IRS UNICAP “Safe Harbor” Provides Dealers With Tax Savings

In what has been hailed as a major victory for car and truck dealers, the Federal government has enacted Revenue Procedure 2010-44, which provides two safe harbors related to the capitalization of handling and storage costs, commonly referred to as UNICAP.  Previously, all dealerships with annual sales greater than $10 million were required to include into inventory any direct or indirect costs related to the production or acquisition of their inventory (for tax purposes).  Salaries and benefits of parts personnel and lot boys are two of the most common costs that had to be capitalized.

Under the new safe harbor methods, a dealership can be treated as a retail sales facility and any of the costs that are incurred in the “retail sales facility” no longer have to be capitalized.  The term “retail sales facility” is defined as those portions of a retail site where customers normally and routinely shop and that are adjacent to or in close proximity to the retail site.  This means that if a dealership has a storage lot that is open to customers or an area that your sales staff, in the normal course of business takes customers to, would now be considered part of your retail sales facility and not subject to capitalization.

The second safe harbor is the “reseller without production method.”  In recent federal audits, the IRS contended that certain handling and related costs that a dealership incurred in the process of performing work on its own vehicles (aftermarket items on new vehicles and reconditioning and repairs to used vehicles) should be capitalized.  Under this safe harbor, a dealership is now only required to capitalize the cost of the parts associated with the work done.  It is assumed that most dealers will continue to capitalize the labor costs as it gives a more accurate representation of the costs involved and would be too difficult to segregate on the repair order.   The main benefit of this safe harbor is the dealership not having to capitalize any indirect costs.

A dealership can elect for protection under either one or both safe harbors.  An application for an accounting change must be filed with the change being automatic (no IRS approval necessary). The application must be filed with the dealership’s tax return as well as a copy sent to the IRS’ national office.

Both of the safe harbors now allow a dealership to deduct costs that previously would have had to be capitalized creating a tax savings for the dealership.

Should you have any questions on how this new ruling will affect your dealership or the procedures involved, please contact Paul McGovern at pmcgovern@downeycocpa.com.

Downey & Company has created a new group on Linkedin called Auto Accounting Professionals.  Please consider joining the group.  The goal is to have a place where those who work in the accounting area of auto dealerships can interact.