#30 - Dave Keller - Top 5 Bookkeeping Tips

So, Dave, how's retirement, buddy?

Retirement is very nice. I enjoy it. I don't miss work at all.

So a special treat for everybody today. Dave Keller, formerly with Clifton Larson Allen, I would dare say is probably the foremost in automotive accounting in the country. And I would also say probably a hall of famer when it comes to educating all of us independent dealers on what we should be doing. Thanks for being here, Dave. No problem.

Thank you for inviting me.

Welcome to the Independent Dealer Podcast, the podcast for auto dealers to learn and grow together. Here are your hosts, Luke Godwin and Jeff Watson.

Let's jump in. Can you kind of give us, I guess, point by point, what we should know as a dealer? You know, what are we doing wrong? What should we know? What don't we know?

Well, the main problem I see on most dealers is that their books are not reconciled. So they're dealing with fic, fictitious numbers and financial statements. And when they get ready to either go get a bank loan or prepare their tax return or figure out how much they need to pay in taxes, they open up another dealership location or things of that nature, they screw up because they're not looking at good financial numbers or good historical financial numbers for that sake. So they don't really have good current numbers and they don't have good historical numbers to find out what they should be relying on for tax return purposes or for going getting a bank loan or for expanding their operations.

Yeah. Dave, how many guys, how many dealers out there do you think are just running their dealership off of their bank account? They're just looking like, if I got money in the bank, I'm gonna spend it.

You know, I was gonna make that point that most dealers run their dealerships off a cash account, just like my dad did his dealership. So if you have money in the bank, you're okay. If you don't, then you start worrying cars or wholesale, something or whatever to go get some money. But that's how most dealers run their business. They never look at their financial statements, and then they're surprised. At the end of the year, whenever we say you owe $80,000 in income tax, and they go, I don't have it. I said, that's because you didn't put anything aside during the year. You spent it all on cars.

Yeah.

I mean, I dare say that's probably the number one torpedo that's going to sink your ship. Right. I mean, I think about dealers around me that have gone under. They were always the type that were like, well, if I owe this guy, $5000. I can only give you 2000 today and I'll give you another 2000 in a couple weeks. You know, they were never paying their bills in full because they literally didn't know what they had in their account or who else they owed. They just weren't paying attention.

So David, if we want to dive into this reconciled process, I know how important it is because you know, I dealt with you for the last five years and you kind of showed me how to do it and what we were doing. You and I have spent countless hours on the phone working at this. But can you dive a little deeper into. I think there's some dealers out there that don't understand reconciliation. Is it something my accountant needs to do monthly? Is it something they need to do yearly? Is it something they need to do every six months? Can you kind of walk us through what that looks like?

Yeah, I mean what you should be doing should be reconciling your books every month end. Don't wait three or four months or six months or until year end to find out where you're really at because it can be pretty shocking. And you've run your business for 12 months and didn't have a clue what was going on just by running it by the cash account. You can outsell yourself in this business very easily, as you guys well know. And that's why some people go out of business because they, they don't have enough cash to get them through what their growth pattern is or what their expansion plans are or just that if they don't have enough volume in their receivable base to generate enough cash flow to keep them going and they don't have any outside access to inventory floor plans and, or just a line of credit to finance their receivable base. It's a catch 22. If you don't know where you're at and how much money you're making and just living off your cash balance, you can be surprised pretty quickly by reconciling your accounts we're talking about. You would look at your balance sheet first is what we start with. Your financial statements are a balance sheet and an income statement. So your balance sheet is as of a certain date and time, like I said, as of the end of the month. Whereas an income statement is for a certain period of time, like the 30 day period of the month or are all 12 months of the year. So what we start with is a balance sheet. The most important account you need to make sure is reconciled every month is your bank statement. If Your bank statements aren't reconciled and you don't know how much cash you have in the bank. Your financial statements can't be accurate at all. So cash is the main thing that we really stress. It's the one thing you guys live off of. There's also a thing that should be reconciled in your books. The very first thing with online banking, you can reconcile your account every day basically by what's clear in the bank. You can check it off and check it off in your system. So you basically have a reconciled bank account by the end of the month if you want to keep up with it that way. If not, it may take you an hour to do your bank statement at the end of the month and go through your reconciliation process, if that long. But it shouldn't be a big process. It shouldn't be a time consuming process. It should be pretty easy based upon how you're recording your activity on your. On your computer system.

And when you say computer system, for those dealers that are just starting out or don't know, they need to have what I mean, what is it? QuickBooks or what are these?

Yeah, they need to have QuickBooks, DealPak, you know, Dealer socket. All the different systems that are out there right now, they need to have a decent dealer management system and they need to have a decent general ledger system. So some dealer management systems out there have a general ledger built into them and some of them don't. Some of them have to use QuickBooks or Peachtree or something of that nature to do the general ledger part.

So you need something that's going to bring in your dealership numbers and your bank statements into one place where you can reconcile those numbers quick. Okay.

It really depends if your dealer management system is integrated with your accounting system or if it's not integrated with your accounting system.

That's what I was going to get to. Dave, do you recommend. I know we've, we've been on the, you know, we've all. Since we've been with you, we've been on a download type of situation where our DMS push us straight to our QuickBooks. Do you recommend that for dealers? I think that would, you know, if it's mapped properly, I think it would cut down on a lot of aggravation. What's your opinion on that?

I agree with you. The problem that we see most of the time is that it's not mapped property. Now, I know that you fought that for a long time to get everything mapped properly. Sometimes the DMS system you're working with doesn't push through stuff to the right accounts. No matter how you try to map it on quick, you know, on the download it doesn't really work right because they don't have all the detailed accounting accounts set up themselves with a DMS to push it through to your Peachtree or QuickBooks system correctly. And you have to make some adjustments after the fact. But as long as you're aware of those adjustments and what you have to do to make it work, I think the integration process and the download automatic download process works better. You have a lot less detail to enter, a lot less mistakes.

Don't even get me started on the mapping thing.

The mapping is the hardest part as Luke well knows.

Oh yeah, it's just the hardest part.

To get cleaned up.

What's the next thing Dave?

Number two next thing is basically is making sure your cash is right. If your cash is right then you can then the next biggest number you guys have in your balance sheets is your receivable base, your notes receivable. So what you have to do by your paper dealers on the buyer payer dealers. If on buyer payer dealers the next biggest one is notice receivable and on regular independent dealers it's your vehicle receivables or your contracts in transit. So either one, you have to rely on your DMS system to give you a good report to balance that too. And most people we find they may run the reports at month end but they never reconcile that report to the general ledger system. Your ledger system may say you got 300,000 contracts in transit and when you report on your system it says 245,000 and you never figure out why you're off.

Yeah, that's definitely. I know with buy here pay here we. I have not close your ears for a second there Dave, but I have not been doing it here lately. But I will get back to reconciling those receivables. But Dave, explain the reason why that is so important. And I know that you could. If they're not right, it looks like you're making money and you're not right?

That's correct. If your receivables are recorded too high on your books, you're probably over showing the amount of income that you have on your income statement. So when you adjust your balance sheet to the right amounts it affects your income statement. So if your balance sheet's not right, your income's not correct. It's almost a direct correlation of if your receivables aren't right then either you didn't Write off the bad debts correctly on a general ledger or you didn't record some different adjustments you may be made on your receivable base in your general ledger. So if you don't reconcile that really on a month end basis, a lot of people try to reconcile it on a weekly basis just to make sure that they're in sync with each other. If you don't do that, then your income is probably off by the amount that your receivables are off.

Right. How about retail dealer, the contracts in transit? How does that. Where is the issue there if it's not reconciled? What's happening there?

Well, the issue there is if it's not reconciled, you don't know if you got all the money or not. You're recording your cash receipts incorrectly. So you're showing $300,000 of contracts in transit, your general ledger, but Your report shows 245,000 because you receipt it in 55,000 on your DMS system that you didn't record on your general ledger system. So it looks like you've got $300,000 more money coming in and you don't. So you have to be realistic with yourself. If you don't have the right amount of contracts and transit on your books and vehicle receivables for an independent dealer, then you don't know how much cash flow you have coming in to be able to service your business operations and also buy more cars.

Very good. And number three, what we got for.

Number three, Dave, Number three is your inventories. And that's another big problem. Again, you have to rely on your DMS system to give you a good report on your inventory. The biggest problem that we find is that your inventories, it depends on how you record stuff in your DMS on, on your reconditioning that you do to the car. If you put in all of your different reconditioning costs on your DMS system and it records it correctly, when it prints out your inventory list and it print out your cost plus the reconditioning costs, plus any ads that you may have done for ship, for transport or GPS or whatever else you're going to put on the car, it will have all that cost in there that you can reconcile back to your general ledger system. If you don't have a good DMS system where you're recording all your reconditioning, all your additional costs you're adding to that car, then your inventory is going to be off on your general ledger when you try to reconcile it. And your cost of sales is Going to be off, which is going to directly affect your income.

So I could have undervalued inventory that I say are my cost of goods. Let's just kind of break this down for everybody. And so let's say I sold $100,000 worth of cars, and my cost of sale was according to my balance or according to my DMS was only 50,000, but if I reconciled it, it's probably 75,000. So I would be overstayed my income by $25,000. Is that correct?

That's correct. So if you have to make an adjustment to inventory, the adjustment's gonna go to cost of sales. That's gonna directly affect your income. So if your inventory is off by 25 grand, your income. I mean, if your inventory's off by 25 grand, your income is off by 25 grand.

Gotcha.

And that's very important. So you got the three largest accounts for any dealership is your cash, your receivables, and your inventory. Those are the three largest accounts that have all the activity going through them on a regular basis. So those are the three. Three big accounts that we would pay most attention to, and that's the ones that people pay attention to.

Yeah.

I know I'm gonna say this probably eight times during this interview, but I feel like that's a rabbit hole that I really want to go down. But I'm gonn. I feel like that's a whole nother podcast that we could talk about valuing your inventory. When do you write it down? How do you account for your expenses? You know, it brings up so many questions in my brain, but, yeah, making sure that your cost of car is accurate, 100% important. Right. I think a lot of people, in the way you look at it, you say, well, I bought a car for X amount. And then I just. All I got to do is look at my credit card receipts. What did I spend on parts? Know not the best way to do it.

Yeah. What happens is if you don't record all of your costs in your DMS system to that stock number, then when you run your. When you run your sales reports, it shows you a gross profit is incorrect. Mm. What we see is that dealers are putting some of the costs into their DMS system and others are posting directly to the general ledger system to different cost of sale or expense accounts. Do that. Your sales reports are incorrect and fictitious on what you're actually making on the car. You're probably showing a higher gross profit than what you really have.

Yep. I've done that. Before.

Yeah, I mean it can get scary. I mean, you can be way off. Let's. Luke maybe found out I was reconditioning another cost you attached to the car. You can be just kidding yourself and what your gross profit is.

Yeah, I think I just found that out recently actually. I was double counting expenses because I was bringing expenses in through my DMS that come in from my shop management software and it was accounting for maybe 50% of my expenses on. On recon. And then I was also bringing in all of my credit card receipts to my GL accounts and I was accounting for them again. So I was actually double counting my recon costs.

Yeah, we've seen that quite a bit too where people don't have that cost corrected. So what you have to do, you have to purify your. We go back to receivables. You got to purify all your receivable lists, make sure they're correct before you can actually go and adjust your general ledger. The same thing with your inventories. You have to go through your inventory stock numbers and make sure it includes all your costs and things are correct before you can adjust your general ledger. So your EFS reports are very critical on receivables and inventory that really affect your net income. So if those aren't correct and purified and accurate each month end. If you don't keep them accurate throughout the month, you're going to be kidding yourself on what your income really is.

Yeah, underreporting my income is scary from a, you know, long term standpoint. Over reporting my income is scary from a today standpoint.

I mean that's, it's very scary either one. I mean, we found problems both ways. Yeah, that's a shock. It's a shocking thing to most dealers when we show them where they're really at.

I think we tend to probably. Well, I know I have over the years is we tend to, you know, before we reconcile, it's our income is over and then when we reconcile it changes. You know, I don't, I don't know if there's a. If you know, if it goes both ways a lot or is it one more than the other? What do you think, Dave?

I think it goes both ways. I mean, I helped reconcile a lot of dealership accounts and it seems like it goes both ways. Some people are showing a lot more income than what they should and other people are shocked when they see that they actually have a loss for the year and not really income. Wow. It can be moved. I mean, I've found up to $7 million difference in people's accounts. Whoo. Wow. We've had to adjust up to $7 million. I mean, I had a dealership group where they. They had somebody, a friend doing their accounting, and they actually over reported income to the IRS of around $12 million over about five years.

Oh, they were in the positive. They were over reporting.

Over reporting.

Oh, that makes me hurt.

They weren't report. They reported all the cash receipts as sales.

Oh, my gosh.

Income. And they weren't reporting any repo losses.

Oh, my gosh.

So they over reported. So we went and corrected all went and we reconstructed his books for the last three years. We only amend three years. We reconciled his books for the last three years going backwards and got his books reconciled. We applied for refunds. I think he's getting about two or three million dollars of taxes back.

Huh. So, Dave, that brings up an interesting point I had written down for a question, and I'm just going to go ahead and break in with that right now. So before we found you, we were using a cpa, a local CPA that, in my opinion, he was a friend of my dad's and he just didn't understand the car business. Can you speak to the. I don't want to be easy here. Can you speak to the need to really have a cpa, an accounting firm that knows the car business compared to one that doesn't?

Yeah, I mean, I think I can speak on that. I mean, my background is I grew up in a used car dealership. My dad owned a used car dealership for 20 years. And then in 92, he bought a new car store, which we still own. So I also work that side of it and help our dealership on that side. And what I can understand is I wasn't able to help my dad with his books until I became a CPA and learned the car business. And I could go back and I started doing financial statements for him that actually made sense for him to go get bank loans. So I was able to keep everything reconciled. I was able to sit down with the banker, everything. I was able to give him accurate income numbers every month and accurate income tax numbers before the end of the year. So it wasn't a surprise to him before he had a local accountant and he didn't know how much money he made or anything, what he's gonna pay in taxes until the end of the year when a tax return was done. What he did is lift up his cash account throughout the whole year. And that's how he Managed his business. I think a lot of people still do that. And it's pretty scary, especially if you don't have an accountant that knows the car dealership and knows how to reconcile from the DMS system to your general ledger system. And also you have to know the idiosyncrasies of all those different DMS systems. What's good about them, what's bad about them, what you have to watch out for, what you can't rely on and what you can rely on on numbers of these systems and what reports to run and how to run the different reports. It all makes a big difference on what, what the numbers are going to end up with. And a lot of that's just experience. And being in the car business every.

Day like we are, that's, that's so, so important. I knew, I knew the way you're going to answer that. And I just tell you, those of you out there listening, if you don't, if you're, if your accountant, your CPA does not know the car business, you need to look into changing today because I promise you, it's costing you money.

Yeah, I was, I've probably been through three different local accountants as I grew from a small business thinking, hey, I can't afford one of these big nationwide companies that know the car business. But I'll tell you what, man, when you sit down and I just kept saying, I don't know what you don't know and you don't know what I don't know. You know, to my accountant, and, and that's that gray area where you're losing money, you know?

Yeah. You should have to teach your accountant your business.

Oh, man, every time, every time we sat down, I had some scary.

Yeah, because he doesn't know the tax rules, the idiosyncrasy of the tax rules. He doesn't know what you can and can't do. And that's, that's a big factor in itself. Besides, he doesn't know how to present it to a bank, how to explain it to a bank, and how to do the footnotes and different things like that if you're required to do financial statements. So it all makes a big difference on not only just getting your monthly statements corrected and how to reconcile them and teach you how to do it the correct way so you end up with good year end statements. But it's what you get to a year end also that could be pretty scary. Like I said, you can be overpaying in income taxes or you could be underpaid. In income taxes, I found it both ways. I found up to $7 million of unreported income. Before that, we picked. That we made a special election for and picked up over three years. So there's different things you can do to correct your mistakes. If you are with a local accountant and you go with someone like cla, Clifton Allen or some other firm like that that basically knows the car business, you might be surprised at what your books really look like when they get done reconciling correctly.

For sure. For sure. All right, Dave, what's number four?

Number four is your loans that you have out there. And it all goes back to. If you don't have your accounts reconciled and have good financial statements, you're not going to be able to go get a line of credit because you're not going to be able to support and show the bank that you have the ability to pay back a line of credit or a regular promissory note of some type of or an installment loan or a floor plan. They want to make sure once you're showing some profits that you're showing some cash flow so that they will loan you money with the ability to repay that money. So the first three things we went through on the balance sheet were cash receivables and inventory. Those are assets. The second thing you got to worry about is your notes, payable or floor plan line of credits, and that's your liability side of your balance sheet. So that's the next biggest thing that I would worry about is that because if you don't have, if you don't have your financial statements in order, you're not gonna be able to go get lines of credit. And a lot of times the floor plan companies won't give you money either if you're showing losses.

Dave, can we speak to how important in the car business it is to have those, you know, those gap loans or cash flow loans that we need to do business. I know you've seen it from especially everybody knows the buy here, pay here world you've got to have unless you're independently wealthy. And I'm not sure why in the world you get in the buy here pay your business if you were. So what does it mean to your small dealers to have the ability to borrow money? How important is it?

It's very important. I mean, I just go back to my dad. My dad, when he first started his used car dealership in 72, he had $20,000 he borrowed from his dad and he had about $10,000 himself. And that's all he used to go buy cars with and have inventory for. And he didn't have any financial statements. He just had tax returns. At the end of the year. When I became a cpa, I started doing monthly financial statements for him. And I got a history of like 12 or 12 to 24 months. I went back and redid them and got monthly financial statements. I went with him to the bank, sat down and got him a $50,000 line of credit because he was able to show profitability and ability to repay. That line of credit grew over three years to $450,000 because we were able to prove to the bank the more money we borrowed on the line of credit for floor plan to finance cars and put them out there, the more cars we sold. He went from 10 cars to 45 cars a month in sales by having a floor plan. So if you don't have that floor plan, you're not going to be able to grow and sell those cars. And my dad wouldn't have been able to generate enough profitability and cash flow and net worth if he didn't do that through those lines of credit back then to go and buy the new car store. That gave him enough net worth to go buy the new car store or do. Or for another independent dealer, it might mean it opening another lot.

Yeah. And we all know we're listening to Eric Freeman last, last podcast. Talk about the. The contingency amount of money that you have to have to open that second location. It's just, it's huge. If you use the floor plan or the. Or the line of credit you have, whether you use it or not, just knowing that it's there in case you need it is huge. It makes you sleep a little better at night for sure.

Yes. If you have a line of credit, the banks like to see that line of credit. You borrow against it, then they see you pay it down and then borrow back against it. They'd like to see activity. If they see that line of credit just growing and growing, they get a little nervous unless you're showing them very good profitability, because it looks like you're overreaching yourself if you're just borrowing and borrowing and borrowing and not really showing the profitability as you borrow. I went through with my dad, I said, dad, we're only going to go get an additional line of credit. We went from 50 to 75,000 to 125,000 to 200 to 300 to 450. And we did it in steps. And we were able to prove to the bank that we could justify that with our volume. So you don't want to keep running up your volume just because you go get a big line of credit. 450,000. If you're not using it wisely, you're not going to be able to pay.

It back for sure. You don't need to go buy Ferraris with it, right?

That's correct. That's correct. Don't go buy a boat, don't go buy a second home and everything else with this line of credit. It's got to be used for the business directly.

Right. That's so important. All right, what's number five?

Number five, I guess is your net worth. And what we look at in your net worth is do you have a profitable retained earnings? If you're a buyer payer dealer, we have to look at both your dealership and your related finance company if you have one together. So we have to combine your dealership and RFC back together as if it's one company to see what your profitability and what your net worth is. To be able to show a bank that you have net worth and it is a viable business, you're an independent dealer like my dad was, you have to be able to show net worth to go and be able to get an increase in your line of credit. If you're, if your net worth's not growing, why would they want to loan you more money? It goes back to banks, loan you money all day long normally when you're profitable, but when you're losing money, they turn their head and walk away. That really makes a big difference for sure.

And that's the net worth. It should be on your balance sheet, right?

Yes. You have assets which we went through the receivables and cash and that we have liabilities which are your loans and accounts payable, then you have net worth. So your balance sheet, your assets equal your liabilities and your net worth. So make sure your net worth is positive and that it your liabilities don't exceed your net worth.

That's so you know, one of the things I, and for full disclosure, I was never a business major in college and I was really blind at how important you know, these things were. Because just like you, Dave, the way my dad ran his business mostly was looking at the bank account. The one thing that you've taught me is how important that balance sheet is. You can look at your P and L all day and they can tell you really what you want it to tell you. But if it's not reconciled to that balance sheet you're really flying blind.

Very blind, as you well found. I mean, as most people find out, whether it's you or someone else, are pretty shocked when they find out where they're really at.

What this overall, this just tells me is, I mean, we're used car dealers and I mean, if you want to run your own business and you want to be a dealership owner, it's. It's not. I mean, you got to know finances, you got to know accounting, you got to know balance sheets and P Ls and the difference between an asset and a liability. And I mean, you really need to get educated. Right? I mean, you can't just show up and think that because, you know, the difference between, you know, a Chevy and a Ford and a Mustang and which ones sell, like, doesn't run a dealership. Right, right.

You have to stand back and actually run your dealership. And I think, I think Luke learned a lot. We spent hours and hours on the phone, think he finally learned how to read his financial statements and know looked right or wrong.

That's it. That's what's so. I mean, you know, thank goodness for the time you spent with me doing that. And it was so, you know, I spent good money to do it with you, but it was. There's no way I could have spent that going to a college class and learning what I did not. I really appreciate that. And it's changed the way I look at every business. And it's just if you don't have the training, guys and girls, you know, get a good CPA that that's in the car business and spend time with them because they, they will teach you and you will learn a lot and it will make you better, make you a better business person in the long run. For sure.

Yeah, I can't say enough about that. I mean, everything that you've said today, I start looking, thinking to myself and I'm like, okay, yeah, that I've been at this, you know, what, 15 years now, and I don't think I understand the difference between some of this stuff and I know some of my numbers are out of whack. And it's just like, man, what a wake up call to make sure that you're dotting your I's, crossing your T's. You don't want to get blindsided by this stuff.

No, you don't. It's pretty scary. I mean, I can't tell you how many people I've told you owe this much in income taxes. There's no way I Have no cash. I said, just because you have no cash doesn't mean you don't tax. And as everybody goes, well, I can't. I don't have any cash. I said, it doesn't make any difference if you don't have any cash. The tax liability is still there because your income is there.

That's right.

It's because you decided to reinvest all your excess cash into inventories, which then turned into maybe receivables and then into cash. Doesn't mean that you still don't own income tax. Mm.

That's probably, again, a whole nother podcast we need to talk about because, you know, sometimes the name of the game is making more money and sometimes it's keeping more of the money you make.

Oh, yeah.

Yes. Yes.

Ahead, what's. So there was a question I think I saw on the forum the other day, Jeff. It had something to do with a demo. Can you elaborate on that?

Yeah, I think, I mean, this guy may be. Again, probably another podcast, but the question I think it was, was how these guys were handling their personal cars from a tax standpoint. You know, getting worried that if you're just driving a car off the lot every day or you have your own personal demo, how does the IRS look at that when it's time to, you know, be taxed?

Mm. And what you have to worry about on a demo is that normally you're driving a car, a demo. Your wife's driving a demo. Maybe your kids are too. So what you have to worry about on your personal tax return, technically, IRS wants you to add that additional figure out what your personal use of that vehicle is like. The commute to and from home is not a business expense. Once you get to the dealership and you're driving that demo, say you drive the demo from your home to the dealership. That's not. That's personal use. When you get to the dealership and then go run around to an auction or to the bank or wherever else, that's business use. So what you have to do is figure out what your personal commuting use is and maybe your personal trips that you may take, record that as a percentage and pick up that percentage of the total as some income on your personal return. And the way you're supposed to do that is you're supposed to GROSS up your W2 wages and withhold income taxes on it. Part of your W2 wages. That's the right way to do it that the IRS wants you to do.

So even if that car is listed on Your website for sale. You should still, it's a good practice to do what you described, right.

Yeah. If you're not picking up any personal use of a car on your personal return, you're asking for the IRS to come in and smack you. Because that's one of the things they definitely will look at. If you're picking up something, then you have the right to argue with them if it's right or not. But if you're not picking up anything, it's fair game to them, especially if.

You don't have any cars registered in your name.

In your name.

You and your wife don't have any personal vehicles registered. That's a red flag.

And most of the time you don't.

So it might be more of an insurance question, Dave, but does it make sense ever to say, hey, because I'm going to put my wife in this car for three to six to eight months, let me just go ahead and get it registered in my own name, get it off my dealer insurance and even if I'm carrying my own note on it, does that make sense? And does that kind of eliminate any kind of red flags just to sell the car to your wife and then buy it back when she's done?

You can do that. I mean, you have to have some kind of receivable or pay cash for it and then borrow the money back or something like that was what would do or show that you're making payments on or something of that nature. If you do that, you're going to be paying sales tax. In most states, dealers don't want to pay the sales tax because they'll never get it back.

Yeah, you lease it to your wife or something. And if you.

So the easiest way, you can still just do to do the demo, but just pick up some personal use of that vehicle. Normally your wife, unless she works at dealership, it's going to be 100% personal use. So you gotta go through the formula of how much that car is worth and there's a percentage of that that you gotta pick up as income. If you're driving, some of it for personal, some of it for business, then you gotta prorate that against the average cost of the vehicle that you're driving.

I guess any other tax tip that you could give us like one tax, biggest tax tip you could give us looking at and what you've seen in the car business that we should be maybe taking advantage of. Not taking advantage. Well, taking advantage of, but not. What do you think it is? What's the number one thing that car dealers need to do that. Maybe we're not doing well.

There's a couple things. Number one, make sure that your financial statements are reconciled. Otherwise you're either underpaying or overpaying on your taxes. The second thing is whether you're independent dealer or by your payer dealer, I would look at having your own reinsurance company where you can shift some income to a lower tax bracket. Basically because when you pay yourself and that reinsurance company, you're getting a deduction of ordinary income deduction. And that reinsurance company doesn't have to pick up that income that year. It only picks up interest income or investment income. It makes off that money that's sitting in that reinsurance company and it only has to pay taxes on that each year. You won't have to pay taxes on any premiums, less expenses. It's a way in the future if you decide to either take a dividend or you decide to shut the company down and have a capital loss or capital income off of that. So it's a lot better way to shift that money to the future tax liability and also a lower tax bracket.

And if you guys want more info, I think episode 19, we, we spoke with Tim Burd at length on, on some of the benefits. So episode 19 is a good one to listen to.

Right. That's, that's, that's a big one for a lot of car dealers is your own reinsurance company because you can control the reconditioning of the vehicle, especially if you're a buyer payer dealer. And if you're an independent dealer and you got your own shop, you can tell them you have to come back to my shop to get it fixed. So see the car, you may be able to sell them a new car.

But be cautious and do the projections on your cash flow. Right. Because that is going to be a cash suck.

Right, Right.

I think that was the number one thing that changed our, our dealership was the reinsurance company. And listening to Dave and going down that, I mean it's a journey to do your reinsurance company. But I tell you the tax advantages that comes from it are measurable, I believe.

Yeah. I think that's one of the biggest tax advantages you can take that can utilize very easily. The other one is to make sure if you're a buyer payer dealer or independent dealer is to make sure your inventories are adjusted to, to the cost to make sure it's your receivables. If you have any bad debts, get rid of them.

How important is if you're a buy here, pay here dealer, how important is it to have an rfc? Is that crucial or just a good idea?

It's probably a good idea in most instances because you get to defer the tax liabilities some future period. You do have extra county and extra tax return and stuff to file. But you can defer all your a lot of your income to a lot to a new future period, two to three years away. So that's a good thing to have an rfc. In most cases it depends on your volume. But if you're starting out, you got four or five or a thousand receivables and you're going to keep growing, it's still a good idea to probably have an rfc.

Awesome. I mean, Luke, any. I could go on this forever. I mean, again, I don't want to get off too many tangents, but any more questions? I mean, I feel like that was a lot to bite off.

I think that's a lot. I think there's so much good information in here for each and every dealer. Let's let them digest this and maybe, maybe we can get Dave back on at another time with some, with a very specific topic to go down that rabbit hole. As you would say, we could take.

Up all your time in retirement. Dave, you got it right.

Yeah. One of the things, well, a couple other things I want to mention is you should know what your book versus your taxable income is. That's a big factor if you use an allowance for doubtful accounts for your buyer payer store. And also you have to worry about your income tax basis, your dealership, if you have an rfc. Normally your dealership has losses and your RFC has income. So your dealership is losing capital or net worth every year with the losses from the discount loss. So you have to be very careful and your accountant and you need to keep track of that very carefully of money, of the leadership net worth and what your tax basis is in that versus the rfc. What happens is you may have to take distributions out of your RFC and put them in your dealership to be able to deduct the losses of the dealership against the income of the rfc. You may have a lot of extra income that you have to pick up needlessly because you can't deduct the loss on the dealership because you didn't have enough income tax basis. So as you get closer to year end, we're getting that point. We're in July, we got six or say six, five months left. You need to start worrying about your income tax basis and find out what it is. And check with your accountant and make sure you can finalize and clear up any problems before year end.

That is a big one. Because I ran into that problem. Cause I didn't understand it.

Right. Right.

Start now. Start now. Yep.

All right.

Dave, we really appreciate you being here.

No problem. Thank you very much for inviting me. Enjoyed it, Sam.