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Automotive Trade Discounts

A unique opportunity is now available to all automobile dealers. Requests for a Change of Accounting Method regarding the treatment of Trade Discounts are now Pre-Approved by the IRS.

Green Outsourcing specializes in assisting Auto Dealers and their CPA's with these calculations. Although not a mandatory change, Green has found most dealerships have a tax deferral equivalent to 2% to 3% of new vehicle inventory at cost.

What does this mean? Almost every automobile dealer, depending on the manufacturer:

  • Receive some form of Trade Discounts. They often appear as invoice line items as Finance assistance, Fuel credits and Preparation & Conditioning credits.
  • Treat these receivables as income and are capitalized in inventory increasing current taxable income.

Revenue Ruling 84-41

Section 471. General Rule for Inventories, 26 CFR 1.471-3: Inventories at cost.

General rule for inventories; inventories at cost; manufacturer's rebate by automobile dealer. An automobile dealer must record the cost of new automobiles in inventory reduced by the amount of a manufacturer's rebate which represents a trade discount.

ISSUE

Is it 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.

If a discount is always allowed irrespective of time of payment, it is considered to be a trade discount.

HOLDING

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 January 2002, the IRS released Revenue Procedure 2002-09 which:

  • "provides the procedures by which a taxpayer may obtain automatic consent to change the methods of accounting".
  • Allows for the most appropriate treatment to not capitalize and defer the revenue until the year the vehicle is sold.

In addition, 2002-09, defines Qualifying volume-related trade discounts as:

(a) the tax payer receives or earns the discount solely as the result of the purchase of the merchandise to which the discount relates;

(b) the taxpayer is neither obligate nor expected to perform or provide any services in exchange for the discount; and

(c) the discount is not a reimbursement of any expenditure incurred or to be incurred by the taxpayer.

In March of 2002, the IRS released Revenue Procedure 2002-19 which:

  • Allows for the entire deferral (Negative 481a) to be taken in the current year versus a previous four year recovery period.  This deferral continues for the life of the discount program or possibly indefinitely if the dealership uses LIFO.

PURPOSE

(2) providing that, in the case of changes in method of accounting that result in a negative (i.e., taxpayer-favorable) 481(a) adjustment, the entire amount of the adjustment will be taken into account in the year of change;

GREEN Outsourcing can assist Dealerships and/or CPA's with:

  • Estimating the amount of deferral available.
  • Identification of Qualified Trade Discounts.
  • Appropriately match VIN's to Discounts for documentation to IRS.
  • Adjust LIFO layers when applicable.
  • Perform annual calculations.
  • Documentation and DATA collection.
  • Form 3115 preparation and assistance
  • Consultation with IRS to outline and confirm specific manufacturer programs.
 
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