The automotive dealership industry is unique because each dealership is in a constant state of construction, remodeling, expanding or purchasing existing properties. The only way to ensure this constant state of flux doesn’t bankrupt a dealership is to review these assets to determine the shortest recovery life possible, expensing in the current tax year.
By taking advantage of all eligible tax deductions it opens up cash flow for your dealership that would have otherwise been lost. A fixed asset review can easily be done by having a cost segregation study performed.
The Tax Cut and Jobs Act or TCJA was the most sweeping tax code change in 30 years and has significant impact on the automotive dealership industry along with the tax incentives that allow you to obtain the benefit from a cost segregation study.
There are three significant aspects of the TCJA that when combined make for an interesting ride for auto dealerships looking to obtain their rightful tax deductions. Let’s take a look.
The TCJA expanded section 179 from a $510,000 limit to $1 million and now includes improvements it did not previously such as: roofing, fire protection and alarm systems. All of which are large expenses for an auto dealership in the midst of new construction or remodeling.
Floor Plan Interest
The TCJA preserved the 100% deduction of floor plan interest. If you are eligible for floor plan interest you must claim it, it is not optional. However, there is a catch. If you are eligible you cannot claim bonus depreciation. This doesn’t mean an automatic sigh and slump in your chair, not all dealerships qualify for floor plan interest and bonus depreciation is not the only aspect of a cost segregation that benefits auto dealerships.
Bonus Depreciation was highly expanded with the TCJA. It was increased from 50% to 100% and applies to both new and used properties acquired through December 31, 2022. This is an unheard of expansion of bonus depreciation and has such a significant impact that the National Automobile Dealers Association (NADA) is currently working through hearings with the IRS demanding the 100% bonus depreciation because the TCJA eliminated the like-kind exchange tax benefit for all but real property. We expect to see continued discussion on this topic over the next several months.
Although some automotive dealerships won’t be able to benefit from the expansion of bonus depreciation because of the changes with the TCJA it does not eliminate the enormous financial impact that a cost segregation study has for an auto dealership.
To find out more please contact speak to your Advisor today!
This tax season I encountered a record number of business owners that were outright shocked to find out how much they owed for 2014 taxes. There are a few common questions I keep hearing.
#1 – How Did I End Up Owing Money?
There are four key areas that contributed this year to so many companies owing:
- Surprise Profitability
The last several years have been decent if you’re lucky but dismal for most. This caused most companies to pull back on quarterly tax prepayments, or often eliminate them altogether.
- 2014 Was Better Than Expected
There is no question that 2014 started an upswing that is continuing to get stronger with each passing quarter (even for those companies have yet to feel the impact of that upswing). Once income began to flow again, many businesses were forced to make capital investments that were years overdue. This means that although 2014 was in fact more profitable, it wasn’t “felt” by many Owners. Not all investments may be written off in the current year. Even if the bank account hasn’t recovered, the P&L sheets have and additionally the IRS considers many to be profitable and out of AMT. Even if the bank accounts don’t reflect the same.
- Tax Breaks Disappeared
Without many major tax breaks that companies have not only come to enjoy, but have come to count on, many are finding themselves with unexpected increases to their tax liabilities.
- Tax Rates Increasing
Tax rates have increased, for example; the recent Personal Limit increase to 40% and Capital Gains increasing from 15% – 25%.
#2 – Why Didn’t My CPA Warn Me?
Many owners are left wondering:
- Did my CPA let me down?
- Why didn’t they prepare me for this?
The reality is, your CPA only knows the information you provide to them And for most of us business Owners we don’t do our CPAs any favors. As Owners we know this, and if we are honest we’ll admit that we just don’t take the time necessary to discuss an overall tax strategy with our CPA.
Yesterday I spoke with one CPA that was completely unaware that their Client had purchased an additional building (over $2M in cost), and another CPA that upon delivery of our Cost Segregation report didn’t understand where we got our figures from only to find out the Client spent over $300K in renovations last year that they failed to tell the CPA about.
Most business Owners are guilty of … running their business. As business Owners, we make decisions today that are good for our company and good for our bottom line, with little to no regard of how it affects our tax strategy (and it usually wouldn’t cross our minds to call our CPA in the middle of summer to review something for next April).
#3 – What Can I Do About It?
Step #1 for most business Owners I’ve talked to is:
- Pound their fist on the desk angrily while complaining about the government
- When that ceases to provide relief move on to the below Step 2
Step #2 (True Step #1)
For some business Owners, you bit the bullet and made a payment yesterday, for others you either filed extensions or simply filed without making a payment and are going to wait for the dreaded IRS bills to arrive.
In either instance, the good news is that just because tax day has come and gone doesn’t mean your numbers are written in stone. There is over $200B in Federal Tax Incentives allocated to small and mid sized businesses to help offset your liability.
We’ve developed a simple online tool for business owners to check in 30 seconds if you qualify for any Federal Programs.
A strategic partnership is when two businesses join together for mutual benefit. The businesses would normally not be competitors but instead work cooperatively with a common goal in mind.
Strategic Partnerships allow businesses to gain a competitive advantage by mutually sharing of resources, markets, technologies, capital or people.
At Growth Management Group (GMG) we believe wholeheartedly in building Strategic Partnerships and actively reach out to industries and organizations that would benefit from such a partnership. In 2013 GMG entered into a strategic partnership with ELFA (Econo Lodges Franchisee Association).
ELFA’s goal is to “help each franchisee maximize the value of their property through networking and the sharing of creative ideas as well as time and money savings tips”. This strategic partnership supports ELFA’s goal by providing its members the opportunity to gain millions of dollars through specialized tax incentives.
At $240,000 the hotel and hospitality industry is currently number two for the largest average savings received per client with GMG. This is because nearly all business owners in the hotel industry own their building, and usually own multiple locations. With that basic qualification hotel owners substantially qualify for :
GMG offers ELFA members additional benefits including:
- Free Consultation
- 30% Discount on Study Fees
GMG believes in building and sustaining strategic partnerships to ensure the continued benefit for all involved. Hasu Patel, President of ELFA said, “The Econo Lodges that have worked with GMG so far are please with the results in savings. I encourage more Econo Lodges to reach out to Growth Management Group”.
If you would like to know more about the GMG’s ELFA partnership or Strategic Partnerships please call 888-705-5557.
The Hotel Industry is unique in that like a commercial product a hotel follows a definite life cycle. If a hotel owner does not keep this in mind, their facility can quickly become worn out and dated in comparison to their competition. To stay competitive, Owners must acknowledge that there will be constant new brand competition. A newer, swankier hotel that offers the latest amenities to its guests will quickly put an outdated hotel out of business. This fact leaves few options of staying competitive for a hotel owner. The most prominent option would be to rebrand. What does “rebranding” entail?
Rebranding can be a broad term ranging from a simple revamping of a logo but more often is a much larger undertaking with the ultimate goal of retaining guest loyalty and awareness. Rebranding is especially important today because of major social, environmental and technological changes that have taken place over the past five years. For example, five years ago wifi throughout a hotel was rare, flat screen televisions were a novelty, the expectation of a hot breakfast almost unheard of, and eco friendly was a word most people were unfamiliar with. All of those ideals have changed, and are now an expectation for most travelers. This new expectation has forced hotel brands to insist their franchises undertake multi million dollar rebranding to live up to their flag.
What does this mean for Hotel Owners?
There is a little known opportunity for Hotel Owners that would directly affect the rebranding of their organization. The opportunity is Specialized Tax Incentives, specifically:
Specialized tax credits are an essential fiduciary component when building, purchasing or renovating a hotel or motel. These credits affect rebranding and the constant renovation of non-structural components of their building such as:
- Carpeting / Flooring
- Decorative Lighting
- Dedicated Electrical & Plumbing Systems
- Power Generators
- Security Systems
- Wifi / Internet Cabling
- Parking Lots
- And many more…
A Cost Segregation Study is an engineering based tax analysis in which these types of components are broken out and allocated to a shorter life class, depreciating them at an accelerated rate. This means a building purchased, constructed or renovated since January 1, 1987 and costing in excess of $500,000 should have all improvements and renovations qualifying based on their individual completion dates. So, every hotel having performed renovations through rebranding within that time frame have a potential benefit sitting on the take just waiting to be captured!
To determine if your facility could capture a benefit, simply contact Growth Management Group and ask for a basic calculation, performed at no charge.
For those that follow the Podcast or the Blog, I’ve been talking since last summer about a “storm” coming for U.S. Manufacturers. A storm that was going to catapult some, while crippling others. We were right in our prediction, but underestimated just how much this “storm” would affect Manufacturers. Daily I find myself speaking to Manufacturers, all with the same story, and all lacking answers on how to solve it.
Right now the industry is facing the shocking realization of large upcoming tax liabilities, without the capital to pay those liabilities. Even though extensions may be filed and payment arrangements may often be made, this is a slap in the face to business owners. They’ve spent years digging out of a hole, surviving. Just to go back into debt and have this daunting concern hanging over their heads while they should be shifting their focus from survival to growth.
There are 4 Significant Changes That Have Caused This “Perfect Storm”:
- Surprise Profitability
The last several years have been decent if you’re lucky but, dismal for most. This caused most companies to pull back on quarterly tax prepayments, or often eliminate them altogether.
- 2013 Was Better Than Expected
There is no question that 2013 started an upswing that is continuing to get stronger with each passing quarter. Manufacturers not only did not anticipate this upswing, they did not really “feel” it either. For years they were forced to cut back to the essentials just to survive. Once income began to flow again, many were forced to make capital investments that were years overdue. This includes; equipment, staff, software, and facility improvements. This means that although 2013 was in fact more profitable, it wasn’t “felt” by many owners. Not everything may be written off in the current year, even if the bank account hasn’t recovered, the P&L sheets have, and the IRS considers many to be profitable and out of AMT, even if the bank accounts don’t reflect the same.
- Tax Breaks Disappearing
Without Bonus Depreciation, (and other major tax breaks that Manufacturers have not only come to enjoy, but have come to count on), many are finding themselves with unexpected increases to their tax liabilities.
- Tax Rates Increasing
Tax rates are increasing for example; the recent Personal Limit increase to 40% and Capital Gains increasing from 15% – 25%.
So, what happens when companies cut back on paying taxes over the last few years, have a “surprise 2013” that showed up in profit but not necessarily in their bank account and experience tax rate increases, even though tax breaks continue to disappear?
They have a choice, either be crippled or be catapulted. Those that choose to put their head down and re-enter survival mode will surely suffer for it. Those that seek out ways to grow will take over new positions in market share while others scramble to survive.
One key area growing manufacturers are taking a serious look at is what Specialized Tax Incentives are available to offset these increases in Tax Liability. Programs such as the R&D Tax Credit, Cost Segregation, Hiring Incentives, and Property Tax Mitigation. Programs that previously seemed out of reach, all of a sudden are making it to the top of the priority list.
Believe it or not, there is at least one thing that the last five Presidential Administrations have unilaterally supported, and we can feel quite certain the next will as well.
There is a little known tax credit that is part of Section 41 of the Internal Revenue Code, allowing manufacturers to reclaim a small portion of their annual payroll simply by performing activities manufacturing companies are already doing as part of daily operations.
This credit may be the only thing both sides of the aisle can actually agree on. It has bipartisan support in both houses, backing of the Obama Administration, and has been renewed by every single Presidential Administration over the last 32 years. How can there be such a disconnect between what may be the only thing the last five presidencies have in common?
A lot of the confusion is in the name. Many manufacturers don’t believe they do “R&D” because they don’t have a traditional R&D department. The IRS definition of R&D is quite different than yours or mine. It often includes activities such as:
- New Product & Process Development
- Developing New Concepts or Technologies
- Design – Layout, Schematics, AutoCAD
- Prototyping or Modeling
- Testing / Quality Assurance: ISA 900X, UL, Sigma Six, etc.
- Integration of new machinery (CNC, SLA, SLE, etc.) into existing processing
- Software Development or Improvement
- Automating or Streamlining Internal Processes
- Developing Tools, Molds, Dies
- Developing or Applying for Patents
Just to name a few…….
Only the folks in Washington DC could take unilateral support and turn it into unilateral confusion.
Since 2004 Growth Management Group has been educating and assisting Manufacturers and other Commercial Property Owners on their rights to programs buried deep within the tax code. To date we’ve assisted small and mid sized companies discover over $300M in benefit. Contact us for a comprehensive review.
$14B Available in Manufacturing Tax Credits
There is a new bill that would put $14B in tax credits back into the pockets of manufacturers. What makes this bill unique amongst its predecessors is that manufacturers don’t have to wait around for this one to pass through its bureaucratic channels (or stall out in a constant state of delay and confusion).
Manufacturers can take advantage of this program before it passes. This is because a largely unknown version of the program already exists called the R&D Tax Credit. A temporary version is in place through the end of 2013 as part of the American Taxpayer Relief Act of 2012. So, manufacturers can actually begin receiving funds this year based on previous years activities.
5 Reasons Manufacturers are not taking advantage of the current version of this credit:
- They don’t understand the IRS definition of R&D (see article: R&D I don’t think we do that!)
- They believe their companies are too small
- They believe the benefit won’t outweigh the work
- They believe they have to change the way they operate in order to qualify
- They believe that the credit is not being renewed
Not only will this credit most likely be renewed, but congress has continually made it easier to qualify and expanded the eligibility to include not only the Fortune 1000 but also small to mid sized firms who can utilize the credit to significantly affect their bottom line.
When working with manufacturers we ask two questions to determine qualification:
- Are you expecting to be profitable this year, or were you profitable in any of the last 4 years?
- Is your annual payroll for any of these years in excess of $1 million?
Since 2004 Growth Management Group has been educating and assisting Manufacturers and other Commercial Property Owners on their rights to programs buried deep within the tax code. To date, we’ve assisted small and mid sized companies discover over $300M in benefit. Contact us for a comprehensive review.
Depending on your answer, you could be getting bad advice which puts more money in the IRS’s coffers (and leaves less in your pocket).
Below is the crux of a typical tax preparer’s opinion regarding Engineering Based Cost Segregation Studies which an experienced CPA would say has kept many commercial property owners from implementing this highly beneficial tax strategy which is effectively encouraged by the IRS.
Here is a typical ‘tax preparer’ statement to commercial property owners:
“You are not getting additional depreciation, you are accelerating depreciation by allocating cost to shorter life. I advise against such a strategy as there can be future tax implications and also there is upfront cost involved.”
For frame of reference, here is the IRS’ view (from www.irs.gov) on cost segregation:
“Buildings and structural components have substantially longer depreciable lives than personal property. Therefore, it is desirable for taxpayers to maximize personal property costs in order to accelerate depreciation deductions and, hence, reduce tax liability.” (source)
Here’s how many experienced CPAs would look at this matter:
The above point of view isn’t considering the bigger picture. For instance, only looking at the (potentially) negative capital gains tax implications associated with cost segregation by itself is ‘missing the forest for the trees’:
- It is not necessarily true this would be a ‘negative’ as it would depend on the ultimate sale price versus the depreciable cost basis; if the sale price is equal to or less than the depreciable cost basis then the capital gains issue is, well, a non-issue.
- There is no consideration given to the positive effect on the income tax picture due to cost segregation; this positive effect needs to be weighed against the potentially negative capital gains effect.
- In general, property owners will benefit from cost segregation if they hold the building for at least 18 months. One reason for this dynamic is that the capital gains tax, even at the 25% ‘re-cap’ rate, is much lower than the typical 35% to 39.6% income tax rate.
- There is an assumption that the property owner is absolutely giving up all future depreciation benefits in exchange for taking those benefits now. Well, if the owner never replaces carpeting, wiring, plumbing and other such non-structural components, then, ‘yes’, that would be the case. But the reality is that these components will ultimately be replaced (which is the basis for the relatively shorter/accelerated tax-compliant depreciation time-lines for such items). The associated replacement costs can be depreciated.
So, in fact, the depreciation isn’t lost in reality. Plus, only about 20% of the building can be ‘accelerated’…the remainder stays in 39-year S/L.
- In effect, this is a time-value-of-money/opportunity cost ‘play’. So an owner’s capitalization rate needs to be considered; a critical mass of money in the hands of a good businessperson NOW could feasibly produce a 10% or greater return. An owner’s ability to convert that ‘now cash’ (i.e., cash that becomes available due to cost segregation’s resulting reduction in current income tax) into more cash could easily dwarf the down-the-road bit-by-bit depreciation cost deductions which the owner MAY be passing on.
- The “upfront costs” for conducting an Engineering Based Cost Segregation Study are barely worthy of factoring into the benefits equation; first, the Study is a business expense and effectively comes at a 35% (+/-) ‘discount’, and secondly, the Study cost can often be less than 10% of the tax benefit (even without the ‘discount’). Most business-minded people would find a project with a minimum 10:1 benefit-to-cost ratio to be worthy of pursuit.
So, do you have a ‘Tax Preparer’ or a CPA? The best way to find out is to ask him or her how they perceive the value of an Engineering Based Cost Segregation Study for a commercial property owner.
To stream a 3-minute video regarding this topic, please click here.
For additional information contact us.