Now is the Time to Conduct Year-End Tax Planning
Is an item on your to-do list “Discuss financial strategies with my CPA for the coming year?” Maybe it should be.
The end of the year is an optimal time to sit down with your CPA, plan moves and discuss ways to trim your 2017 tax bill. Financial strategies you put in place by December 31 can save you big money come April.
Defer income, accelerate expenses
One common year-end strategy is to defer income into the following year and accelerate expenses into the current year. Doing so will delay the payment of some amount of taxes for one year by reducing your taxable income — and that boosts current cash flow. This strategy could be even more beneficial this year if tax legislation is signed into law reducing tax rates for 2018.
Additionally, you might be able to make a deduction for prepaid expenses, if they’re recurring services and will be incurred within the next 12 months. Consult with your CPA about a specific election to expense these recurring costs.
Another avenue: Interest credits and other manufacturer payments can be treated as trade discounts deferred for tax purposes under certain circumstances. Reducing the cost of inventory in this way could significantly lower your dealership’s taxable income in the current year. If you’re not already taking advantage of this benefit, you’ll need to file a change of accounting method.
Look at inventory management
Another way to possibly lower your 2017 taxes is to write down your used vehicle inventory to market value, assuming that this is less than cost value. Use an industry guide such as Kelley Blue Book or NADA guides as the basis for your market value adjustments. You’ll then be able to take a deduction based on the lower resulting inventory value. If you use last-in, first-out (LIFO) inventory accounting for used vehicles, though, you can’t take used vehicle write-downs.
Using LIFO to value used vehicle inventory hasn’t been as beneficial in recent years as it once was, due to low inflation rates. By counting the last vehicles on the lot as the first vehicles sold, LIFO lowers taxable profits on these vehicles. In general, LIFO reduces taxable income by the rate of inflation, so if inflation picks up in the future, LIFO could become more attractive for valuing used inventory.
Meanwhile, if you use LIFO to value new vehicle inventory, lower inventory values could cause LIFO recapture income for 2017. But the change in the inflation index has a greater impact on your LIFO layer than does your inventory value.
Write off uncollectible receivables
It’s not uncommon for dealerships to have uncollected accounts receivable at the end of the year. Review your past-due receivables and decide which ones are uncollectible — then write these off before the end of 2017 as bad debt expenses.
You can still pursue collection next year. If you’re successful, you’ll then need to include the collected revenue in your income for the year in which it’s collected.
Still more ideas
Here are some more year-end tax strategies to consider:
Hire your children to perform work for your dealership. This could reduce your personal taxes, because you can deduct the wages (assuming they’re reasonable) and your children’s tax rate is probably lower than your individual tax rate. But make sure the kids are paid a market rate for their services and actually perform them.
Consider discounting or selling at auction slow-moving used vehicles. If you sell them at a loss before the end of this year, you can deduct this loss on your 2017 tax return.
Reconcile the parts inventory balances on your books with a physical listing of these parts. Then you can write off any discrepancies, along with any obsolete parts that are nonreturnable.
Impact of tax reform?
Keep in mind that the various tax reform proposals being discussed in Washington could affect some of these strategies. Talk to your tax advisor about the current status of tax reform and whether this could affect your plans.
Make tax-deductible retirement plan contributions
One of the most commonly overlooked dealership tax-reduction strategies is making tax-deductible contributions to employees’ retirement plans. Two examples are 401(k) plans and profit-sharing plans.
Your dealership can match contributions employees make to their 401(k) accounts at whatever percentage you desire. In addition, or instead, you can allow employees to share in the dealership’s financial success by making contributions to a profit-sharing plan.
For 2017, you can contribute up to $54,000 or 25% of compensation (whichever is less) to employees’ profit-sharing and 401(k) accounts. This is on a combined basis, but reduced by any contributions the employee makes to the 401(k) other than “catch-up” contributions. The maximum amount of employee 401(k) contributions this year is $18,000, plus an additional $6,000 catch-up contribution if an employee is age 50 or over.
Even better, you have until your 2017 tax-filing deadline — including extensions — to make tax-deductible contributions to employees’ 401(k) or profit-sharing accounts for tax-year 2017, as long as the plan exists on December 31, 2017.