It has been under discussion since April whether President Biden will work with Congress on several new initiatives. This includes a major infrastructure deal as well as increasing the corporate tax rate from 21% to between 26% and 28%.
While talks on both initiatives are ongoing, car dealership directors will need to keep a close eye on any changes to the corporate tax rate.
Tax increases can affect both large and small businesses
While President Biden’s proposed tax changes will primarily focus on the largest global companies, many policy experts believe that even medium and small businesses could feel the effects of a tax change. Car dealers are still recovering from the downtime caused by a pandemic and are grappling with inventory issues that are affecting their bottom line.
While the Biden administration’s policy is focused on economic growth, more and more small business proponents are wondering how tax changes can make longer lasting effects on businesses like car dealerships.
For this reason, dealership principles should ponder a few key areas and plan for possible changes.
Weighing short-term needs against long-term strategies
First and foremost, it is important for traders to realign their long-term strategy with short-term cash flow needs. While tax changes are unknown at this point in time, the intent is to raise long-term capital gains taxes, which will increase qualifying dividend rates.
A corporate tax hike would also affect the 831 (b) elections, because if state corporate tax rates increase, then under an 831 (b) election, investment income would be subject to the higher tax rate.However, any changes would likely come after 2022, so traders will need to discuss short-term cash flow needs with their CPAs sooner rather than later.
For many retailers, this is about their future estate planning needs. Therefore, relying on the advice of trusted CPAs and financial advisors is key to short-term needs and long-term success. A popular question that traders should ask themselves right now is: are you in cash flow mode or long term economy mode?
Determining the correct participation program
Finding the right equity program that fits your business strategy is critical, one that both meets short-term needs and keeps long-term goals in mind.
Typically, common types of R&I products available through participation programs include extended vehicle service contracts, guaranteed asset protection coverage, and coverage for engine components and technology systems – which is important today given the advanced technological capabilities of many vehicles.
Profit-sharing programs also include retro agreements, participating retro contracts, and insurance / reinsurance programs offered through different types of programs such as z).
Dealers increase their R&I profits by using a DOWC. In addition to the higher profit potential in F&I sales, the additional benefit here is that retailers can market their own F&I offerings and build a portfolio of F&I products that appeals to a large number of customers. These R&I products can range from service contracts to by-products.
This is especially important today as the inventory challenges put more emphasis on dealers selling used vehicles than new ones. This means that dealers can customize the type of R&I products that they carry and offer their customers, for example extended vehicle service contracts, which in this case can benefit more used vehicles.
From a tax point of view, a DOWC is considered a trading company for state purposes. For federal tax purposes, the DOWC is considered an insurance company if the company meets certain criteria. A summary of the taxation criteria for a DOWC is as follows:
- Treated as an insurance company for federal tax purposes
- Complete recording of the acquisition costs in the year of the occurrence
- 100% use of the net operating loss carryforwards
- IRC §831 (b) option is available if the company meets the requirement
- Qualified dividend treatment for distributions to shareholders
With these strategies in mind, with the right equity program and R&I product portfolio, auto dealers will be better equipped to meet their business strategy needs in the event that tax changes are pending in the years to come.
Matt Gibson (Picture above, left) is vice president of Protective Asset Protection, a provider of R&I programs through vehicle dealers.