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Freight Depot | 1200 Market Street | Chattanooga, TN 37402 | 423.756.7771 | hhmcpas.com
Freight Depot | 1200 Market Street | Chattanooga, TN 37402 | 423.756.7771 | hhmcpas.com
DEALERSHIP INSIDER | October‘11
ARE YOU IN COMPLIANCE WITH YOURSELF?
You own a dealership. Over the years since you started, you have instituted many policies, procedures and rules. Your employees may or may not be aware or follow all of your policies, procedures and rules. You may or may not remember and/or enforce consistently what you think you have in place to help manage your company.
Do you have some type of written policy? If not, how does anyone know what they are or be expected to abide by them? Are they all in your head? It doesn’t matter if you have one or 100 employees. Most people need guidelines and reminders to help them stay within the parameters you have setup for your company.
As the owner of a dealership, policies and procedures surround you in every way you can imagine. You must comply with state laws to maintain your dealer license, business license and continue to stay in business. Your dealership must comply with all the federal and state laws which seem to require a full time person to spend all their time just trying to keep up with it all so attorney generals, the IRS, sales and payroll tax auditors stay out of your facilities.
Have you established policies and procedures for your accounting department? Following are some basic policies and procedures you should have for your accounting department to be compliant with good internal accounting controls.
NUMBER ONE. Do you have segregation of duties in your office? For example, does the person who collects cash complete your bank deposit? Is the person who completes the bank deposit different from the person who completes the bank reconciliation? One of the problems in many dealerships is there are not enough people to separate the duties correctly to be in compliance with good internal control policies. When you have too few people, you should be reviewing various monthly bank statements, deposit slips, electronic transfers and checks written to ensure you are aware and approve all the transactions. Bank statements should be sent to the dealer’s home or personal post office box for review before bringing them into the office for reconciliation.
NUMBER TWO. Adjusting journal entries recorded by your office personnel should be reviewed, xplained and signed off by the dealer. Adjusting entries are different from original source entries. Original source entries are used to record actual transactions, such as sales invoices, cash receipts, cash disbursements, parts, service and body shop tickets, purchases from vendors, vehicle purchases, etc. Adjusting entries are used by your office personnel to correct original source entries. If there are too many adjusting entries, you will need to find out why your personnel are having so much trouble recording original transactions correctly the first time.
Under most circumstances, original transaction should not be recorded as adjusting journal entries.
NUMBER THREE. Cash disbursements take on many different formats. Some examples are electronic transfers, petty cash, credit card purchases, actual checks, debit cards, etc. There has been a large increase in the number of electronic transfers both to and from dealership bank accounts. The best way to review these is to logon to your bank account and go to the section showing these types of transactions. Your office may also be keeping a manual log or actual printouts of transfers in a file. If so, make sure all of the transfers on your bank account are accounted for. If not, find out how they are keeping up with all of these transactions. There needs to be some documentation for each of the transactions and why it was completed. You should also be able to identify who the transfers were made to, what they paid for and who authorized it.
Petty cash is one of the most abused accounts in most dealerships. Too many disbursements are made from these accounts. There is normally too little documentation for the transactions. The activity is also not normally recorded correctly as it actually happened, as most people record the activity only when replenishing the account.
Credit card statements should be reviewed each month. Most accounts allow you to view the activity on-line and also print statements. Whichever method you use, you should be able to match the original receipts from the merchant with the credit card activity.
You should be able to ask for a copy of a paid invoice(s) or other documentation for every check written. A copy of the check should be attached to the paid invoice or other documentation and the amount of the check should match the invoice paid. If a check was written for a floor plan or lien payoff, a copy of the check should also be placed in the car deal jacket.
All debit card transactions should be reviewed. There should be a list of whom if anyone has a debit card for your bank account. Any activity generated from this type of transaction should be kept in the bank statement file and have the appropriate documentation attached to it.
NUMBER FOUR. Cash receipts are normally printed and given to the customer, but most dealerships don’t print a copy for themselves. With archiving is offered by most software vendors, the dealership has the ability to reprint the receipt at any time. If the receipt affects a car deal, such as a down payment, a copy of the receipt should be placed in the car deal jacket.
A cash receipt can also be in the form of a credit card transaction. A batch transaction report should be printed every day at the close of business. All the individual receipts should be attached to the batch report.
You should review how all cash is being handled. Who counts it, who makes out the deposit slip, who actually takes the cash to the bank? Find out if someone actually verifies the amount taken to the bank matches the original deposit slip. The bank receipt should be attached to your copy of the deposit slip and the total amounts on each should agree with each other.
NUMBER FIVE. Purchases should be authorized by the appropriate manager. If possible, control the purchases by using signed purchase
orders. When someone has to get approval to order or purchase something, expenses are normally better controlled because the purchase has to be authorized by someone other than the person who wants to buy the service or item. The purchase order should be attached to the actual vendor invoice for verification later.
Do you have any of these policies, procedures and rules instituted at your dealership? If not, why not? Failure to do so will result in non-compliance with good internal accounting controls and put you at risk for inconsistencies and possible problems in your accounting records in the future. Institute them today. Write down how you want certain transactions handled and documented so there are no misunderstandings due to lack of communication with your personnel. Everyone will be better for it.
IS YOUR ACCOUNTING DEPARTMENT SERVING ITS CLIENTS?
Many businesses have failed due to poor accounting and finance departments, so why would a business underspend in this critical area of the business? Given the current economic climate, an easy area to question costs might be the accounting department. While no department is sacred, including accounting, before anything drastic is done, conduct a thorough review of that department’s effectiveness and ability to adequately serve the rest of the dealership.
Choose someone independent of the function to conduct interviews to see how the department is functioning from the user’s perspective. This could be the internal audit depart¬ment, another accounting office, another general manager, or your outside CPA firm. Conduct the interviews in a safe environment so that those being asked to comment will feel comfortable providing candid feedback.
The key to this assessment is to conduct interviews across the dealership to see what is working and what may need to be improved. Invaluable input will be received if this interview process if done right. Once this information is known, then management will have the background needed to make informed decisions on the accounting department’s effectiveness. For
example, management might see a need for additional resources, or it could become obvious some personnel may need additional training or some personnel are just not effective.
Underspending on the accounting side of the business can incur hidden costs every month. As an example, the competence of personnel dealing with the bank will play an important role in how that bank perceives your organization and the quality of interim financial information. Perceived incompetence or unreliable financial information may escalate the cost of capital or even make capital unavailable. As another example, your accounting firm may incur additional time making adjustments at year end to prepare the financial statements or tax returns. If the dealership had stronger accounting personnel, this additional time could be avoided.
The keys to any successful accounting function are competency, accountability, monitoring, a customer-first orientation, and ongoing training. If your dealership’s accounting department emphasizes these attributes, the financial side of the business will run smoothly and the organization can realize cost savings in many ways.
TAX TIP: INDEPENDENT CONTRACTOR VS. EMPLOYEE
DEALERSHIP INSIDER October ‘11
The IRS is aggressively attempting to reduce the “tax gap,” which is the annual shortfall between taxes owed and taxes paid. Employment tax noncompliance is estimated by the IRS to account for approximately $54 billion of the tax gap. Under-reporting of FICA makes up $14 billion; under-reporting of self-employment tax accounts for $39 billion; and under-reporting of unemployment tax accounts for $1 billion in lost revenue.
The IRS entered into agreements with workforce agencies in 29 states to share the results of employment tax examinations. These agreements provide a centralized, uniform means for the IRS and state employment officials to encourage compliance with federal and state employment tax requirements. In addition, for the 2008 through 2010 tax years, the IRS plans to examine 6,000 randomly selected employers’ Forms 941, Employer’s Quarterly Federal Tax Return.
Because the existing worker classification rules are complex and ambiguous, much uncertainty surrounds their interpretation and application. The lack of a single, definitive test for classifying workers as either employees or independent contractors contributes significantly to the worker classification problem.
Therefore, understanding the difference between an employee and an independent contractor is very important. If you are an employer, you are required to withhold and contribute a matching amount of FICA and Medicare taxes from your employee’s income. However, if your workers are independent contractors, you are only required to report payments of $600 or more on a Form 1099-MISC (Miscellaneous Income). Failing to make the right classification could cost you money.
If you have workers who make substantial financial investments in tools, equipment, or a place to work, or undertake some entrepreneurial risks, they are probably independent contractors. However, when you control and direct the workers who perform services for you as to the end result and how it will be accomplished, you are probably involved in an employer-employee relationship.
Unless there is a reasonable basis for treating your employees as independent contractors, failing to withhold income and employment taxes from their wages can result in severe penalties and interest, in addition to the back taxes owed. Of course, penalties for intentional worker misclassifications are harsher than they are for inadvertent mistakes.
Your benefit plan may also be in jeopardy if any eligible employees have been misclassified as independent contractors. Since these employees have been excluded from plan participation, your retirement plan may lose its tax-favored status. The problem is compounded when excluded employees seek restitution for lost benefits not only due to their exclusion from the benefit plan, but also for health coverage and other employee benefits. If you are going to classify an employee as an independent contractor, you
must ensure that they truly qualify as an independent contractor under applicable tests.
No single definitive test exists for determining whether a worker is an employee or an independent contractor. The U.S. Department of Labor (DOL) and the IRS apply separate tests, but the primary factor in both is the amount of control the employer wields.
The DOL applies the “economic realities” test. It assesses whether the worker economically depends on the employer for continued employment, based on several factors:
• The extent that the services are integral to the business’s practices,
• The worker’s investment in facilities and equipment,
• The nature and degree of control the business has over the way the worker performs the work,
• The worker’s opportunity to make a profit or incur a loss,
• The requisite level of skill and judgment to perform the work,
• The expected duration of the working relationship.
The IRS has streamlined its traditional 20-factor test for evaluating who’s an independent contractor to now focus on three areas:
1. Behavioral. Does the company control or have the right to control what the worker does and how he or she does it?
2. Financial. Does the company control the business aspects of the worker’s job (for example, how the worker is paid, whether expenses are reimbursed, who provides tools or supplies)?
3. Type of relationship. Are written contracts or employee-type benefits involved? Will the relationship continue, and does the work performed constitute a key aspect of the business?
Employers do have a limited safe harbor from employment taxes if they misclassify an employee. The IRS can’t recover employment taxes or penalties from an employer who misclassified a worker if the employer had a “reasonable basis” for doing so.
LOOKING BEYOND LABELSThe language used when drafting agreements with would-be independent contractors is critical. Merely labeling the document “Independent Contractor Agreement” won’t do. Employers must tailor the agreement to address the issue of control. One way is by stating that how the work is performed is up to the worker’s discretion. But courts will look at the parties’ actual conduct in determining worker status. Your attorney can help.
Since the potential liability is considerable, we feel that it would be beneficial for you to verify that your workers are properly classified. It is also important that your employment tax records are in compliance with IRS guidelines, especially in the event of an audit.
TAX PLANNING OPPORTUNITIES FOR 2011
Tax planning shouldn’t be just a year-end activity because of the number of variables that can affect how much tax you pay and when you pay it. By regularly reviewing where you stand on year-to-date basis, you may be able to reduce your current year tax liability.
EQUIPMENT PURCHASESIf you have or will be purchasing any major equipment for your showroom or shop in 2011, you have some opportunities to expense the cost of the assets in the year you place them in service, rather than depreciating them over a number of years:
Bonus Depreciation - the 2010 Tax Relief Act allows businesses to deduct the capital expenditures of most new tangible personal property between September 8, 2010 and December 31, 2011 by permitting the first-year write-off of 100% of the cost as depreciation. The bonus depreciation rate will drop to 50% in 2012. Bonus depreciation can be taken whether or not you have a loss from the business
Section 179 - if you have purchased used equipment that does not qualify for bonus depreciation, you might be able to deduct them under Section179. Congress increased the expensing limit to $500,000 for the calendar year 2011 for your dealership’s fiscal year that starts in 2011. This tax break begins to phase out dollar for dollar when total asset acquisitions for the tax year exceed $2,000,000. You can’t use this expensing election to create or increase a loss from the business.
COST SEGREGATION STUDYIf you’ve recently purchased or built a building or are remodeling existing space, consider a cost segregation study. It identifies property components and related costs that can be depreciated over five, seven or 15 years instead of 39 years. The acceleration of depreciation into 2011 will defer your tax expense.
RETAINED WORKER CREDITThe credit is the lesser of $1,000 or 6.2% of a retained worker’s wages during the 52-consecutive-week period. A retained worker is a worker who 1) Qualified for the payroll tax holiday, 2) was employed by the employer on any date during the tax year, 3) was employed for 52 consecutive weeks and 4) whose wages for the last 26 weeks was equal to or greater than 80% of the wages for the first 26 weeks.
WORK OPPORTUNITY CREDITTo be eligible, the employees must be from a disadvantaged group such as food stamp recipient, disabled veteran or ex-felon. The credit is 40% of the first $6,000 of qualified first-year wages of a qualified employee up to a maximum credit of $2,400 per employee.
SMALL EMPLOYER HEALTH INSURANCE CREDITThis credit is available to small employers who provide health insurance for their employees. The maximum credit is 35% of the group health coverage premiums paid by the employer. To be eligible, the company must meet all of the following requirements:
• Employs no more than 25 full-time equivalent employees during a tax year.
• Pays average annual full-time equivalent wages of $50,000 or less
• Has a qualified health insurance plan or arrangement that requires the employer to make a non-elective contribution of at least 50% if the premium costs, on a uniform percentage basis, on behalf of all of its employees who enroll in the plan
SALARY VS. DISTRIBUTIONSDue to the differences between tax structures, there may be tax planning opportunities in whether shareholders take money from the company in the form of distributions or draws.
S corporations - to reduce their employment taxes, shareholder-employees may want to keep their salaries relatively low and increase their distributions of company income. However, to avoid penalties, they must take a “reasonable” salary which varies with facts and circumstances, but it is generally what the company would pay an outsider to perform the same services. While distributions are not taxed at the federal level, there may be state tax implications; for example, distributions from Tennessee S corporations are subject to the Hall Income Tax. Also, if S corporations have more than one owner, distributions must be done on a pro rata basis.
C corporations - shareholder-employees may prefer to take more income as salary because the overall paid by both the corporation and the shareholder-employee may be less.
While opportunities exist, remember that the IRS is cracking down on the misclassification of corporate payments to shareholder-employees, so you will need to tread carefully.
RANDALL HEBERT, MBA, CPA, CVA 423.702.8145
TRAVIS M. HORTON, MBA, CPA 423.702.7275
CHET LOGAN, CPA 423.702.7262
CALL THE DEALERSHIP SPECIALISTS AT HENDERSON HUTCHERSON & MCCULLOUGH, PLLC
Freight Depot | 1200 Market Street | Chattanooga, TN 37402 | 423.756.7771 | hhmcpas.com
