Tax Season is Here Already?

by David Keller | CliftonLarsonAllen

There are a few things you need to have completed before tax season starts. First of all, you should have the prior year-end accounting closed out. You should have printed all of your required AutoStar reports to PDF and/or Excel and archived them to use for reconciliation of your general ledger accounts. You also should make sure you have reconciled your general ledger accounts at year-end to your AutoStar reports and other documentation so you have correct balances going into the new year. You won’t have as much time to do this once you start tax season and you also will want to see how you are doing financially as soon as possible after each month ends.

You have been waiting all year for this. Now it is finally here. I hope you are ready for it, because it won’t wait for you.

Even more important, you should have stocked up on inventory and completed the necessary reconditioning on the units you hope to sell this tax season. I am assuming you have charged the unit for all the reconditioning costs so you can see what your true gross profits are each month. Have you taken a physical inventory to make sure you know where all of those vehicles are? Have you figured out a way to get all of the vehicles you are going to buy during tax season through the shop quickly so they are ready for sale? Failure to do so wastes the precious few days you have to maximize your sales during the seemingly short tax season.

Have you reviewed and evaluated your loan discount rate for selling loans to your related finance company (RFC) for this tax season? If not, you should run your static pool report and review it to see if changes are needed from last year’s loan discount rate. Have your write-offs increased as a percentage of the originations on expired pools? Do your write-off percentages for unexpired pools appear to be higher than normal based on the remaining principal balance? If you need to change your default discount rate, you need to do it as soon as possible so your notes are sold at the correct rate from the beginning of the year.

You should pay particular attention to your prior tax season notes generated and what percentage and dollar amount of those notes were written off during the remainder of the prior year. This may be an indication that you need to change your underwriting and approval process this tax season to avoid unnecessarily higher than normal write-offs. If you are not watching this, it can drastically affect your allowance for bad debts percentage in the future and could cause loan covenant and profitability problems.

One thing you need to do if you are selling your notes to your RFC is to make sure the discount loss you want to take on each individual note doesn’t exceed the gross profit generated from the vehicle sale. If it does, you will need to override the default discount rate and limit the percentage used. To do this you would take the gross profit and divide it by the principal amount to be sold in order to arrive at the maximum discount percentage you can use. Then use a percentage slightly under the computed percentage to override the default discount percentage for normal sales. This will keep you in compliance with IRS regulations.

Hopefully you have estimated what additional principal balance you hope to increase your portfolio by. If you need to use your credit line at the bank to achieve this growth, then you need to review your availability to make sure you can borrow the amount of funds needed to fund the growth. Now is the time to talk to your lender and make sure you have enough cash to fund not only the purchase of additional inventory during tax season, but also the growth in sales and generation of installment notes to be sold to your related finance company.

Another item to consider is sales tax. If you are in a state where you pay the entire sales tax up front at the time of sale, but your state allows you to take a credit for any repossessions, you may not want to sell the notes right away to your RFC. Selling the notes to the RFC normally disallows any credits on repossessions. This can cost you hard cash that you will never recover. Instead, you should identify and review the period of time after the sale when the largest chance of repossession has occurred, and then sell the notes after that period. Doing so will maximize your tax credits and preserve your cash flow. You can also just wait until year-end to sell the notes and achieve the same tax saving results most of the time. A word of caution here: you may need to reevaluate your discount percentage as it may be different than what you would use selling them daily to your RFC.

Good luck selling!

Dave Keller is a CPA and dealership partner with CliftonLarsonAllen. David’s work includes business and operational consulting and tax services for the firm’s new, used, and Buy Here Pay Here automotive dealership clients. Learn more at

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