Comments Off on The Problem with Parts Inventory Adjustments
By Mercedes Hendricks, CPA
The Parts Management Report is full of great information…if you know how to read it! The details that comprise the DMS’ parts inventory management report are extensive and, while difficult to navigate, can tell you a lot about how well the parts manager is controlling the inventory.
The parts pad is the perpetual parts inventory record. The inventory management report provides a record of parts ordered, stocked, invoiced, sold, returned, and yes, adjusted. Why would there be adjustments in the pad? Often what happens is a parts manager or employee performs a bin check and notices a difference between the parts physically on hand and the pad count. This difference is then manually adjusted to reflect the physical bin count.
Inventory adjustments may be done with perfectly good intentions. The problem is that if these differences are not thoroughly investigated before being adjusted in the pad, even the best of intentions [...]
Comments Off on Bonus Depreciation can reduce your 2016 taxable income for Qualified Improvements to your Dealership
By Dan Flugrath, CPA
The Protecting Americans from Tax Hikes Act (PATH ACT) added a new provision for Bonus Depreciation regarding Qualified Improvement Property (“QIP”). The significant change is the dealership or dealership owners or principals can own the premises.
QIP are improvements to the interior portion of a building that is non-residential property that is placed in service after the date the building was placed in service. There are 3 improvements which do not qualify for this expensing election:
Enlargement of building
Any elevator or escalator improvement
Internal structural framework of building
Prior to the PATH Act, Qualified Leasehold Improvement Property (“QLIP”), improvements to leased property that was at least 3 years old, that was not leased to a related party and met the definition of Improvements similar to the QIP rules above was eligible for bonus depreciation.
The difference between the QIP and the QLIP rules are:
Comments Off on Respect your slush funds…or they may just disappear!
By Mercedes Hendricks, CPA
“Save it for a rainy day” – that was a phrase my dad would say when I received some money as a kid that I wasn’t expecting. This saying has a positive connotation, right? Receive some money today, put it in the bank and save it for when you need it. In dealer’s terms, I am referring to factory incentives, sales packs and other similar items where you have recorded a reserve instead of recognizing the income, even though it has been earned. This is a philosophy that many of my dealership clients use in one way or another.
While a common practice, interestingly, we have seen first-hand how this approach can get dealers into trouble. The problem with “rainy day” reserves is that there are rarely sufficient controls in place over how they are to be used, which can lead to errors, or worse, manipulation. If you are going to [...]
Comments Off on Will the adoption of LIFO on your 2016 return be beneficial to your dealership?
By Daniel Flugrath, CPA, CFP
Most likely the answer to this question is “yes”. Many economists are stressing caution regarding a warming economy, along with the anticipated interest rate increase expressed by the voting members of federal governors who meet next on March 15, 2017. If 2% inflation occurs, applying 2% to $1 million of beginning inventory could yield as much as a $20,000 deduction (assuming a consistent model mix). Adopting LIFO is done by filing the IRS form 970 with your dealership’s annual income tax return. The election does NOT require IRS approval. There are three different LIFO methods that are widely used by dealerships: Alternative LIFO, Vehicle Pool Method, and IPIC.
Generally, under the Alternative LIFO for new vehicles, for each separate trade or business, all new cars, including those used as demonstrators, must be included in one dollar-value LIFO pool, regardless of manufacturer; and all new light-duty trucks, including those used as [...]
Comments Off on Simple Yet Effective Procedures for Accounting to Monitor Fixed Operations
By Mercedes Hendricks, CPA
I spoke with a Controller recently who asked me how she could better monitor the parts and service departments. This Controller understands financial statements better than anyone, but when it comes to fixed operations she’ll admit she struggles with obtaining and interpreting data in order to ask effective questions and hold the managers accountable. Here are three basic procedures accounting can perform that will not only enhance the understanding of parts and service operations, but will also let the managers know they are being watched.
Run the open RO report and have one of the accounting members go to the service department and locate each of the vehicles on the report. Since RO’s should be closed when vehicles are returned to customers who have paid their portion of the services, all of the vehicles on the open RO report should be physically present.
Comments Off on New Reporting Requirements on Foreign Owned Disregarded Entities
By Dan Flugrath, CPA
The Treasury Department and the IRS finalized regulations on reporting and record maintenance regarding foreign owned disregarded entities on December 13, 2016. If your U.S. dealership is fully or partially owned by a Single Member Limited Liability Company (SMLLC), which in turn is owned by foreign individual or foreign entity, these new rules apply for your 2016 income tax returns and going forward.
Disregarded entities can be domestic or foreign entities. The new rules are for reporting purposes only. No changes apply for purposes of filing income tax returns.
The new regulations impose information reporting requirements on financial transactions between the disregarded entity and its foreign owner. These rules are not limited to the retail automotive industry. The foreign or domestic disregarded entity must obtain a Federal tax ID number if any reportable transactions occur. Previously these disregarded entities had no obligation to report information to the IRS.
Why are we talking about petty cash? It’s petty! … Or is it? We have seen several cases at dealerships recently where abuse of petty cash has led to tens of thousands of dollars in losses. It is a testament to how often the petty cash may be overlooked at a dealership and where key controls to mitigate losses may be missing.
Petty cash at dealerships often have balances that range from $500 to $3,000 to cover immediate cash needs, such as spiffs and deliveries, without having to wait for accounting to issue checks. While a common practice, this comes with the risk that cash could be misappropriated. What is the best way to prevent this from happening? Segregation of duties.
Access to the petty cash box should be limited to select individuals that do not also have access to accounting functions in the DMS, such as journal entries, or cash [...]
Comments Off on Make your life easier, accrue for the “extra” payrolls!
By Mike Frakes
Early in my career when I was a Controller, I was surprised by those two “extra” payrolls that occur every year. The dealership was on bi-weekly payroll and I was not accruing for the two times a year that there were three payrolls in a month. This resulted in two massive expense spikes. Nothing will take the wind out of a General Manager’s sails quicker than him or her thinking a certain amount of net profit has been generated based on average expenses only to find out that it was a three-payroll month.
I began accruing for the additional two payrolls in my second year as a Controller and continued to do so year after year. The calculation was simple. I took the last payroll of the year, added 10% and annualized it to get my monthly accrual amount. For example, if the final payroll was $100,000 for non-commissioned employees (including payroll [...]
Comments Off on Impact of Volkswagen Settlement to Dealers in USA
By Dan Flugrath, CPA, CFP
Volkswagen Group of America reached an agreement with VW – Branded Dealers with a class action settlement on October 18, 2016. The Federal Court will hold a fairness hearing on January 18, 2017 at 8:00 A.M. to make a determination as to whether or not the initial court-approved dealer class action notice is fair and to decide whether to approve the settlement.
As a result, Volkswagen dealers are facing two financial matters stemming from the actions of the manufacturer. Those two financial matters are classifying the settlement proceeds as lost profits or as reduced value of their Blue Sky or Goodwill. The allocation of the compensation between these two distinct items will have a significant tax difference. The difference arises due to the Blue Sky being a capital asset which is taxed at capital gains rates vs. lost profits being taxed at higher regular income tax rates.
Comments Off on How to Increase Transparency in Your Parts Inventory
By Jorge Arrieta
In the automotive industry, we tend to see employees performing tasks in a certain way because traditionally “it has always been done that way,” yet often no one questions why?
The New Year is a great opportunity to review and improve on our operational procedures. The parts department is a perfect example of old habits that die hard. For example, for dealers using CDK, the use of the “display/sell” or “DS” function can be used to adjust parts inventory. This function can be appealing due to the convenience it provides however, when the display/sell function is used, the parts pad can be modified without management authorization or a paper trail. In addition, the accounting records may adversely be affected because accounting personnel may not be notified of the adjustment, or have visibility to test if the transaction should be recorded in the general ledger. One of the largest concerns is the risk [...]