Did you know that you have several elections to be made in your dealership? Some are as easy as checking a box, some require formal requests, and some are presumed unless changed otherwise.

How many of you have a calendar tax year? Did you know that that was an election made with your first return? Cash or Accrual, Cost, Lower of cost or market, LIFO FIFO and the list goes on and on.  

Why in the world does this matter?

When elections are made by you (not your accountant, attorney, or friend) they bind your dealership to terms that you agreed to. Generally it is standard practice to have certain elections for your company and not others. BUT WHAT HAPPENS WHEN IT ALL GOES WRONG!!!

 S-Corp Elections

Consider a common election that many of you have either made or may make to elect to be a subchapter S Corporation (S-Corp). If not properly made, and you may be taxed as a C-corp. This could be disastrous and is almost impossible to fix in the first year. Imagine that you start a company, incur a ton of expenses in the first year like all small businesses and then cannot take those expenses as a loss personally or against future gains. I would be furious. Or on the other hand, what if you made a lot of money (a good problem) but now are taxed at the C-corporation’s rates, and nothing passes through. A bad answer.

Cash and Accrual Methods

Another common election to be considered is Cash or Accrual basis of accounting. Most dealerships will have to use Accrual….STOP READING, FLIP TO PAGE 2 OF YOUR RETURN AND CHECK THIS. The accrual method is mandatory for dealerships that have gross receipts in excess of 1 million. That includes almost anyone who has a dealership, BHPH and some wholesalers. The IRS does not have to audit you immediately. This can be disastrous, and without a long and drawn out explanation, you may be playing with fire. Several dealers in NC have had to shut the doors for errors like this.

Cost, LOCM, and LIFO

Inventory methods can be used to decrease values of inventory. If you have significant inventory, it is worth it evaluate if one method would be better than others. If I were to hand you 10k today instead of a year from now, would you take it? Of course you would. These are elections that can help you. Many just pass on this because they don’t understand it.

How can you correct this?

There are ways to correct invalid elections and methods, but it requires a skilled accountant who is familiar with your business. Usually if there is an income effect it can be spread over several years to minimize the impact. Sometimes there is nothing that can be done, some are not correctable with amended returns, and you may have to pay a hefty price. The best strategy is to have it done correctly in the first place so there are no issues.

John E. Donaldson CPA

Potter & Company, P.A.

www.gotopotter.com/dealerships

704-926-3300