It is critical to make sure your dealership CPA is proactively asking you the right questions, particularly in areas related to government compliance and timely strategies that are current and forward-thinking. This article highlights important topics your dealership CPA should be asking.
The New Lease Standard – ASC 842
The new lease standard, ASC 842, is here to stay and became effective for private companies (with calendar year-end financial reporting) as of January 1, 2022. For dealers, the impact is primarily on operating leases, of which real estate leases are likely the most significant. The right-of-use asset (ROU) and the lease obligation will now be recorded for operating leases on the balance sheet. Are you ready to implement this new standard?
What can your CPA do for you?
- Educate you on the impact of ASC 842 and the steps needed to implement
- Help analyze lease contracts and terms
- Help identify potential solutions for accounting for leases, including LeaseVision
Pass-Through Entity Taxes
The Tax Cuts and Jobs Act of 2017 generally limited individual taxpayers’ federal deductibility of state and local taxes (SALT) to $10,000. As a response to this limitation, certain states have passed “workaround” legislation whereby pass-through entities (PTE), i.e., partnerships, sole proprietorships, S Corporations, and LLCs, may make an election to pay the assessed state tax at the entity level and ultimately reduce the owners’ tax liability. Certain states passed workaround legislation that was effective for 2021, and some states passed legislation effective for 2022. Have you determined if your state has enacted this type of legislation? If so, are you taking advantage of these workarounds and recording them properly for book and tax purposes?
Cost Segregation Studies
Have you completed a renovation, purchased a new building, or acquired real estate as part of a dealership acquisition? If so, your CPA should be asking you to perform a cost segregation study in order to identify potential opportunities for accelerating the depreciation of these new assets. Many times, the outcome of the study proves to be a significant multiple of the cost and is an easy decision for the return on investment.
What is the process of a cost segregation study?
A cost segregation study is conducted by an engineer who specializes in a detailed analysis of complex mechanical and electrical systems. Their engineering knowledge enables them to determine which portions do not serve a building function and, as such, qualify as personal property. The engineering professionals will need to:
- Evaluate building assets that can be depreciated at an accelerated rate by identifying short-life assets within the real estate
- Segregate and reclassify qualified assets and report back with multiple assets and the tax class life which results in a more favorable tax position
- Implement processes in adherence with tangible property regulations, if not previously adopted
FTC Data Breach Safeguards
The Federal Trade Commission (FTC) is requiring additional security “safeguards” for consumer financial information in response to the number of widespread data breaches that continue to occur in the current threat landscape. U.S. auto dealerships will be required to comply with the FTC-amended safeguards rules by December 9, 2022. Are you prepared for these changes?
Internal Audit
The following questions are often included in an internal audit program. The common myth is that an internal audit is expensive and not practical. However, the purpose of an internal audit function is to test compliance with the dealership’s policies and procedures and identify potential areas of risk. Have you considered the following questions lately?
- When was the last time you reviewed the open repair order (RO) report and confirmed all open ROs had vehicles on site?
- When was the last time you tested your cash handling/disbursement processes and controls?
- When was the last time you reviewed policy expenses and confirmed appropriate approval?
How FORVIS Can Help
Today more than ever, it is essential for dealerships to consider their operating environment and whether their current CPA is meeting all of their needs. Automotive retail is in a continual state of flux and needs accounting professionals with strategic insights into current government regulations and compliance, advice on cybersecurity and market disruptions, as well as other topics related to operating a forward vision dealership.
For more information, please contact our Dealerships Practice at FORVIS or fill out the Contact Us form below.