Issue link: https://read.dmtmag.com/i/146868
On the Numbers When Dealers Prosper, The Whole Industry Benefits Passive income tax, dual-use, LKE, oh my! Don't worry – you're not in the forest alone. By Garry bartecki It's been pretty busy around AED lately regarding financial and tax matters. On the tax front we have been: n Working with the Ways & Means Committee to exclude equipment rentals from the passive income/investment income definitions in Obamacare n Preparing and submitting a white paper to the IRS in answer to their request for comments and suggestions on the dual-use property question that keeps coming up on audit n Reviewing a favorable legal memorandum that states a taxpayer using LKE does not have constructive receipt when equipment sales proceeds are used by the QI to pay down equipment financing related to the unit sold The favorable legal memo is a big deal because it helps dealers who were questioning their ability to use cash from the sale of a unit to pay off the related debt on the unit and still use LKE. You can. E-mail me for a copy of the IRS document if you'd like to review it. If you are using LKE you may want to place a copy in your permanent tax file. The other two tax issues are of equal importance, because one provides safe harbor accounting to determine which dual-use property is considered a business asset subject to the depreciation rules for tax purposes, and because the second asks Congress to remove construction equipment rentals and rental equipment sales from the definition of rentals that are included in the passive loss 3.8 percent tax embedded in Obamacare. I assure you that AED is leading the charge on these issues. If AED can get the investment income definitions changed and produce a negotiated settlement with the IRS regarding dual-use, that will also be huge! If we get this right, dealers will reduce their personal tax bill because they do not have to pay the 3.8 percent tax on passive rental activities, they'll be more willing to use LKE to reduce their tax bills, and they'll know exactly how to comply with dual-use regulations that allow additional tax deductions and the availability of LKE. We will keep you informed. If you have questions about how all this affects you, please contact Steve Pierson (630-954-1400), our dealer tax expert, who can answer most if not all of your questions. On the financial side we have: n Released the Cost of Doing Business (CODB) Report, which again shows the resiliency of this industry under what have been some very tough conditions n Reviewed and are updating our materials for the fall CFO Conference scheduled for Oct. 10-11 in Chicago n Begun production on an updated Product Support Opportunities Handbook scheduled for release this fall, analyzing contractor survey results on their parts and service purchasing preferences n Kept current on the upcoming changes regarding Lease Accounting and Revenue Recognition Rules As I have mentioned previously, the CODB provided a unique situation where both the Typical Dealer and HighProfit Dealer have similar sales numbers. In the past, it was not unusual for members to say that High-Profit Dealers are the large dealers, and maybe that was the case then; but for 2012 results in the current report, that is the case no longer. Because while sales were the same in some cases, profit before tax for the High Profit Dealer was 100 percent + higher, and return on assets was 250 percent higher. Makes this report kind of interesting to study. I also prepared a comparison report of the Critical Profit Variables, comparing 2012 results to 2003 results. I wanted to see what changed. What do you think it was? Did 2013 perform better or worse? As it turns out, sales increased 80 percent between 2012 and 2003, with 2012 beating 2013 in all expense categories. The only category that stayed the same is the Gross Profit Margin. If you have not done so already, you may want to order the 2013 CODB and spend a little time with it. Get Used to Change I'm afraid to say this, but the new accounting changes are probably going to stick. I do not believe that either will cause material problems for your accounting department except for operating leases you sign to lease equipment, buildings and vehicles. There may be a revenue recognition issue on certain types of rental contracts, especially if other services are part of the rental payment. Leases with maintenance contracts would be an area that probably needs review. As you can see, AED has been busy working for the benefit of members, whether they be dealers or OEMs. As I see it, the more cash flow we help generate for dealers, the more the entire industry will benefit. Garry bartecki (gbartecki@ aednet.org) is AED's vice president of Finance. August 2013 | Construction Equipment Distribution | www.cedmag.com | 53 53_On_the_Numbers_KP.indd 53 7/25/13 12:58 PM