Wake Up and Smell Your Tax ExposureBy Garry Bartecki
Article Date: 10-01-2010
Copyright(C) 2010 Associated Equipment Distributors. All Rights Reserved.
Your best defense against a potential double-whammy is to have an expert review your position who knows the specific tax laws that apply to equipment distribution.
It appears that each new financial report you listen to or read has some bit of good news, which is then contradicted in the next financial news report you receive. As a result, it is very hard to plan long term and even for the next three months.
Add on top of that the tax changes and health care changes taking place and the financial horizon really gets blurry. Is it any wonder why the business world is holding back in terms of hiring or business expansion?
The tax picture for dealers could not become any more complicated than it is. Or could it? After hearing the tax update Steve Pierson presented at the Executive Forum, I think there’s plenty of reason for concern. Rates are scheduled to increase, new taxes are taking effect, new disclosure requirements are needed for 2010 C-Corp returns, and the 3.8 percent Unearned Medicare Contribution coming on board in 2013 could include income from rental activities. Yikes!
As I have mentioned previously in this column, dealers have a tremendous cash drain exposure because of taxes; taxes of all kinds, but especially income taxes. Normally, when you discuss income taxes with dealers they fall asleep because they have paid minimal taxes because of MACRS, bonus depreciation, Section 179 write-offs, operating loss carryovers and carrybacks, and the availability of like-kind exchange transactions. Having these tax benefits available has been great, but now that inventory and rental fleet replenishment have slowed, and used rental units are being sold to generate cash, your tax picture has changed because in many cases, any used equipment sales will be 100 percent taxable at ordinary tax rates. In other words, if your book income is break-even or shows a loss, it is possible to generate taxable income, taxable at corporate rates or added to your personal income.
As we all know, the IRS does not extend payment dates for taxes due on your tax return. So all of a sudden, you get a tax return with a balance due, which you did not expect. In addition, you receive a schedule for estimated tax payments to cover what you may owe for the following year. That’s double what you didn’t expect in the first place, all due within the next 12 months – cash payments when youcan least afford them.
What scares me is that the scenario outlined above is going to be experienced by AED members regarding 2010 or 2011 tax returns. Believe me when I tell you, your tax returns are both complex and scary. So scary that the agents have a tough time determining what their adjustments mean in terms of a tax change. One agent I worked with recently suggested that we run the changes through because he/she didn’t know how to do it.
I mentioned new disclosure requirements – this refers to disclosing to the IRS any Uncertain Tax Positions taken in the tax return and any potential additional tax liability if the position is not upheld after review by the IRS. Right now, this only applies to C-Corp tax returns with the flow through entities sure to follow.
The more I go over this material the more I believe that every dealer has to review their basis tax positions and make sure they understand how each position provides either exposure or deferral of potential tax liabilities. If there ever was a year when you have to be 100 percent comfortable that your financial team has a handle on your tax exposure, this is the year.
If you are using a tax person without extensive industry experience you are taking an unnecessary risk and should have an industry expert review what has been done to date. You can do this in two ways:
1. Have an industry expert prepare the 2010 return using data supplied by your current tax person.
2. Have an industry expert review your tax position before you have your 2010 return prepared so that the 2010 return is properly prepared.
I am not suggesting you change your accounting or tax relationship. What I am suggesting is that we educate your current service providers regarding current issues to minimize your tax exposure going forward. In short, if you do not work in this tax arena on a regular basis you have a good chance of missing an important issue during tax preparation, which will cost you those hard- earned dollars you need in order to keep your head above water.
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