Auto Dealer Monthly, September 2013

LEASE HERE PAY HERE NO DISCOUNT AVAILABLE Accounting wiz explains why the LHPH contracts you sell to your related fi nance company dont qualify for the same deduction you take on BHPH paper Buy here pay here BHPH dealers are accustomed to taking a tax deduction when they sell contracts to their related fi nance companies RFCs Th is deduction is permitted by the IRS and it helps make up for the loss the dealer takes on the sale I have noticed that some dealers apply the same deduction to the sale of their lease here pay here LHPH receivables I would advise against that and Ill explain why Th e Internal Revenue Code has a general rule that covers losses on transactions between related parties including BHPH dealers and their RFCs Th e rule states that losses are disallowed until the property is transferred outside of the related party controlled group Fortunately for dealers the Defi cit Reduction Act of 1984 carved out an exception to that rule Th e so called factoring exception basically says that if one corporation acquires a receivable from the sale of goods or services to an unrelated person and sells that receivable to a related corporation at a discounted amount representing its true fair market value the loss a k a discount expense is fully deductible as long as it didnt exceed the gain created from the original sale to that outside person Th at is why discounted sales from a BHPH to an RFC are allowed to work Th ey are protected by the factoring exception However it doesnt work the same way for LHPH paper When a dealer acting as a lessor immediately sells the lease contract to their related corporate fi nance entity the transaction runs into trouble Having booked the full cap cost as a sale on his books the dealer then tries to arbitrarily extend the discounting exception to the lease contract and allows a deep discount Th e problem is there is no substantiation for doing so in the tax laws A tax lease as in a typical LHPH contract where the lessor is entitled to take depreciation is not a sale of goods or services Th at according to the UCC in section 2A on leases is a deal breaker FACT CHECKING I decided to do some research to determine what the Senate and House Finance Committee had in mind when they wrote the Defi cit Reduction Act almost 30 years ago I turned to the conference report a resource oft en used by tax professionals to look at what the House and Senate were aft er before they were forced to compromise to fi nalize each new point of law On Page 158 of the report titled Sec 123 Treatment of Related Person Factoring Income it defi nes trade or business receivable as any account receivable or evidence of indebtedness arising out of the disposition by a related person of property in the nature of stock in trade Stock in trade type property would certainly cover the vehicles on your lot but it requires there be a disposition of the property which still sounds more hopeful than the word sale Unfortunately leasing is not a disposition because the lessor retains title Unless the title transfers and it never will as an LHPH lease 30 AUTO DEALER MONTHLY SEPTEMBER 2013 contract the factoring exception does not apply And remember the sale requirement is between the dealership corporation and the customer not the dealership corporation and its related leasing corporation RLC when it transfers the lease Additionally the rules state that losses or discounts in this case between related parties are not allowed as a deduction until the item involved is transferred outside the controlled group of companies If and when the discount on the lease gets disallowed in an IRS exam it would probably end up deferred or suspended on the dealers tax balance sheet until the lease terminates for one reason or another Examples could include anything from a total loss or a vehicle that was returned and sent to auction once the term was up Only then would the discount be deducted for taxes by the dealer Aft er reading the conference report I spoke informally with an IRS attorney whose job is to provide counsel on letter rulings and requests from the fi eld He agreed that a lease is not a sale of goods or services To this point there has been no litigation challenging the discounting of the sale of leases from a dealer to his or her related leasing company Its possible that the sale of LHPH contracts could eventually be categorized alongside BHPH contracts But to continue lease discounting without consulting a qualifi ed accountant or tax attorney is extremely aggressive and risky p customed t stomed co ted IR ta dealer deal By Nathan King ISTOCKPHOTO COM JEREMYSALE Nathan King is a certified public accountant with LHPH info He offers accounting and tax consulting as well as early lease termination protection packages to LHPH dealers NKing@ AutoDealerMonthly com