Frequently Asked Questions - Net Inventory Method
What is an Automotive Trade Discount? What is the Net Inventory Method? Why should I consider Green Outsourcing? Where are Trade Discounts located? Why should we itemize the reduction of inventory by VIN vs. using a percentage? Will I jeopardize LIFO conformity/reserve if I do not record my vehicles net Trade Discounts? Revenue Ruling 84-41 If on LIFO, what are the requirements? Why are Trade Discount deferrals now an issue? How do Finance Credits or Flooring Assistance qualify as a Trade Discount? See these pertinent IRS rulings:
Revenue Ruling 84-41 HOLDING What are Advertising Expense adjustments? Do all Advertising charges qualify as Trade Discounts? Why does Green Outsourcing match VIN's to Advertising Expenses? How should I record the treatment of Trade Discounts or Advertising Adjustments? Why are Green's fees so competitive?
Generally an Automotive Trade Discount is an unconditional receivable associated with the purchase of a vehicle such as finance and flooring credits, fuel adjustments, preparation and conditioning costs plus many more.
The Net Inventory Method reduces trade discounts and advertising fees from inventory for year ending tax purposes. Inventory is reduced prior to annual LIFO calculations to yield often large benefits for automotive dealers.
Because you can develop a new revenue stream with absolutely no overhead. Green Outsourcing helps you deliver enormous tax benefits to your automotive accounting clients by automating the data capture required for the Net Inventory Method. The average accounting firm simply isn't staffed to handle the enormous amount of data processing Net Inventory demands. Once you've converted a client to Net Inventory and achieved tax deferrals, Green also handles the annual compliance maintenance for you. Green tracks, documents and confirms every factory Trade Discount program quarterly to ensure your clients are up-to-date with every factory program, which frequently change. Even better, we utilize capped pricing with no C.O.D. surprises, and GUARANTEE a 10 days or less turnaround time. Green's cost effective annual calculations include current documentation and support, and vehicle categorization by VIN before LIFO calculations are prepared.
Trade Discounts are itemized on Invoices, Payment Statements, Credit Memos, and other documents. It varies by manufacturer, but Green is familiar with every program.
Some Dealerships have reduced inventory by a percentage. Not only can this averaging potentially cost your client tens of thousands of dollars in tax benefits, the percentage available is directly linked to the number of vehicles traded between dealers. Also most industry LIFO experts and IRS agree that an estimated inventory reduction to determine the base cost of a vehicle is not the safest method of calculation if/when LIFO comes under audit.
Yes, potentially. Here's what the IRS has to say:
Most industry experts recommend a three year "look back" and then adjust the layers to the base year.
It's due to the following IRS rulings: Revenue Procedure 2002-09 provides guidance on "Qualified Volume-Related Trade Discounts" and Revenue Procedure 2002-19 allows for the recovery of a negative 481a ("taxpayer favorable") to be realized in the year of change.
Regardless of the intended or stated purpose of a factory receivable, Finance and Flooring assistance is "an unconditional receivable associated with the purchase of a vehicle." Whether the dealer floors the vehicle or not, it does not determine if the dealer will or will not receive the discount. The dealer still receives the discount (flooring or finance credits), which reduces the base cost of the vehicle. The mechanism that triggers the discount is the purchase of that vehicle. In addition, if the mechanism that triggers the payment of the credit is the sale of the vehicle, this does not eliminate the qualification of the Trade Discount. The dealer qualifies for and will receive the discount simply because they purchased the vehicle.
If a discount is always allowed irrespective of time of payment, it is considered to be a trade discount.
It is not proper for an automobile dealer to record the cost of new automobiles in inventory (and cost of goods sold) without reduction of a manufacturer's rebate. In this case, the manufacturer's rebate received by an automobile dealer represents a trade discount and, therefore, must be treated as a reduction in the cost of the automobile in the year of purchase.
Advertising Expense adjustments are factory charges/receivables used for "Local" advertising that are accelerated into the year the vehicle was purchased.
Some do but most do not. In fact, advertising charges typically create the most debate regarding treatment, allocation, qualification and distribution of these expenses. Every factory program is different and each program differs by region and/or local market. Green excels at understanding and tracking these programs. Those Advertising Expenses which qualify as Trade Discounts receive automatic consent. Those which do not qualify as Trade Discounts require IRS filing fee of $1,500.00 per return.
Primarily for audit protection. Especially if the dealers uses LIFO, you can trace the base cost/adjustment back to each vehicle.
Generally, for tax purposes an M1 adjustment is used. However if for book and tax we have industry specialized experts available for assistance.
Green Outsourcing specializes in the qualification, identification and data capture of Trade Discount and Advertising Expense adjustments for financial professionals in the Automotive Industry. Green's specialized streamlined system utilizes the most current technology and eliminates many duplicated processes in data capture. Most of all, Green is committed to developing a cost effective outsourcing solution with EVERY client.
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