Tax Planning Series: Dealership Tax Planning
As part of our Tax Planning Series, we’re diving into important updates and strategies to help you prepare for tax season. In this segment of our Tax Planning Series, Jacob Pardue, manager at HHM CPAs, dives into key dealership-specific tax planning strategies and considerations. He discusses how automotive businesses can navigate the challenges of expense control, budgeting, and year-end planning to optimize their tax positions. From managing gross margin fluctuations to identifying often-overlooked expenses, Jacob highlights how dealerships can take advantage of strategic tax planning—particularly around asset purchases and loan covenants—to strengthen their bottom line and stay compliant. Below, Jacob answers some of the most pressing questions for dealers heading into tax season.
What are you seeing with expense control and how can it play into year-end planning?
2024 has been a mixed bag for our automotive clients as gross margins, and subsequently profits, have regressed from pandemic highs. While our overall outlook for 2024 is still favorable, specific manufacturers are beginning to struggle with inventory mix and ballooning days’ supply. Increasing supply, coupled with high carrying costs due to elevated floor plan and insurance rates, have led some of our clients to take a closer look at their profit and loss to make sure other expenses are in line. Expense control is vital for any healthy business – regardless of how well it is performing. Making sure expenses aren’t out of line, especially when being analyzed through proper budgeting, can help businesses maximize their bottom line. And while we don’t suggest our clients throw good money after bad for the sake of a tax deduction, understanding expenses that are necessary and can be pushed into the current tax period, like fixed asset purchases or closings on real estate, can be a big factor in year-end planning.
What is the importance of budgeting?
We believe budgeting is a critical exercise for owners, operators, and accounting staff to fully understand how their business is performing. Both setting future expectations and benchmarking current performance versus past periods, peers (such as 20 Group reports), and even publicly available data can help our clients know the areas of their businesses in which they are succeeding, needing improvement, or failing in. At the bare minimum, we believe our clients should understand how their current business is performing with respect to its past performance. If you are struggling with finding accurate data to benchmark or budget for your business outside of what you can produce, HHM can help provide you with tools and resources to reach your objectives.
What common expenses are often overlooked when planning for taxes?
Typically, non-recurring expenses such as year-end bonuses, management fees, foreseeable repairs and maintenance, and variable payments on debt or other obligations can be missed when year-end planning. HHM strives to work with our clients to accurately pinpoint these items to get a better understanding of how income will shake out for the year. It’s also important to time one-off purchases, like machinery, equipment, company/rental vehicles, and even real estate in the tax period that is most beneficial for the taxpayer. For some clients, pushing those purchases into the current tax period makes sense to speed up deductions, while others may want to wait depending upon their circumstances. Either way, proper year-end planning is key when making these decisions.
What are loan covenants, and how can they impact tax planning?
Simply put, loan covenants are financial guidelines that lenders put in agreements when lending businesses money. Often, these covenants result in quarterly, semi-annual, and/or annual reporting to the lender that shows that these guidelines are being met which is called being “in covenant.” Common loan covenants are working capital requirements (current assets less current liabilities) or debt service coverage (often a component of adjusted cash flows compared to debt service payments). If your business is slowing down, it may be time to familiarize yourself with your loan covenants to make sure you are still in compliance. If done correctly, proper year-end planning can help you stay in compliance if you are close to being out of covenant with your lender. If you fall into this situation, being proactive and working with HHM before the reporting periods ends can help you find a proper course of action.