#58 - Braden Wilson - Year End Tax Advice

Hello and welcome to the Independent Dealer Podcast, the podcast by Dealers for dealers, about dealers. Luke, Today we're going to talk taxes.

Oh my gosh, taxes.

What the world.

Now we have a good friend of the industry, Brandon Wilson from HHM Certified Public Accountants. They're out of Tennessee, but they are one of the top dealer accountants CPAs in the country. And Brandon is at all of the conventions supporting our industry, speaking to our industry, doing things the right way. This is a great episode. You need to listen, you need to take notes and number one, if you don't have a great account, you need to get one and you need to take his advice today.

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. Alright, Brandon, thank you so much for joining us again. We really appreciate it. The year's coming to an end. All of us dealers, we're starting to stare at our books and thinking, man, I got this tax liability coming up. I got this big check, I got to cut to Uncle Sam. Am I doing everything that I can do or that I should be doing to make sure that I'm being smart about my taxes? Right. I mean, yeah, you're pro at that. You know exactly what it is. What can we do? Help us with some practical ideas and tips that we can apply in our dealership.

Yeah, Jeff, so you're exactly right. There's a ton of things that you need to look at just from a tax planning strategy. But more so than that, there's a number of things you need to do just from really understanding where your books are at. Oftentimes we get in the habit of really focused on selling cars and trying to collect on payments that sometimes things in our books get overlooked and not knowing where those things are at can swing the way your taxes look when you come April and you file those taxes. So what I want to do is just kind of, I want to go through the balance sheet basically from an accounting perspective and let's kind of look at the things that your office managers and your controllers need to be looking at really at the end of each month. But for sure, looking at as you're closing your books for November, these are what you need to look at. And then again for sure, when you're closing the books for December, absolutely, you got to make sure that these things are done. But I really focus on, I try to get all my dealers to make sure that absolutely we're doing this in November so that we can from a projection standpoint, it doesn't do anybody any good for us to work on tax projections if we don't have decent numbers to start with. So let's just kind of dive right in. And as we kind of go through these, if you guys have any comments or questions, feel free to jump in and let's just kind of go for it. So at the top of our balance sheet, we've got cash, we've got our petty cash accounts. So, you know, I hope that each dealer is looking at this at least, probably quarterly. And most of you, most dealers don't keep a ton of petty cash, but you may have several different drawers laying around between the service department and the sales office, who knows? But what you really need to do is get in there and have someone from accounting take a look at those, make sure that there's proper receipts in there. If you're supposed to have $500 of cash in there, I've only got 300. I better have $200 worth of receipts that need to be turned in for reimbursement back to the cashbox. The other thing you want to look at there is, and I've seen this several times, is maybe the person who's in charge of the cash box has been writing personal checks to. Maybe they took, let's say they took 50 bucks out of there in October and they thought, well, I'll just put a personal check in that reimburse it. But that check is never getting actually taken to the bank and cashed. So that could be an indication that this person is kind of borrowing from the cash box for personal purposes and not ever intending to repay that. So keep an eye on that. You know, November, December for sure. And then so let's move on into our operating bank accounts. Hopefully we're reconciling these things every single month. But for sure, at the end of November and December, let's make sure we are looking at our bank statement, reconciling that to the general ledger. Okay. So we're wanting to look for any aged outstanding checks. Okay, so maybe we've written checks June, July, August. Why haven't those cleared yet? You know, we need to be asking those questions. Someone in accounting needs to be following up. You know, maybe, maybe we paid a vendor and they lost the check, you know, and out of being a good business person, I think it looks good on the dealer to say, you know what? So and so, vendor, we see that you haven't cashed this check that we wrote you. It's been six months. You know, what's going on, did you lose the check or whatever? And so that kind of, you know, helps maintain those vendor relationships. But you may also see there's. There's just erroneous stuff in there.

Hey, Brandon, can we. Can we back up and just go over, you know, sometimes I know when I was young and dealership operation, I didn't understand the reconciliation of a checkbook or your bank accounts. Can you just walk us through real quick what that involves? And I agree it should be done every month because you could really have some issues out there. Can you just walk us through that real quick?

Yeah. So what you want to do is, is basically you start with your bank balance and you can actually do these daily if you want to. Luke, you know, you can pull your bank account balance online. So. So if you're doing it daily or monthly, you pull your bank balance. Find out what the bank says you have in the account. Okay. Then you want to. You want to print your outstanding checks list from your. From your DMS system or your accounting system, Find out what checks you have written that the bank hasn't cleared yet. Okay, so we start with our bank balance. We subtract out all the checks that we have written from the account but the bank has not cleared. And then we need to look at our deposits in transit. Okay, so maybe we made a deposit yesterday. So our books are saying that we've got $20,000 of this deposit that the bank doesn't say they haven't cleared it until later on today. So just to recap, that bank balance minus your outstanding checks plus your outstanding deposits equals your general ledger balance. If that doesn't match up, then you've got some issues that you need to look into. Maybe somebody's posting entries to the cash account that they shouldn't be. And so if you're. If you're able to reconcile daily or at least monthly, you're going to be able to find things that are potentially wrong with your cash account.

Thanks for the explanation because that's something people should really understand, you know, and.

The last thing, really on the last two things I'll kind of focus on cash, is when you're doing that reconciliation, you're going to find times where, you know, maybe there are electronic payments. These are the biggest issues when you have ACH type payments that you've set up automatically to come out. And sometimes those get forgotten about as far as getting them posted into the accounting system. So the bank may say, oh, man, you had $2,500 payment to the IRS for taxes that hopefully we didn't forget to post that, but you could. If you're not physically writing those checks, a lot of times those things will get missed. So if you notice those things are hitting the bank account and not your gl, don't just note them as a reconciling item, make sure that they are getting posted. You need to go back and actually post those into the cash GL and then for sure on deposit the deposits in transit. If you've got deposits in transit on there for more than about two or three days, you've probably got some, some errors on that. You know, if I take money to the bank, it's going to show up in my account within a couple days for sure. So still kind of in cash. I think most dealers are using kind of some different cash clearing accounts, whether it be for the parts, parts and service department or your down payments or just any of the miscellaneous cashier deposits that come in. So what happens typically is as those funds are receiving from the customer, they are held in these cash clearing general ledger accounts. And then typically you're making your deposits daily or every couple of days. So once you make that deposit, it reduces those cash clearing accounts and, and moves that money into your operating account. Therefore, those cash clearing accounts should one, they should have low balances or you should be able to only have just a couple of days worth of deposits in there. And so you should be able to clear those out like literally almost every day. And that's keeping out on those things.

Oh yeah, for sure. And a lot of everybody's. If people are using a good DMS system and they're using it to download into QuickBooks nightly or daily or immediately like some of us do, you use cash clearing accounts even if you don't know. And you really need to pay attention to those and you need to know what they are. So this is a really good information.

That's right. That's right. And really the whole purpose of those is to make it easy to reconcile your operating account. Okay. So what happens is you're collecting payments from customers all day long. It's all different, all different payments. If all of those small deposits went into your operating account, then you tried to match that up with what the bank says you actually deposited. You know, you're taking, you're taking all those days receipts and taking them to the bank. So the bank only shows you one deposit of $25,000. But you've got all these incremental deposits that actually came in. That's why they do that. They put it on the cash clearing. Then you select all those and move them out, put them in your operating makes reconciling a breeze. Alright, I think we've talked enough about cash. Cash is king. But let's move on to receivables a little bit. So the first thing I want to talk about is indirect deals. So we sell the car and let's say capital one decides they're going to finance it for us. We consider these contracts in transit. Contracts in transit are these indirect deals that we expect will be collected, you know, within really about 14 days. So what I expect every single month is especially November, December. Let's review that contracts and transit schedule. Let's look at the aging on there. If there's stuff really, you know, between over 7 to 14 days, let's follow up on those because that's an indication that maybe some paperwork hasn't been submitted to the lender or whatever to get this deal officially approved and funded. So keep an eye on those. And one thing you might consider doing, depending on your pay plans, if you are noticing a growing number of contracts in transit that are aging beyond say 20 days even into that next month, there's an issue there. Something's not getting submitted timely. So you might consider charging back your F and I managers for any aged contracts in transit that are over, let's say 20 days. Like put some pressure on them, make them feel the pain. If we don't get collected, man, you're getting this charge back on your pay plan.

Yeah, I couldn't sleep at night if I had a contract in transit over 20 days. That's a report that I think we should be looking at daily. With the way that most of our lenders are set up and the way we should be keeping our, our packages and our stips put together, I mean it should be a matter of hours, right? I mean anything over 36 hours. And I'm.

Are we talking about like, okay, so if we have a. And everybody should have a contract in transit on their balance sheet and you're saying charge back to your F and I or to your salesperson, who there. Are you talking about the whole deal or you just talk about a percentage if it takes more than a certain amount of days. Brandon.

So let's say the F and I manager, let's say he got paid, I don't know, a flat of $500 for this particular contract. You know, he got paid. He got paid on the back end product basically, or getting this deal done. Maybe he's getting a percentage of the finance reserve that the dealer's getting for setting this deal up. If this deal gets aged and we're not getting paid, let's charge him back his commission on that. Like, hey, man, we're gonna, we'll pay it for, we'll pay it to you in advance like you did the deal. We got it done. But then if this thing comes around and we haven't been paid, look, man, we're sending it back to you. We're going to get that back. That's what incentivize them to get the deals done and get paid. So as we're, as we're getting these deals done, you know, we're getting, we're getting down payments. And you know, one thing, one thing we want to do is most of, most of the time you're going to see that that down payment money is going to get posted into a separate vehicle receivable account. Basically, there's different names for it on different DMS systems. But, but usually these are, these are for your down payments and your cash deals. Maybe, you know, maybe the customer is bringing in a check or whatever for 15,000, and that's you kind of, you're trying to keep it separate from your contracts and transit. So you put it in this vehicle receivable. So you've got those type transactions and your down payments. So in this particular account, you may see some stuff in there, you know, starting to hit 30 days, I would, anything over 30 days, I would start getting nervous about and making sure that, hey, what's going on here? Let's review the terms of that contract and follow up on those. The one thing you may see in there are hold checks. Now, whole check is just a part of the business, and I understand that. But the one thing that we need to consider, and I hope all the dealers that I work with understand this, if you're doing indirect deals, if you have indirect lenders that are funding your deals, most of your dealer agreements are going to say in that agreement, hey, that down payment cannot be a loan. It's got to be, you know, clear money. And so a whole check is essentially, you know, you've kind of given that customer additional time to pay that down payment. Most of the time, these hold checks are not, they are not allowed, these indirect, indirect lenders. So, and I've seen this happen many times, Customer ends up defaulting six, seven, eight months down the road. If the lender decides to go back and look at the contract and they see a whole check in there, they will literally cause the dealer to buy back that entire paper, to make that paper whole for the finance company.

Okay, so that's a really good point. You need to make sure that if you're doing what we call, at least at my dealership, we have deferred downs, we'll defer a down payment. But if we're not being very active and tracking those, of course the customer's gonna forget about it, the salesman's gonna forget about it, and we gotta have them accountable too. It really comes down to making sure that you're keeping track of those things. Now, stuff like that, like those can be potential losses, right? I mean, those could be write offs. Are there larger type things we can do or larger type write offs that we can look at at the end of the year? Either we're a buy here, pay here, or we're a regular retail dealer to try to just to plan ahead, you know, try to mitigate that tax base a little bit. What would you say?

Yeah, that's right.

Obstacles.

Yeah. Just trying to summarize. You know, let's really go through and reconcile each account, review your schedules, look for any outstanding items in all, in all your receivables and payables. And you know, specifically on your, on your buy here, pay here receivables. You know, pull those, pull your, pull your aging account. Get that list of all your active accounts and let's look at the last payment dates. You know, there, there could be things on there that have not had any payments, depending on how often these things are being reviewed. And you know, if you haven't had any payments on those things for a couple months, let's go ahead and write those off, take the deduction. We can try to, we can continue to try to collect on it and we'll pick that up as income later on if we end up collecting. But, you know, let's go ahead and write those off. Take that deduction.

Yeah, Brandon, help me with this one. And I don't want to jump ahead or miss something, but when people write down their inventory, I've never done it and I probably should, but I don't.

Understand it, why I do it every.

Year and I just probably does it monthly because he buys such nice cars. They're depreciating so fast that he's got to. But is it just playing the game of like, well, I'm gonna write this off, but then that means that I'm gonna make more profit next month because now my basis is lower and I'm gon show higher gross profits next month when I sell these cars. Help me get over that hurdle and.

Let'S walk through the proper way to do it. If you don't mind, Brandon.

Yeah. And so we've got a couple things that we need to consider when we're looking at it. So we've got the tax motivation of the IRS says, look, you can write down your carrying value of each inventoried item to the. Basically the black book. Wholesale average doesn't have to be black book, just has to be some sort of national publication. So you can't just say, okay, we've got a million dollars in inventory, let's Write it down 20%. That doesn't work. You can't just do a bulk write down. You need to specifically look at each unit document what the publication says that average wholesale value is, and that's what you put down. So if we've got six in it, wholesale average is five. We've got $1,000 we can go ahead and take a deduction for at the end of the year. Okay. So that's the tax motivation behind it. If you have to submit a GAAP financial statement, there's some additional considerations that you want to look at depending on your financial covenants. Maybe you don't want to write them down for GAAP purposes. You don't want to write them down to wholesale. You want to look at what your net realizable value is. And so you can have a different market value for GAAP versus what you want to use for tax. We obviously want that lower value for tax, but let's not necessarily use that for GAAP if that's going to cause us to blow our financial covenants. Absolutely. A great method to the first, an income tax.

And so I do it in December because I've got some inventory that's probably aged and just needs to. We need to take the depreciation now, Jeff, to your point. Yes. Are you going to gain it back sometimes in January in different profit? Yeah, but you're getting the tax savings for that year, so there's time value of money there. But also we know that sometimes we keep inventory way too long. Writing it down sometimes allows us to sell inventory that's been sitting that we, that we had priced wrong as well.

So gives us an excuse to lower the price, is that what you're saying?

100%. And so it's just, it's in your mind, if I've got 10,000 and a product that really I should have 8,000 in. Yeah, well, I've got a bunch of those. It might make sense for me to do it. I mean, you see that Brandon as well, is that, I mean, that's a good reason to do it, I would assume. Right?

It is. I mean, you got it. There's a, there's a daily cost for keeping a car on the lot. And if we are carrying cost is too high ourselves and can't move it. Hey, let's, let's help them out. Write it down and let's move it.

Can I do that on individual units? I don't have to do it on all of them.

You have to look at all of them.

Oh, that's right.

Every single car would need to be booked out and I'd have to make a decision or I'd have to at least write down all of them to the same factor. The same measuring stick.

That's right.

And we, like I said, that's. It takes me, it probably takes me two days to do it, I would say. But I think, I mean, I think I've looked at the last two years at like a $70,000 depreciation, which, I mean, that's real money, right?

That's real money. Hey, Luke, are you typically seeing, I think year to year, I'm seeing most, most. Most of my dealers are seeing about a 20 to 25% reserve, essentially a write down as far as their cost.

Yes. So I think mine in the last couple years has been, let's say, going into the new year, let's say I'm carrying almost, Almost, let's say 900 to a million dollars in inventory. So at that point, mine's probably in the 10 to 12% range. I would see. I think that'd be a safe number. Let's go back to one other thing. When you talked about buy here, pay here, charge offs, and I've not done this, but I've been encouraged to do it at times. You can actually write off accounts into the new year if payments weren't made into the new year. Correct.

Yeah. So that's something I like to look at. If we're really trying to stretch for some additional deductible deductions. You know, we're not filing these returns typically until early March. You know, we've got, we've got some time, the deadlines. Depending on C Corp or S Corp, you may have until as late as April 15th to file these returns. So why not take and look at all your, all of your accounts in January and February and see if they didn't make any payments in January, February. Let's go ahead and write those off as of December. You know, I mean that's, that's a pretty good indication that those were bad accounts. If they didn't pay me, maybe they did make that December payment, but then January, February, nothing. Hey, let's charge them off.

No, I agree. I mean it may, it may hurt you in the, in the new year, but we're talking about time value of money, which I think is underestimated. A lot of times when we talk about you, you brought up an interesting point just then that I think it was a big discussion last year. Most of us are probably always been S Corps, but there was a legislation passed in the Trump tax cut, made some carve outs for C Corps. Are we still recommending which way are you recommending S or C for most people.

If you're already set up, I'm going to say the math doesn't necessarily make a big difference by the time you change to change one way or the other. If I am, if I'm setting up a new one, you might consider the C Corp option. Just because you're going to continue to reinvest, you're really trying to grow, grow, grow. So you're not leaving a ton of earnings within the company. You're basically reinvesting those into inventory. So you're not really at risk at that point for double taxation coming down the road 10, 15 years. You may, you may be. So you've always got that C Corp double taxation issue to consider. So, you know, I think a lot of people are still probably going to say let's, let's. While it may help us in the front to be a C Corp, at the end of this thing, we probably want to be an S Corp. Okay. So it's, you know, I'm probably still pushing S Corps. Hey, talking about inventory real quick too is don't forget about looking at your parts inventory. Those things can get hairy. Depending on who's running your parts and service department, you may have $100,000 of inventory on your GL. But man, you go back there and look, you only got ten grand. Like for one, you probably got some fraud errors you need to look at. And you've also got a tax write off right there for sure.

My tires, they get out of hand sometimes. So I, I definitely understand that one. The next thing you talked about was any accrued bonuses to non shareholders. I know that there are some bonuses you can pay into the new year that can be charged back as well, right?

Yeah. So if you're a non shareholder, let's say you really you guys had a great year and you want to kind of incentivize and reward your, your sales team and all that, you know, all your non owners, we can go ahead and accrue that in to 2019, but we don't have to pay that until, until March 15th basically of 2020. To get that 2019 deduction.

It just needs to be on your balance sheet for 1231.

That's right. You need to show the intent was, you know, and what you probably want to do is have maybe a document drafted up that you don't necessarily have to have your amount already calculated before the end of the year because, you know, we know, we all know there's going to be some adjustments that are made by the tax guys whatever come January, February. But at least if you have documented that, hey, we want to pay out our intent is that depending on the tax, the net income of the company, we want to, after the adjustments are made, we plan to accrue in that bonus. I'd like to have that in writing before the end of the year. You don't necessarily have to have an amount and that's just if the IRS looks at it. They don't want it to look like, oh, well, you're just trying to play games. You didn't really intend to pay this in 2019. This was something that you did for tax motivation in 2020. So this is really a 2020 expense. Just document that you want to do one, move on with it and pay it.

What are some capital improvements we can make at the end of the year that make good sense tax wise and that every dealership may need?

Well, I mean, you could potentially have service loaners, you know, maybe, maybe you want to take some cars out of inventory and place them in service as a service loaner. If that's the case, there are some rules we can go ahead and write those things off beyond just the used car write down. We can go ahead and place those in service and write them off as a fixed asset. Maybe you want to beef up your parts and service area, let's get some new lifts, those sort of things. Improvements to the showroom, in fact, improvements to the showroom, probably we can just expense that immediately as a repair. But the one thing to keep in mind on your capital improvements is I would say if you've invested somewhere around $2 million to either acquire your dealership in the past, and it hasn't been that long, if you didn't do a cost segregation whenever you bought the building, you may be missing out on some depreciation expense each year. So potentially you may be having to recover that cost that you invested in the building over 39 years. But there may be several opportunities that some of that should have been 15 year property or 7 year or even 5 year recovery period property. So what you might do is if you're in that 2 million dollar range or so, or maybe even a million and a half is go back and look at does it make sense to have someone do a quick study on this? Because you can do a change in accounting and go ahead and kind of get yourself up to speed on that.

What is the typical cost of one of those cost segregations like that?

You know, I don't have that number right off. You can do a pretty basic one. So I mean like when I'm doing the tax returns for my dealers, if they've had a situation like that, a lot of times I can use kind of the property tax records and see, man, you had, you had 20,000 square feet of the per of the land was, was pavement, was parking lot. Nobody carved anything out for parking lot, you know, so we can put a value to that and go ahead and put that on 15 years and even bonus that thing out, you know, so you can, you can, you can do a full fledged one and have a whole separate third party come in and do it. It does get expensive, but you can also do it just kind of a more efficient way.

For us. Buy here, pay here companies. I think something that kind of gets lost some time is a related finance company. Is it possible to set one up at the end of the year and do some transfers? Or is that something that maybe we should be waiting until next year to do?

It depends on the state. Some states require separate sales and finance license, some states don't. And again, depending on how your state is, will determine if you have enough time to get one established before the end of the year. The IRS is pretty clear on they want you to have everything documented as far as your dealer agreement between the dealership and the related finance company, which basically is just a. It's just an outline of the terms that says from time to time the related finance company will buy contracts from the dealership at discounts. And you do want to kind of see that cash physically come from the related finance company before the end of the year and buy some of those contracts. It's not necessarily required that there be cash, but if you're not going to pay it before the end of the year, let's have a official promissory Note drafted up, accrue the interest monthly and let's actually start paying on that each month. But absolutely, it's a great method. It's an IRS approved method that you can essentially convert those accrual method tax. So basically on the dealership side, when you sell that car, you gotta pay tax on it. If we're doing buy here, pay here, we haven't collected that money. So that kind of is painful. A lot of times we set that related finance company up. We've essentially converted that accrual basis method of accounting for tax purposes into a cash basis, meaning that as we physically collect those payments from the customer, then we're paying the tax. So it's definitely a method to keep in mind.

And reinsurance companies, is that something we should have started in January or can we try to hop into one now to save a little bit of money?

So there are some potential opportunities that you can kind of go back and do some retroactive reinsurance plans. And the way that works is basically as if I hear pay here dealer my cars or my, there may be a situation where the customer's card, it breaks down for whatever reason. And you know, we've got to fix the car, we don't have to. But a lot of times if we don't fix it, they're not going to keep paying. So we got to get it anyway. So you know, we're, we're fixing these repairs as they're needed. So we almost have an implied warranty that we've given to the customer that hey man, if this thing breaks down, we're going to fix it for you. So what can happen is you can actually set up these, these implied warranty reinsurance programs and you can even, you can go back and basically apply that for every car deal that you did for the year and you got to fund it, you know, you've got to accrue that in and actually cut that, that cash at some point. But, but yeah, absolutely you can, you can get that done. I would say most you can probably get that done. If you started now, you can get it done before the end of the year and take that deduction.

That's interesting. Somebody came to ask me the other day about a product called vsi. Do you know anything about that, Brandon?

Yes, a little bit. I try to defer all those back end type reinsurance type products to the reinsurance guys. I'm trying to remember exactly which one that is. They've all got different names between.

VSI was something to the effect of you could Take in. And I was just wondering what the IRS's opinion on this was. That you could take and insure your portfolio through your reinsurance company. So let's say you're going to have a certain amount of defaults, this, that and other. And if you charge, let's say $250 per account, you could insure your finance company for let's say loss because of repossession, the car just being gone, or wreck damage without insurance, these type of things. Have you ever heard of that or do you know what the IRS standing is on it?

You know, I have seen the VSI programs and the IRS stance on all these reinsured type products. Whatever you want to throw in there is, is there a true risk? As long as there's a true risk and we're actually moving that risk, we're shifting that risk over like that's all they're really concerned about. You know, if we're, if we're, if we're in the middle of, of Chattanooga, Tennessee and we're putting earthquake insurance in there, you know, that's, the IRS is going to look at that and they're gonna say no, that's, that's a tax evasion type move. But we're real risk.

But let's say we were in a flood zone in a hurricane prone area. You might, could, could find a risk there maybe.

Absolutely. You know, maybe you're leasing, maybe you're doing lease or pay here and you have set a residual value on that car and there's a risk that that residual value you set on the day that deal was done is going to be lower than what you thought it was going to be. That's a risk that you can reinsure. You know, so I would just recommend reaching out to a couple different reinsurance providers and just talking about your specific situations and seeing, letting, letting them help you evaluate what risk you may have that you can reinsure. It is a great deferral opportunity from a standpoint.

So B and I, Chapter S Subchapter S Corp. And we, you know, of course all this, all this money flows through to us and to our personal tax returns after, after the March deadline, then we start to work on our personal taxes. What should we be doing here to make sure that our personal finances are in order to maybe cut down on some of our liability to the IRS on the personal side?

Well, the first thing I would look at is we want to set a reasonable salary for our four hour owner's compensation in the S Corp. Okay. Because under the New tax reform that you mentioned previously, we have what's called that qualified pass through deduction, where you get to take a deduction for up to 20% of your pass through income. So if I set my wages too high, those wages that I'm going to get on my W2 are not eligible for that 20% deduction versus if I take less wages, then I'm going to have more income pushed to me on my K1. But all that income is going to be eligible for that 20% deduction. So don't necessarily set your W2 compensation too high because you're missing out on potential 20% pass through deduction. But you also have to balance that with your state income taxes. There may be some strategy there to look at as well with balancing that W2 comp. You know, beyond that, if you're, if you're making. We get our itemized deductions, we get to, we get to take a standard deduction. Are you guys there? Not sure what Luke's doing over there. Playing around.

Go ahead, Brandon. Yeah, so you can take your itemized deduction or your standard deduction.

Right.

Can anybody hear me?

Yeah, yeah, we got you.

Sorry. Yeah. So that's. How do you determine the proper amount to take though? I mean, so of income? I mean, is there a. There are formula to this?

Well, Luke, the way I look at it is if I, if I didn't want to work at the dealership anymore, what would I have to pay someone to do my job? Mm. What's a reasonable salary to pay somebody else to do what I do?

That makes good sense. That's.

That's not enough.

Yeah, that's a great rule of thumb.

So if we take a lower salary, let's just say we took a. Let's say we took an $80,000 salary and our job is really worth 200 grand. Let's just say that. And we, we let all the rest of the money flow through the k1, but then we took a distribution. Is our s going to look at that and say, hey, that's a little funny?

Absolutely. They could. That's why you want to set it. You really do want to evaluate what's a fair salary for what I'm doing, you know, because you do have that chance. It does get looked at. They can reclaim. Characterize the nature of that distribution as wages, charge you the tax and some penalty on that. Okay. So you got to be careful with it and be, you know, just be fair. Some additional things we probably can look at from a personal standpoint, is consider bunching your itemized deductions into one year. You know, maybe with the new rules you can itemize, you can take the standard deduction of up to like, I think it's 24, 4 for 2019 if you're married. So if your itemized deductions are less than 24, four, you're not getting any benefit for those. So maybe you're used to giving every year to your church or some nonprofit. Say you're given five grand at the end of each year, but that only gets your itemized deductions up to like 23,000. That didn't do you any benefit from a tax standpoint for 2019 because you got to take the standard of 24 4. So let's hold off, let's not make that contribution until maybe January 1st of 2020, and then we'll do our 2020 deduction at the end of 2020. So we've combined those. We got the benefit of both of those in that 2020 year, which pushed us over the standard deduction in 2020. So there's some, just some balance, just kind of thinking through those things. If you've got some appreciated stock, there's some two for one benefits that you can do by donating that basically you get to take a charitable donation for what that stock is worth on the day that you donated it versus if I sell it and then contribute to cash. If I sell it, I've got to pick up the capital gains and pay tax on that and then I'm getting the charitable donation. And so if you're going to make a donation, I would say look, look at what appreciated stock you haven't considered donating, that it's a better method than just donating cash.

Oh, for sure.

So as buy here, pay here dealers, or even independent dealers, most of the time we own the real estate as well. Right. And we typically own that in a separate entity or personally, whatever. So that rental income that we're generating, I've seen this several times, it doesn't get classified properly on your tax return. It needs to be classified as self rental. So what that does is typically rental income is subject to this additional 3.8% net investment income tax. But the self rental from your dealership is excluded from that. So make sure your tax preparer marks that as self rental so you can avoid that tax. If you missed that in the past, you can go back and amend it and get that money back. Basically the same thing. If you've loaned your, your S corporation money to operate the Dealership and it's paying you interest. Make sure that interest is being excluded from that 3.8% net investment income tax. That gets missed a lot as well.

That's interesting. I didn't, I, I'm sure it, mine's been done that way, but I, I never knew that.

Yeah, just keep, keep an eye on that, look at your, look at that particular form on your tax returns and just double check it. It's an easy fix. But if you've missed it more than three years in the past, you're just out of luck on that. Yeah.

What else can we do?

Well, you've got some opportunity zone investments and that's kind of a big ticket item, I think. I haven't really looked at the minimum thresholds on those, but you typically are having to reinvest quite a bit of money. But if you've got some sizable gains from. Or maybe you can sell some. If you're looking at selling some real estate or some capital gains type stuff, you can reinvest those into these opportunity zones and create some permanent deferrals. So it's something to just kind of throw that out to your tax advisor as you're doing your planning, just to let them look at it more. There's a lot of rules we can get. I can literally put you to sleep today if we go through all that and we'll avoid that. And the last thing I'll probably look at on the personal side are conservation easements. This is one thing that the IRS is pretty. They are aware that these are going down and they are auditing quite abidities. But the main risk here is they're looking at what was your valuation? Was there a proper valuation here? So the IRS allows you to basically donate raw property, essentially. And so maybe you've got this raw piece of property or you can even invest into a partnership that accumulates all these funds and buy this property. And maybe the partnership or you could have turned this property into a strip mall and made millions and millions of dollars, but you decided, you know what, we're going to conserve this property forever. We're going to give this to the Conservatory Fund or whatever the IRS calls it. And so the IRS says, well, you get to deduct the foregone value of what you could have done with that property. So it's a really neat thing. I've seen clients where they've contributed 100,000 and saved over 200,000 in taxes. So it's a no brainer. So something to at least throw out to Your tax advisor.

That's amazing.

You know what?

I'm sorry, go ahead.

What's that?

Go ahead, go ahead.

Just, you know, just kind of going through all those things. I mean, there's, there's a lot of opportunities and it's all going to be specific to, you know, how everybody, each dealer, they run things different ways. You know, what you don't want is to have a surprise come April. If I, if I show up in April and I tell my dealers, hey man, you owe a hundred thousand, that's a bad day for him. And so we like, yeah, so we like to reach out and you know, look at, go ahead and get the books of the dealership and the related finance company and the real estate and go ahead and project out. You know, now is the time to go ahead and sit down, have your, have your tax Guide, project where 2019 is going to be. Worst case scenario, let me tell you, within the next week or two, this is what you're going to owe come April. Maybe there's several things on this list that we can do to help bring that number down. But let's not wait and miss those opportunities. Let's get with your advisor, do some planning. It'll pay off for you.

I think that is the message. I mean, it's so important to, number one, to have a great automotive CPA accountant number one. And number two, you need to make these calls right now. You need to spend however much money and time it's going to take talking to that person to get prepared for the first of the year. One thing we didn't go over that I think is a really important aspect is health saving account and retirement planning for this time of the year for 401ks or simple IRAs. What can we do right now with, with that money to really prepare?

Yeah. And depending on the structure of the entity that each dealer has that is listening will determine specifically what they can do. But there are some deferral opportunities. If you've got a 401k plan, you can go ahead and contribute through your, through your wages. Maybe you're going to bonus it out. Maybe you've got some cash sitting there and you haven't Contributed to your 401k yet. Go ahead before the end of the year and have that bonused out to you and then just have your payroll take that and send that right into your 401k because we can avoid the income tax on that. Same with the HSAs. The HSAs, I think you can even make that contribution through your, through Your HSA provider doesn't have to go through your payroll, but absolutely, I mean, you got to take advantage of those things, let that money grow for you over time, and save your taxes in the short term.

And I think with retirement plans, sometimes you have until a certain point into the new year to do that as well, to contribute to last year. Is that correct?

Yeah, certain plans have up until April 15, until the day you file your tax return to fund those. So. Absolutely. A good point.

Well, I think there's so much good information here. Tax planning and accounting are not the most glamorous things we can talk about, but they are so important for the dealer when it comes to your cash, saving your cash, and to cover your tail, because you can't just, you can't fly by the seat of your pants on this stuff, guys. They will. The IRS will get their money one way or another. They will throw you in jail if.

They don't get their money.

So you, madam, make sure you're doing what you're supposed to be doing.

Let me throw one last thing at you. This isn't necessarily a tax planning item, but for the buy here, pay here, guys. If you're, if you're collecting cash, you want to keep a list of all the people that you have collected at cumulative $10,000 in cash for, and then you need to send the Form 8300 to the IRS. That is a big time penalty if you miss that. Okay? So just be aware of that one.

And we've had, I've had in the last. How long has that law been effect? Probably 15 years maybe. Yeah, I've been audited three or four times for 8,300. They come out, they go through every book you have, they are meticulous about it, and they are looking for things. So dealers, make sure you are keeping track of that because that gets sticky big time. All right, Jeff, you got anything else, man?

That is so great. I'm just trying to take it all in. So many things that, so many questions I need to talk to my accountant about. I've got a phone call today to do just that. So, I mean, it's been awesome. Like I said, we work. We try to work and get to make more money. We try to sell more cars, but we don't take any time or energy to keep more of the money we've already made. You know, be smart about it.

We're sure, for sure. All right. We won't. We won't take any more of your time. I appreciate you being here and this is, by the way, Brandon Wilson from hhm. Correct. Y' all. Are y' all just in. Well, I know y' all do dealers all over the country. Are y' all mainly located in Tennessee?

Look, we've got our headquarters is in Chattanooga. We've got about 125 accountants in that location. And then we also have a second location in Memphis, probably another 30 accountants over there. But our home offices are not we're not limited by our home office, man. We go to the client. So we're in. We go to pretty much all the states.

I think you were down in South Carolina a little bit this week, weren't you?

That's right. Monday through Wednesday. Got back from Spartanburg about midnight.

Well, thanks a lot for being here.

Thanks, Brandon.

All right. Thanks, guys. Appreciate it. Sa.