a mix of both. The means of calculating the liability can also vary in practice—so these unique rules should be evaluated in relation to your dealership’s accounting and income tax treatment. While there are several key factors to determine the correct California sales and use tax treatment. Dealers need to be cautious in reviewing and retaining evidence and documentation related to: • The purpose and nature of your loaner vehicle acquisitions • Why a loaner vehicle is being provided to the customer Without an accurate analysis of the relevant facts as they pertain to applicable California laws, it’s not uncommon for dealers to overpay sales and use tax—or to pay taxes that may not be their liability at all. For these dealers, the savings opportunities vary depending on how long units remain in the loaner fleet, relative costs, and loaner usage. With that said, refund remedies are available in California for this above-the-line cost. Many such remedies are provided by business consultants on a contingent fee basis. While not unusual, these remedies can become problematic depending on the consultant and the relative aggressiveness of the refund sought. Aggressive projects may result in higher refunds, but they may cause other problems, for example, by triggering a California sales and use tax audit. CONCLUS ION In summary, because loaner vehicles are often a smaller cost relative to a dealer’s inventory, they can be relegated to an afterthought—inviting accounting and tax oversights. Depending on the nature and size of your loaner vehicle fleet, the amount could be immaterial or could be significant, both as an above-the-line expense under GAAP and from a California sales and use tax perspective. Correcting these oversights could save you money—and it could also allow you to take advantage of tax timing differences for federal and state income tax purposes. Scott Swearingen, CPA, Partner, Moss Adams LLP, has been in public accounting since 1994. He is involved in all phases of dealership accounting, financial statement reporting, and operations, including the related internal controls. ((949) 221-4025) or scott.swearingen@mossadams.com Sid Tobiason, CPA, Partner Moss Adams LLP, has practiced accounting since 1978. He advises clients on federal income tax, estate tax, entity structure, the purchase and sale of businesses, ownership transition, and succession planning. (858) 627-1448 or sid.tobiason@mossadams.com Alex Tran, CPA, Manager, Moss Adams LLP, provides state and local tax services to a variety of clients across the firm. (858) 627-1452 or alex.tran@mossadams.com