Pub. 2 2020 Issue 2

Dealer Opportunities in the Tax Code MATTHEW PORE, CPA TAX PRINCIPAL WITH ALBIN RANDALL & BENNETT IN PORTLAND, ME Tax Incentives For Auto Dealers Auto dealers by instinct are always looking for the edge, and when it comes to income taxes they are looking for ideas and ways to reduce or mitigate their income tax liabili- ties. This article outlines a few concepts that auto dealers could use to help reduce their income tax obligations. Section 179D In December 2019, Congress passed a budget agree- ment that included a number of “tax extenders.” One such extender could be useful to automotive dealers with real estate holdings. Congress revived the Energy-Efficient Commercial Buildings Deduction as outlined under IRC Section 179D. This law was originally introduced in 2005 as a way to encourage more energy efficient building. The benefit for taxpayers who build or make improve- ments that meet or exceed ASHRAE 2001 standards is a tax deduction equal to $1.80 per square foot of their building/improvements placed into service. The deduction is allocated to three separate building components as follows: $0.60 is allowed for HVAC systems that achieve 15% savings; $0.60 is allowed for lighting systems achiev- ing 25% savings; and $0.60 is allowed for building enve- lope systems that achieve 10% savings. Dealers who are building or making substantial improvements to their real estate should consider incorporating energy-efficient com- ponents in their projects to harvest additional tax bene- fits. It is worth noting that the 179D deduction had previ- ously sunset at 12/31/2017 and is now available through 12/31/2020. This means that a dealer who had a building project in 2018 and 2019 can go back into prior years and apply the 179D concepts to get tax benefits. To qualify for 179D benefits, an independent, third party firm is required to review and certify that each of the business components meet or exceeds the required standards. Cost Segregation Studies A cost segregation study is not a new tax concept, but it is certainly worth highlighting due to its powerful tax benefits. Simply stated, a cost segregation study is a formal process performed by engineers to identify and segregate build- ing costs or the purchase price of real estate that would otherwise be depreciated over 27 ½ or 39 years. Individ- ual components of the project/real estate are identified and classified based on their use, purpose, service and/ or physical characteristics. This process allows the engi- neer to determine which components are identified as personal property defined by IRC Section 1245 and which components are identified as real property defined by IRC Section 1250. The powerful tax benefit is being able to accelerate depreciation of the Section 1245 components by electing bonus depreciation. Currently, 100% bonus depreciation is available for assets placed into service through 2022, and then depreciation decreases to 80% in 2023, 60% in 2024, 40% in 2025 and 20% in 2026. There has never been a better time than now to utilize cost segregations studies in parallel with bonus depreciation to minimize income taxes. Dealers who are purchasing or building real estate should strongly consider the benefits of a cost segregation study. Research and Development Credits One area of the tax code that is generally not applied to auto dealers is IRC Section 41, Credit of Increasing Research Activities, otherwise known as the Research and Development Tax Credit. The automotive industry is always evolving, and today’s dealer are developing and utilizing software to remain competitive and engage in e-commerce. Companies using internal-use software and client-facing software are entitled to research and devel- opment tax credits for the development and customization of the software platforms and applications. To qualify for R&D Tax Credits, typically an engineer will perform a study and review various aspects of the software and applica- tions to determine which costs will qualify for the credit. Software engineers will review the sophistication of the system design, database architecture, security admin- istration protocols, front and back end communication, programming and source code algorithm development as components that may qualify for the tax credit. The inter- nal-use software features that may qualify include data entry, secure document management, inventory manage- ment, back office functions, marketing automation, report- ing system, mobile integration and analytics. Client-facing software features that may qualify include secure login, bill payment, eSignatures, interactive customer service, instant quotes, social media integration, built-in forms, view/edit profile and document duplication. Dealers who are invest- ing in software internally and for engaging in e-commerce to remain competitive in their markets should consider the tax benefits of a research and development study. Matthew Pore is a tax principal with Albin Randall & Bennett in Portland, Maine. If you are interested in learning more about the tax incentives men- tioned in this article, please contact Matthew or one of our other dealership services team members for more information. Matthew can be reached at 207-772-1981 or mpore@arbcpa.com. N E W H A M P S H I R E 7