Over the years the Internal Revenue Service has issued regulations and notices which deal with W-2 reporting for owners of businesses.  These notices simply reinforce advice that we have given our clients in the past and it is clear that you will need to take steps to comply with this guidance.  Additionally, we want to remind you of the reporting requirements concerning company-provided fringe benefits and personal use of company-provided vehicles. Special rules apply to qualified demonstrator usage; accordingly, we have provided a separate memo relating to these rules.  To this end, we are providing the following general information.  Should you, your office manager or your payroll clerk have any questions, please give us a call.

Taxable fringe benefits are reported on the employee’s Form W-2 and are generally subject to both federal income tax and FICA withholding requirements.  You may also identify the total value of the fringe benefits in Box 12 or Box 14, depending on the type of benefit.  Following is a list of some common fringe benefits that should be included in employee’s Form W-2.  Obviously, not every item will apply to you.

All Employees

1. Employer-provided parking in excess of $255 per month.
2. Employer-provided transportation (i.e., transit passes) in excess of $255 per month.
3. Cost of providing group-term life insurance coverage in excess of $50,000 (nondiscriminatory plans only).
4. Cash payments under a Cafeteria Plan.
5. Personal use of company-provided vehicles (see attached methods for valuing this benefit).
6. Employer-provided Child or Dependent Care Services in excess of $5,000 or the employee’s earned income.
7. Expense reimbursements and advances if the employee is not required to provide substantiation and/or return any excess advance.
8. Payments for health, disability, life or accident if not paid in connection with an employee benefit plan or paid under a discriminatory plan.
9. Education expenses paid for courses that are not required for the employee to perform his job duties.
10. Payments under an Education Assistance Program that exceed $5,250.
11. Nonqualified moving expense reimbursements (reimbursements for expenses other than cost of moving household goods and travel expenses, excluding meals, from old residence to new).  Qualified moving expenses are reported on the W-2 as nontaxable benefits.
12. Any employer-provided benefit that is both business and personal to the extent of the personal portion.  Expenses considered personal in nature includes, but are not limited to, payment of the employee’s share of FICA tax, club membership dues, travel expenses for employee’s spouse, etc.
13. Premiums paid on group permanent life insurance.
14. Awards and prizes (non-cash), i.e., employee achievement awards, unless they pertain to length of service and safety and do not exceed specified limits (generally $400).
15. Employee Contributions to Archer Medical Savings Accounts or HSA’s.

More than 2 Percent Shareholder – Employees of S Corporations

In addition to the taxable fringe benefits listed above, more than two percent shareholder – employees must also include the following benefits in income.

1. Premiums paid to an accident and health plan for the employee, spouse and dependents.
2. Premiums paid for any amount of group-term life insurance coverage.
3. Cost of meals and lodging furnished for the convenience of the employer on the employer’s premises.
4. Cost of employer-provided group legal, dependent care and educational assistance programs.
5. Cost of benefits provided under a Cafeteria Plan.
6. Disability insurance premiums if paid under a benefit plan provided to employees.

The company is entitled to deduct these expenses in determining its taxable income.  Any of the above expenses, with the exception of items B and C, includable in the shareholder-employee’s W-2 are not wages subject to FICA and FUTA tax if they are paid under an employee benefit plan established for the company’s employees.

In determining whether a shareholder owns more than a 2 percent interest, stock owned by any lineal descendent (i.e., children, parents, spouse, etc.) is considered owned by the shareholder – employee.

The above list of taxable fringe benefits is not meant to be all-inclusive.  There may be other benefits not listed and specific to your company that should be included in the employees’ W-2.  There may also be exceptions available that could result in some of the above benefits not being taxable to employees.  If you need further clarification or additional information on any of these fringe benefits, please do not hesitate to call me.

Enclosures
Autodealerships_enclosure

Recently, a case being finalized to settle a dispute for an undisclosed amount is prompting a call for change.

The case centers around a case in which two individual tire blowout situations on a single car that had been maintained by the selling dealership spurred controversy. Though the car dealership was legally liable for the failed tires, it was not technically responsible for the unfortunate circumstances. Currently in most states, the Department of Transportation (DOT) does not review issue dates on tires. This was a major point of consideration in the case of the blown out tires, since the tires in question were actually several years older than the recommended acceptable selling date.

Bottom line for dealers: until the DOT implements more stringent used car inspections as they related to tire issue dates, dealers will continue to be liable for a process over which they have little or no control.

Not only is this a safety issue for consumers but it is a risk management and liability issue for used car dealers.

HBK CPAs & Consultants’ Dealership Industry Group is leading a charge to sanction a mandatory 29-point inspection caveat to each tire sale transaction for car dealerships.

Call HBK today at 317-886-1624 or contact team leader Rex Collins at rcollins@hbkcpa.com directly to learn more about how this matter could impact your dealership.

States continue to struggle to pay for their institutions and programs. They are looking for ways to generate more revenue. And they are getting increasingly aggressive in their efforts.

Recently Ohio decided that a business didn’t have to have an in-state location to owe a “commercial activity tax” if it sold its products to customers in the Buckeye State. Now Colorado wants to collect sales tax on purchases its citizens make from out-of-state businesses. The Centennial State has passed and enacted a law that requires all companies making sales to consumers and businesses in Colorado to report the sales and related taxes to both the customers and Colorado. Amazon and other online retailers challenged the law, but on Monday December 12, 2016 the U.S. Supreme Court declined to hear the case, in effect, allowing the statute to stand.

That customers buying goods from businesses in other states owe sales taxes to those states is not new. But most customers making purchases online ignore the rule. Colorado’s statute is indicative of how states are now expending significant effort to collect these taxes. At least three other states – Louisiana, Oklahoma and Vermont – have passed similar laws that could take effect in the wake of Colorado’s action.

A 1992 Supreme Court decision states that a business must have a physical presence – the term is broadly defined – in a state to be required to collect and remit sales taxes. Colorado’s law does not contradict the Court; it doesn’t require the business to collect the tax, only to report the sale and related tax.

Most retailers are aware that customers buying goods from out of state owe sales taxes on those purchases to those states. Many retailers have received surprise audits from other states, some resulting in six-figure sales tax assessments on cross-border transactions. In requiring retailers to notify customers to pay sales tax and to report purchases to the state, Colorado might have found an easier way to track and eventually collect those taxes.

The Supreme Court’s refusal to hear Amazon’s challenge could have far-reaching implications for retailers serving out-of-state customers. Other states are certain to follow, interpreting the Court’s decision as an endorsement of the law and enacting similar statutes in effort to collect additional tax revenue. While it is likely that other challenges to such statutes will be launched on the basis that compliance by out-of-state retailers is an excessive burden to their businesses, retailers must comply with Colorado’s statute.

Further, retailers need to be prepared for what could be an onslaught of such state statutes. We advise dealers to put in place a system to (1) track purchases from out-of-state customers, (2) notify these customers of the sales tax amounts and their obligation to remit the taxes to their home states, and (3) report out-of-state sales to the designated state tax agencies.

With the enactment of the Patient Protection and Affordable Care Act of 2010 (PPACA), also known as ObamaCare or the Affordable Care Act, many dealers may have been erroneously snared by a new tax.

This new tax, the Net Investment Income Tax, imposes a flat 3.8% tax on net investment income (NII) and was intended to impact higher income individuals as well as certain trusts and estates with income from passive investments (e.g., interest, dividends, capital gains, etc.). For more information, click the appropriate link below:

Automobile Dealerships

Equipment Dealerships

The nation’s dealerships have been besieged with employment discrimination lawsuits. At the heart of most is the lack of properly developed employee policies. Yet some attorneys have told their dealership clients not to have written policies, that they can be used against a dealer in a lawsuit.

Written policies, like other documents, can be used against a dealership if it doesn’t follow its policy. A poorly drafted policy can become primary evidence in a discrimination case. But carefully written policies protect against such claims. Today’s litigious environment has proven the value of a properly written policy, generally in the form of an employee handbook, and illustrated the risks to the dealership without one.

Generally a written policy is not a legal requirement, though some policy documents are mandatory or at least an important component in complying with certain state and federal labor statutes. For example, the Supreme Court has ruled that employers can protect themselves from sexual harassment claims with clearly communicated policies against harassment. And employers must provide written documentation to employees on their rights and employers’ obligations relative the Family Medical Leave Act.

Properly developed policy
A formal handbook that contains well thought-out and developed sensible policies and procedures provides a framework for how your company and employees are to act. A properly crafted employee handbook gives both managers and employees a guide to what’s expected of them and can prevent misunderstandings about those expectations. They also illustrate management’s commitment to a positive atmosphere in the workplace and its effort to avoid discriminatory practices. And managers are more likely to apply company policies consistently when they are properly recorded.

A properly drafted policy also takes care to avoid creating a binding contract. A dealership can inadvertently create a contract with language that creates rigid rules that must be followed precisely under all circumstances. It is better to build flexibility into the wording. In particular, avoid language that appears to be a promise, words like “only” or “must.” Instead use terms like “generally,” “typically” and “usually,” and “may,” “could” and “might.” They give managers the flexibility to interpret and apply a policy appropriately, that is, to fit the situation.

Your handbook should include a statement whereby management retains the right to unilaterally change or modify the document and its policies. Most important, the policy or handbook should contain “at will” language, which allows an employee to quit at any time and for any reason and likewise permits the employer to terminate an employee at any time and for any lawful reason.

A couple of final points:

• When you have a drafted your policy, and before you give it to your employees, have it reviewed by your legal counsel to ensure it is not in conflict with any laws or regulations.
• And finally, a well conceived handbook and effective policy must also be reviewed and updated regularly to remain relevant, not only to reflect changes in your workplace but to accommodate changing local, state and federal laws.

The FTC has amended the Used Car Rule which deals with the use of Buyers Guides.  These changes are significant and dealers should take care to comply or risk significant fines.  The Used Car Rule, as revised, still requires the dealer to display a Buyers Guide in the window of all used vehicles; however, significant changes which are effective January 27, 2017 have been made to the language/disclosures that are required to be made on the Buyers Guide.

The new rules modify the description of an “As-Is” sale and add boxes to the front of the Buyers Guide for the dealer to check to indicate the status of any manufacturer or third-party warranty and the availability of a service contract.

Additionally, catalytic converters and air bags have been added to the list of potential major defects.  Further, statements are to be included in the Buyers Guide that inform the customer to obtain a vehicle history report, that direct the customer to check for open recalls and that advise the customer to ask for a Spanish-language version of the Buyers Guide (This statement is included in Spanish on the English-language version of the guide.)

Dealers are allowed to use their unused stock of Buyers Guides (for up to one-year from the effective date) but should use Buyers Guides that comply with the new rules once that supply is depleted.

Dealers can get more information from the FTC’s “Dealer’s Guide to the Used Car Rule,” which is available at www.ftc.gov/tips-advice/business-center/guidance/dealers-guide-used-car-rule.  Further, “Fillable” versions of the Buyers Guide in English and Spanish are also available at FTC.gov.

Deducting commuting costs is generally not allowed. However, there is an exception carved out by the courts for the required transportation of work equipment and tools. The additional cost — incurred strictly to carry the work implements back and forth — is deductible as an employee business expense. (Self-employed individuals write off the cost as a business expense on Schedule C.)

Example: Joe works at a construction site in the city. Previously, he took public transportation to work at a round-trip cost of $5 per day. Now, however, he is required to transport equipment back and forth from the job site in a trailer. It costs him $7 a day to drive his car each day and an additional $15 a day for the trailer rental.

According to the IRS, the $15 daily cost of the trailer rental is deductible, but Joe cannot deduct the extra $2 per day cost of driving his car. Reason: Only the additional cost for the same mode of transportation is deductible, even if a less expensive mode of transportation is available.

On the other hand, suppose Joe owns a truck and is able to transport the equipment without renting a trailer. In this case, Joe can deduct the additional cost of $2 per day if he can prove that he would have commuted by public transportation if he was not required to transport the work equipment.

Want more information on ways to reduce your construction business tax bill? Contact us.

Do you include all of your costs when preparing a contract bid? Job costing involves not only the direct expenses of labor and materials, but many indirect costs such as depreciation, overhead, employee benefits, equipment, tools and other outlays necessary to operate your construction business — even if they are not related to any one specific job.

Don’t forget to consider all of these indirect costs and compute them accurately when you bid a job. With detailed job cost reports, you can track the profitability of each project.

Contact HBK. We can help you develop or fine tune a job costing system that accurately reflects the cost of doing business. More precise estimates lead to more profitable bids.

Many dealers are finding that the buy-here, pay-here (BHPH) business is extremely lucrative.  Along with running a profitable BHPH operation dealers should be aware of some significant tax planning opportunities with regards to establishing a related finance company to carry the paper. In order to ensure that you can utilize these opportunities, we would like to highlight here some of the potential pitfalls.

OVERVIEW

The use of related finance companies (RFC) is a common practice in the retail automotive industry.  Such companies serve many valid business purposes and were utilized before any tax advantage scheme was offered.  However, some RFC’s are being utilized by used and new car dealers to reduce or defer the reporting of income.  This section of this article is to be used as an overview of RFC’s.  In it will be found reasons for establishing RFC’s, and issues faced in an IRS examination of an RFC issue.

There are three issues that exist in dealing with RFC’s.  The first involves the economic reasons for the arrangement, the second involves the validity (form) of the RFC itself, and the third and most critical issue involves the economic substance of the discounting transactions.

ECONOMIC REASONS

There are several reasons for creating and using an RFC.  The following are some of the major reasons that an RFC is created.  Each of these reasons can provide a significant and valid business and economic reason for creating a separate entity to finance the dealer’s receivables, even if no third party receivables are acquired.  There are others that are equally valid and legitimate reasons for using an RFC.

1. Providing credit to enable the purchaser to buy a car.

Many, if not most, of the purchasers that utilize the services of an RFC do so because of an inability to get credit elsewhere.  In this way, the RFC serves a useful purpose in providing credit to individuals with little, no, or bad credit.  A properly operating RFC also focuses the collection function outside of the dealership itself, which relieves the sales personnel from a task that is time consuming since payment schedules are on a weekly or monthly basis.

2. Improving the collection of accounts receivable.

An RFC can significantly enhance the collection of accounts receivable by requiring the borrower/buyer to remit payments to a third party, even though the third party is related to the dealer.  It has been the industry’s experience that when payment is made directly to the dealer, a bad experience with the car often leads to a default on the note for the car.  This, in turn, creates a collection problem, and possibly a publicity problem for the dealership.  On the other hand, if an RFC is involved, experience shows that the customer is less likely to default on the payment.  Given the general credit worthiness of the customers, this is a significant advantage.  Some dealers, through effective management and controls, have RFC discount rates lower than what they can obtain from third parties and still make a profit on their RFC financing operations.

3. Avoiding licensing and other regulatory requirements on the dealer entity.

Many states have licensing requirements for finance companies.  Establishing an RFC permits the dealer to isolate liability for violation of any requirements in a separate entity, without jeopardizing the status of the dealership.  In addition, some states have capital requirements for finance companies that may interfere with the normal operations of a dealership.

4. Preventing adverse publicity on repossessions and other collection actions from affecting the dealership.

Repossession and collection problems are a daily fact of life for buy here/pay here dealers.  Creation of an RFC permits a new entity to undertake these actions, thereby insulating the dealer from any adverse publicity.  Even in states where disclosure of the relationship is required, the resulting publicity is usually less adverse when an RFC is used.

5. Insulating the dealership from the financial risk of default on the notes.

The industry often deals with a customer base that generally has poor or non-existent credit.  The default rate on buy here/pay here notes is substantially higher than on general bank loans.  This economic fact is recognized both by the interest rates charged by the dealer or finance company and the reserves that independent finance companies generally maintain.  A separate RFC removes the financial risk from the dealership entity.

6. Diversification of ownership.

Since the financing of used cars is not inherently a part of a dealership, an RFC permits the dealer to provide ownership in that specific business to both family and non-family members without diluting ownership in the dealership.  This allows the dealer to separate the two businesses and reward certain employees or other individuals with an ownership interest in a segment of the business.

A final advantage is that an RFC can be expanded, depending upon the dealer’s desire, to finance unrelated receivables as well as those of a particular dealership.  It should be pointed out that although this is possible, it rarely happens.

VALIDITY OR FORM OF RFC

The second issue that should be considered, the form issue, is how a valid RFC is structured and operated.  Since the purpose of the RFC is to isolate liability or segregate transactions in a separate entity, the RFC should meet several criteria to be treated as a separate, valid business.  These criteria are:

1. The RFC should be a separate, legal entity.
2. The RFC should meet all licensing requirements of the jurisdictions in which it operates.
3. A major factor is that the RFC should be adequately capitalized in order to pay for the contracts.
4.   The RFC should have its own employees and compensate them directly.  However, the fact that the RFC and the dealership or other related entities may elect to use a common paymaster does not indicate, in any way, that the RFC does not have its own employees.
5. The RFC should obtain and maintain all appropriate local business and similar licenses.
6. The RFC should have a separate telephone number.
7. The RFC should have a separate business address, which may be a post office box.  Even if a separate business address is maintained, it is common for the RFC to have an office at the dealership.
8. The RFC should maintain a separate set of books and records.
9. The RFC should comply with all title, lien, and recordation rules in the jurisdictions in which it operates.
10. The RFC should notify customers of the purchase of their notes.
11. The RFC and the dealership should have a purchase contract for the receivables that both complies with the appropriate state law and provides evidence of how the FMV of the receivables was determined.
12. The RFC should pay the dealer for the receivables at the time of purchase.  The RFC can generate the cash to make the payment from any combination of capitalization of the RFC, bank or third party borrowings, or borrowings from related entities or shareholders. Borrowings from related entities or shareholders could diminish the validity of this factor.
13. The RFC should be operated in a business-like manner.

Clearly, to the extent that these attributes are absent, a serious question as to the substance of the RFC exists.

ECONOMIC SUBSTANCE

The third and most important issue that should be addressed is the sale of discounted receivables at fair market value (FMV).  Sales of receivables must have economic substance to qualify for tax purposes; valid business reasons alone will not suffice.

The FMV of a receivable or group of receivables will depend on a number of factors, the facts and circumstances of each receivable determining the importance of each factor.  Purchasing receivables is not an exact science, and many subjective factors enter into the determination of value.  The industry’s position is that a deep discount is warranted in nearly all transfers of receivables.  The factors that directly influence the amount of discount include:

1. Absence of or poor credit history.
2. History of payments on the note.
3. Amount of time left on the note.
4. The age of the vehicle.

Reviews of some third-party finance company documents indicate that these companies can offer to acquire the receivables from dealers at up to a 50 percent up-front discount.  These discounts apply whether or not the finance company buys in bulk or “cherry picks” the best accounts.

A dealer can use an RFC to discount its receivables and have it accepted for tax purposes.  To summarize the above discussion, the following three factors need to be addressed:

1. The discounting transactions must have economic substance.  All of the relevant facts and circumstances must be considered.  Remember that the primary reasons for selling receivables are to obtain cash (improve cash flow) or to shift risk.  If both of these are missing, it is a good indication that the sales transaction lacks economic substance.
2. The form of the transactions and the form of the RFC must be perfected.
3. The receivables must be sold for fair market value.  The seller and purchaser must base the discount on some reasonable factors, not on an arbitrary determination of the discount rate.

The benefits to a related finance company are tremendous; but, as you can see, many potential pitfalls abound.  Accordingly, you will want to consult with an advisor who is fully aware of the BHPH business and how to properly structure and utilize RFC’s. That’s why HBK is here, to answer your questions on this and related tax matters.

Do you know what your business is worth right now? Practically speaking, it is worth what the highest bidder is willing to pay for it — no more or no less. Nevertheless, by taking all the relevant factors into account, you can position yourself for the best possible deal.

The first step is to have a business valuation prepared for your company. Our firm can provide a comprehensive report, which can be a starting point for negotiations.

Typically, potential buyers conduct their own due diligence of businesses they are interested in. They may rely on professional appraisers who use different measuring sticks and come up with another valuation. For example, a buyer may seek a valuation based on fair market value, intrinsic value or a different standard might be applied. Internal factors that are unique to the business are taken into account, such as the company’s financial position.

At this juncture, other external factors can also come into play. Some of these issues reflect the economy, market demand for the company’s products or services, and the health of the industry as a whole. If demand is low, it could suggest reduced profitability. Therefore, it might be advantageous to postpone your plans to sell the business until demand increases or stabilizes.

Interest rates can also affect the value of a business. When interest rates are rising, it can have an adverse effect on cash flow, since outstanding debts can result in higher charges. Therefore, you might want to sell a business when interest rates are relatively low.

Our firm provides a comprehensive set of services relating to business valuations. We can walk you through every step of the process so you understand it completely. Our services include an analysis of:

• The relative strengths and weakness of your business.
• Steps you can take to enhance the value.
• How to keep taxes to a minimum.
• Where to find potential buyers.
• The optimal time to sell.
• The value of tangible assets, such as real estate and equipment, as well as intangible assets, such as
• patents, trademarks and non-compete agreements.

Contact our office to arrange a meeting. Our business valuation professionals understand the complex internal and external factors involved in valuing a business.