CATA News

By Brian T. Wallace, CPA & Partner, Withum

 

With industry-wide inventory shortages abound, many dealers have struggled to hold on to incoming inventory to meet the market demands. With some of the fluctuations in sales for new- and used-car dealerships, it will pose some problems going into year-end tax planning scenarios for those that have been valuing inventory under the LIFO accounting method. 

Depending on the size of your LIFO reserve and the size of your inventory now in relation to the prior year, you could be in for a sizable income pick-up which could have an impact on future tax scenarios for either the dealership or the pass-through owners. 

This, combined with expected income pick-up associated with PPP loan forgiveness (note that the expenses contributing to the non-taxable forgiveness income are nondeductible essentially making the forgiveness itself taxable), could combine for a one-two punch that hinders your dealership’s cash flow coming out of the first quarter of 2021. 

One consideration would be electing off of LIFO. 

 

Typically, with an accounting method change, you could elect to take in the reserve evenly over four years, reducing your potential tax event in the current year and taking advantage of what remains of some of the more favorable tax years ahead (think qualified business income (QBI) deduction). Not only would this apply for new-car LIFO but, it could apply to many other inventory-based tax deferrals including dealer trade discounts. 

Make sure you consult with your dealership tax professionals at year-end planning to make sure a proper LIFO estimate is indexed. While dealers are coming out of some record-breaking gross profit months, it still is important to keep cash reserves, and good tax planning is key to making sure the cash remains in your dealership in times when it is needed. 

I am working with local and national industry groups to assess the need for congressional relief, as this clearly is an unintended consequence of the government-mandated shutdowns associated with the COVID-19 pandemic. However, dealerships should not count on this relief and should reach out to their tax advisors to develop a strategy to minimize tax liabilities and help dealers hang onto cash.

 

Withum was named by Forbes in 2020 as being among America’s top recommended tax and accounting firms.

 

 

The Treasury Department on Sept. 21 issued final regulations on the availability of bonus depreciation to motor vehicle dealers that Congress excluded from the limitation on the deductibility of business interest which was included in the Tax Cuts and Jobs Act of 2017. The final regulations largely reflect the determinations Treasury made in the proposed regulations it released in September 2019.  

Key features of the final regulations that the National Automobile Dealers Association urged Treasury to adopt include:

• Dealers whose total business interest, including floor plan financing interest, is below the statutory cap on interest deductibility (which was 30% of a dealer’s adjusted taxable income but was expanded by the CARES Act to 50% for 2020, as well as 2019 for corporations) are eligible for bonus depreciation;

• The determination of a dealer’s eligibility for bonus depreciation is made on an annual basis (meaning ineligibility one year does not necessarily preclude eligibility the next year); and

• The IRS will promulgate transition rules for dealers who elected out of bonus depreciation or who reduced their floor plan financing in 2018.

The amount of business interest dealers deduct is a straight calculation (meaning it may not be limited to an amount below the statutory threshold in order to provide access to bonus depreciation).  The NADA will soon release additional information on the final regulations. Dealers are encouraged to review this development with their tax advisor.

 

U.S. demand for light vehicles has roared back since the sudden precipitous decline caused by COVID-19 that started in March and bottomed out at an annualized rate of 8.7 million in April — a 50-year low — with volume declining 46% year-over-year to 717,000 units.

Automakers increased and strategically placed incentives and attractive financing offers on certain vehicles, dealers adjusted to lockdowns by upping their online sales efforts among other things, pricing on used vehicles remained solid and sales came out of the pandemic doldrums faster than most expected.

 

By the end of the summer, while fleet volume was still flagging, retail vehicle sales were closing in on pre-recession totals.

Although growth is expected to temporarily flatten, with the final months of 2020 running at a 14.5 million-unit annualized rate, that count still is well above April’s trough. Currently, analysts expect the year’s sales to end at 13.9 million units, well below the 17-plus million averaged over the past five years, but above many initial pandemic projections calling for a sub-13 million year.

After the pause, sales are expected to continue sequential growth later in 2021. However, there is more upside opportunity than downside to the 2020 forecast.

One reason is pure momentum. Sales have continually surprised on the high side since the spring, even after incentive spending came back down to Earth after spiking upward 26% year-over-year in April. Since then, there also have been cutbacks in long-term financing options.

What’s mostly moderating short-term expectations are economic headwinds, such as permanent job and wage losses, as well as continued limited availability of new vehicles.

One consequence to the sharp growth in sales since April is that automakers are finding it tougher to restock dealers with new vehicles, leading to an extraordinarily high rate in turnover in recent months to meet demand.

That culminated with August sales volume equaling roughly half of the nationwide inventory the month started with, compared with typical turnover closer to one-third.

Widespread vehicle assembly plant shutdowns in the spring caused inventory to drop to 9-year lows and, based on projections, is not expected to improve much above that level over the rest of the year. Indeed, U.S. light-vehicle inventory ended August at 2.6 million units, down 26% year-over-year and lowest for the month since 2011’s 2.0 million.

 

There still is enough uncertainty in the current environment that pegging sales over the final four months of the year at a specific annualized rate is even more problematic than usual.

By the numbers, sales can run higher than projected depending on how much above normal dealers can continue turning over inventory — which might become more challenging when the ’21 models, with their mostly higher prices, become widely available in the fourth quarter. But, in theory, if dealers can continue turning over half their inventory, there is enough production in the pipeline for sales to track at an annualized rate of 16 million for the rest of 2020.

 

Such a surge could lift total 2020 sales to as high as 14.5 million units, and to the extent sales significantly outdo the current outlook, that would lead to an increase in 2021’s current forecast of 15.2 million units.

 

Still, what cannot be discounted is the possibility of a slowdown. Consumer confidence could continue to fall, and the pace of rehiring might not have enough strength to offset the impact of permanent job losses, including many recently announced corporate layoffs, to keep sales rising through December.

 

Also, pent-up demand from delayed purchases and deferred lease returns in the second quarter could be starting to play out.

 

Furthermore, there still is the issue of supply bottlenecks in key segments to contend with.

 

Pickups are most pinched for supply. August ended with inventory down 44%, and that could worsen depending on how much Ford has to slow production in September and October for changeover to its redesigned ’21-model F-150.

 

There currently also is extra thin inventory of sport/utility vehicles, due mainly to a slowdown in production of GM’s full-size SUVs, which are being re-engineered for the ’21 model year. However, availability is projected to be adequate by November, possibly sooner.

 

Ironically, despite severely lean inventory, pickups are propping sales by outdoing all other segments over the past six months.

 

Volume sales of pickups since March declined only 16% year-over-year, compared with a 28% drop for the entire industry – 31% for the industry less pickups.

 

Initially, automakers reported that higher manufacturer from the manufacturers, juiced by generous offers of low-interest, long-term financing, propped demand for pickups vs. other vehicles. But sales apparently stayed revved up over the summer from nationwide improvements in housing and construction – the latter thought to have been sparked by housebound homeowners doing more upgrades.

 

Heading into the year’s fourth quarter, lean inventories of full-size trucks – the majority being large pickups -- could become a more acute issue.

 

In recent years, combined sales of large pickups, SUVs and vans have been strongest in the fourth quarter. Inventories of full-size trucks are down 35% year-over-year at a time when demand could be about to get stronger.

 

While it could be good for overall sales, an increase in commercial fleet orders could strain the supply of full-size trucks for dealers in the fourth quarter.

 

Commercial fleet volume is expected to rebound faster than rental volume, and Fiat Chrysler already announced it was putting more effort into satisfying fleet customers in the second half of the year. If others follow suit, more overall production volume could be allotted to accommodate fleet customers vs. retail.

 

Ultimately, what could excite consumers and prop shopper traffic -- and maintain high inventory turnover -- is the bevy of all-new and redesigned products still to come for the ’21-model year.

 

Although some intros were delayed to next year due to the impact from the virus, there was no significant reduction in the originally scheduled number of fresh vehicles coming to dealer lots in 2020 or 2021. In fact, Wards Intelligence analysts expect 18 new or redesigned ’21-model cars and trucks hit the market in 2020, followed by an additional four intros in early 2021.

 

The Federal Trade Commission and its regional partners in Cleveland, Ohio, will host a virtual workshop 12-2:45 p.m. CST Oct. 29 to discuss advertising and data security basics for small businesses.

The Green Lights & Red Flags: FTC Rules of the Road for Business workshop will bring together Ohio business owners and marketing executives with national and state legal experts to provide practical insights to business and legal professionals about how established consumer protection principles apply in today’s fast-paced marketplace.

The workshop will begin with a discussion of how small businesses can protect themselves from scams. Featured speakers will include Andrew Smith, director of the FTC’s Bureau of Consumer Protection; Rebecca Schlag, Ohio’s senior assistant attorney general for consumer protection; and officials from the Cuyahoga County (Ohio) Department of Consumer Affairs the Better Business Bureau serving greater Cleveland.

The workshop also will include discussions on truth-in-advertising law, social media marketing, consumer reviews, children’s online privacy, email marketing, data security basics, and practical tips on responding to a cyberattack.

The full agenda and other information can be found on the event page. The workshop will be 12-2:45 p.m. CDT. Those interested in attending the virtual event should register using the registration link on the event page.

The event is sponsored by the FTC and officials in Ohio. The workshop continues a popular series of business seminars that the FTC and its regional partners have held over the years in cities nationwide. The FTC relaunched the series in 2019 with an event in Atlanta.

The FTC works to promote competition, and protect and educate consumers. Learn more about consumer topics and file a consumer complaint online or by calling (877) 382-4357 [FTC-HELP].

 

Eighty-two percent of dealers said they would rely heavily on social media advertising such as Facebook and Instagram for the rest of this year, according to a new survey from automotive digital marketer PureCars.

Sixty-two percent said they would use direct marketing channels, and 61% would use SEO/search marketing efforts to reach customers.

The PureCars survey found that dealers’ digital advertising strategies have shifted since the beginning of the COVID-19 pandemic and so have their advertising strategy plans for the remainder of the year.

"It goes without saying that dealership advertising patterns were most disrupted in the spring, following the initial outbreak of COVID-19," PureCars chief executive Jeremy Anspach said in a news release.

The survey also seems to illustrate a decline in interest for using traditional broadcast media for advertising. That represented the lowest percentage in the survey, at 33%. Traditional print media was next lowest, at 37%, followed by traditional media signage/billboard, at 38%.

Forty-eight percent of dealership executives mentioned connected TV as a conduit for reaching customers.

In addition to where and how dealers will spend their advertising dollars, PureCars also surveyed dealer participants about which messages they will convey to customers. PureCars said it was not surprising that 83% of dealers said they will use messages about COVID-19 cleanliness.

Sixty-seven percent said they would use messages about digital retail/contactless.

PureCars said a surprising survey result was that dealers are choosing to promote payment over price as their advertising message. Sixty-seven percent said they promoted F&I options. That is followed by great offers at 64%, and trade-ins at 63%.

Anspach said after the spring disruption in dealership advertising patterns, dealers "quickly regrouped," and dealership advertising has shown a steady rebound through summer and into fall.

"The dealers surveyed confirmed what we’re already seeing, which is a boost in digital advertising plans for the balance of year and into 2021," Anspach said. "We’ve seen dealers invest in channels and tactics they never considered as critical prior to 2020. 

"These unprecedented times have forced dealers to rethink their digital advertising and sales strategies, inspiring more creative approaches to solving tactical, as well as operational, challenges that have yielded impressive results, benefiting both dealers and consumers."

 

The David F. Mungenast Sr. Lifetime Achievement Award is presented annually to a member of the international nameplate auto retail industry who embodies an unrivaled commitment to his/her dealership and employees, community, and family. It is presented during American International Automobile Dealers Association’s annual meeting.

The dealer association’s board of directors created the award to honor the memory of Mungenast, a former AIADA member who also served as its chairman in 1998. He was known by family members, employees, and those in the industry and community as their founder, mentor, employer, and friend. Dave Sr. and his wife, Barbara, were both dedicated to giving back to the communities that helped make them successful. 

Consider the requirements and fill out the nomination form to nominate an outstanding member of our industry for this award. Please return the nomination forms must be submitted by Oct. 31 to the AIADA by mail, e-mail, or fax. The winner will be announced at the association’s 51st annual meeting & luncheon in January.

John F. Weinberger, a co-founder of what today is one of the Top 120 dealership groups in the nation, died Sept. 12 at age 88.

Mr. Weinberger and his younger brother Herman established the Continental Motors Group in 1962, specializing in the sales and service of imported cars. The group now operates seven franchises in Chicago’s western suburbs.

He began as an apprentice technician. He also enjoyed racing cars and earned numerous podium finishes in his 30s while competing in Sports Car Club of America events, and he continued racing vintage cars until he was 84. Mr. Weinberger was inducted into the Road Racers Drivers Club, joining an exclusive group of famous race car drivers. He was a past SCCA board member and an active member of vintage racing clubs including the Sportscar Vintage Racing Association, the Vintage Sports Car Drivers Association, and Historic Sportscar Racing, LLC.

His dedication to the retail automobile industry included serving terms on the boards of the CATA, the Illinois Automobile Dealers Association, and the American International Automobile Dealers Association. 

   

Continental Motors Group today is operated by his sons, Jay and Joel, and by his niece, Cheryl Nelson, who is Herman’s daughter.

Mr. Weinberger met his wife, Lisa, at a tollbooth in Oak Brook when they both were driving. He did not have exact change that day, so she offered him the coins and her phone number. A few years later, they were married at that tollbooth. 

The couple established the Continental Motors Group "Driven to Care" car giveaway program, which to date has donated 72 refurbished cars to people who have overcome challenges such as homelessness, substance abuse, and physical abuse. He also mentored and provided scholarships to graduating high school students interested in a career involving the preservation and restoration of vintage cars.

Other survivors include another son, Bob; and many grandchildren and great-grandchildren. Memorials appreciated to The Footprints Foundation, in care of Continental AutoSports in Hinsdale. 

 

By Shartega IT, CATA Approved Member Partner

 

Most dealerships retain sensitive personal information such as names, Social Security numbers, financial statements, credit card information, or other account data that identify customers or employees. This information is necessary to fill Purchase Orders, complete payroll, finance a vehicle, or perform other dealership functions. 

However, if sensitive data falls into the wrong hands, it can lead to fraud, identity theft, or similar harms. A security breach can tarnish your customers’ trust and perhaps even lead to a lawsuit.

The truth is, safeguarding personal data is a must. Statutes such as the Gramm-Leach-Bliley Act, the Fair Credit Reporting Act, and the Federal Trade Commission Act may require you to provide reasonable security measures for sensitive information.

 

So what can you do to boost your data and security hygiene? The answer is simple: Start taking security seriously.

We recommend deep diving into how your dealership uses, acquires and stores data. If you can understand the lifecycle of data and how it travels within your ecosystem, how it interacts with your CRM, DMS, or other applications, then you can fine-tune ways to secure it. Protecting your data from breaches and hackers, and creating a plan to respond to security incidents is a must for today’s dealers. So where do you begin?

Back in 2013, President Barack Obama signed Executive Order 13636, which spoke to the nation’s vulnerable infrastructure and the need for a proactive cybersecurity framework for the private sector to embrace and the public sector to follow. A contract was awarded to the National Institute of Standards and Technology (NIST) and a year later, in 2014, the organization released a 41-page introduction to its framework. 

 

The Framework presents industry standards, guidelines, and practices in a manner that allows for communication of cybersecurity activities and outcomes across the organization, from the executive level to the implementation level. The Framework Core consists of five concurrent and continuous Functions — Identify, Protect, Detect, Respond, Recover. When considered together, these Functions provide a high-level strategic view of the lifecycle of an organization’s management of cybersecurity risk.

If you’re ready to start taking security seriously, start by understanding how your dealership uses, acquires, and stores data. Then build your own security policy and solution using the NIST framework. Together, we can make a difference.

 

By Jason Courter, 2020 AIADA Chairman

 

We’ve all heard the phrase "new normal" a lot this year, but lately it’s really resonating with me.

These days, I don’t back out of the driveway without a mask in the car. That’s the new normal. My youngest is starting her senior year on a laptop. That’s the new normal. And sales at our Honda stores are finally leveling off after some pretty dramatic ups and downs since March. That’s the new normal, too.

None of us are thrilled to be living in this new normal (my high school senior least of all), but it’s the reality we must navigate, for now. There haven’t been any magic bullets for running a dealership group during a pandemic. Every success my team has had has been the result of hard work, persistence, and stamina.

That’s why I’m taking this moment, after nine months of tumult, to say, "Nice job," to my fellow dealers. You’re still here. You’re still opening your doors every morning. You’re still making payroll and making customers smile. It hasn’t been easy and it hasn’t often been fun, but we’re surviving.

This new normal will require from dealers a new type of advocacy. It might be a while before you walk through the halls of Congress or shake hands at a political fundraiser, or even vote in-person at your local polling place. But that doesn’t mean you can’t be an active and involved dealer advocating on behalf of your employees and your stores.

One big thing you still can do under social distancing guidelines is hold a Virtual Dealer Visit with your Representative at your store. With the AIADA’s help, you can set up an online meeting between your lawmaker and your employees, give your member of Congress a virtual tour of your store, and help him or her understand the value you bring to their district.

Another easy but impactful action is to be an online advocate for your business. Use your personal or business accounts on Twitter and Facebook to share the good work your stores do with the hashtag #DealersDoGood. Visit the AIADA’s social media toolkit for more ideas on what you can share. And get ready-to-post images from our 2020 Economic Impact Report.

Together, we will show Washington, D.C., just how well dealers are adapting to the new normal.