In a Technical Advise Memorandum (AM-2014-004) dated May 9, 2014, the IRS has concluded that facility image upgrade program payments are includable in gross income. The IRS described three detailed fact patterns in which dealers received payments, and concluded that in all three situations, the amounts were includable in gross income. Situation two was clearly articulating the facts and circumstances present in the General Motors “Essential Brand Elements” Program.
The Technical Advise Memorandum acknowledges that certain dealers are not including the payments in their gross income. They cited three tax accounting treatments that they deemed inappropriate: recording the payments as non-shareholder contributions of capital, reducing the basis in the constructed assets, and reducing the basis in the new vehicle inventory.
The IRS did acknowledge that dealers may be required to return some or all of the money if the improvements do not meet the conditions of the manufacturer. This fact did not affect their conclusion that the payments were includable income. The TAM states that the dealership is responsible for contracting the construction provider and the dealership, not the manufacturer, owns the property that is constructed or improved. The IRS sites the John B. White case as support for its position. In “White,” an auto manufacturer made payments for leasehold improvements to induce the dealer to move to another location and the tax court upheld that the payments were includable in income.
The three situations identified appear to cover substantially all of the reimbursement programs that we have experienced with clients. If a dealer reviews his/her particular circumstances and concludes that the payments are includable in income, he/she must make sure to take advantage of all available elections to expense, bonus depreciation, and direct expensing options. Dealers that are involved in substantial renovations should engage a qualified cost segregation company to assist them in gaining the appropriate depreciation and expense deductions.
If you have any questions about auto dealership management, please contact Paul McGovern at 800-849-6022 or PMcGovern@DowneyCoCPA.com.
