Tax Issues You Should ConsiderWritten By: GARRY BARTECKI
Article Date: 02-01-2007
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.
The IRS is looking at 263a adjustments, LIFO and tool reimbursement programs.
The annual AICPA's Dealer Conference for dealer CFOs again covered a wide spectrum of financial topics. In particular, three tax topics were discussed this year: Section 263a adjustments, LIFO and tool reimbursement programs that are of particular interest to construction equipment dealers. 263a Adjustments
If you think back 10 years and maybe longer, the IRS decided it was a good idea to add a portion of the indirect costs of processing inventory to your inventory, thus reducing expenses and increasing taxable income. There were some crazy calculations to figure out how much you had to add to inventory, and I bet most of you complied when the law was first passed.
What was unique about this was it was once-a-year adjustments to reflect the changes in the value of your inventory or the indirect costs. If the inventory went up 20 percent in value chances are the 263a adjustment followed suit. If it went down, the contrary was true. It was pretty simple, as long as you remembered to adjust it every year.
But it appears that many dealers forgot to make the adjustments and probably have not done so for many years. Hence, the IRS's interest in making sure this "inventory item" is on your balance sheet. If you don't remember seeing it anywhere, you may want to see what you did in the past, where it may be hiding and what you have to do to become current. In short, find out where you stand and do something to have the 263a adjustment visible on your trial balance.
One final note on 263a: It applies to equipment inventory, both new and used, and parts inventory, but not to rental assets.
The auto industry always found LIFO useful, but it was never very popular in the construction equipment industry. The IRS's interest in LIFO concerns the methods being used to calculate the reserve. It appears some folks are leaving the reservation and taking deductions they may not be entitled to.
Consequently, it you're using LIFO, it may be time to be sure you're in compliance. Better to find out now while you can make corrections than to find out later and pay interest and penalties.
If you're not using LIFO, it may be time to review the program to see if it makes sense for you. There are new simplified procedures available that keep compliance costs to a minimum. But, don't forget, LIFO has both tax and accounting implications.
Tool Reimbursement Programs
The IRS made a special issue out of the tool reimbursement programs used by many dealers (across many industries) to reimburse technicians for the cost of tools they are required to purchase. The IRS apparently has problems with these programs and believes they are not in compliance with applicable laws and regulations. At this point, they're not willing to negotiate any form of settlement to make these programs workable. You can conclude that its going to be tough to get anything resolved on this issue if they won't even discuss it.
The problem from the dealer's standpoint is that the dealer could bear 100 percent of the tax burden if the program is reversed. In short, the dealer pays the income taxes the mechanic avoided along with the related payroll taxes and interest, if any. Any adjustment would cover a three-year period.
Since the IRS has made it known that this is one of their hot topics, every dealer using such a program should review compliance on this issue. Compliance on the other hand is tough to review if you have no zero tax law to compare it to. Just make sure you meet the three tests for an accountable plan: a written program requiring substantiation of the expenses, refunds required for any excess reimbursements a tech may receive, and reimbursement only for expenses incurred while the tech works for you. As of now, there's not much else you can do.
Something has to give here. There are just too many dealers using this program across too many industries not to have the IRS make a decision one way or the other about what has to be done to be in compliance and legal. It's going to be a real mess if they start reversing these programs.
There is a pending tax audit that may shed some light on the matter, and many dealer related associations are talking about forming a coalition to address the issue with the IRS.
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