Minimize Your Shop’s Tax Burden
Shop owners can confidently explain the difference between quality and inferior parts to their customers, often pointing toward an upfront investment that pays large dividends down the road. But how many of these same owners are taking their own advice when it comes to managing their respective company’s tax burden?
Two certified public accountants in the automotive repair industry suggest many shop owners are making dangerous mistakes, missing out on significant deductions and, in general, not spending the money for quality accounting that can save game-changing amounts of money for their businesses.
Their advice boils down to a few key pieces of advice: Capture every available tax credit, reduce the amount of stored inventory, utilize creative accounting for your facilities and, most importantly, work with an accountant that is a true partner for your business, rather than someone who just prepares your taxes at the end of the fiscal year.
As with the differences between quality and sub-par replacement parts, paying the added money to have a professional tax advisor go over your business with a fine-tooth comb, rather than just filing your paperwork, could save your business millions of dollars.
It pays to play
While there’s no question lower-cost accountants can file your company’s taxes for less money than paying for ongoing accounting advisement, Dennis Frankeberger, a CPA and certified fraud examiner with Frankeberger Vausher + Company in Chino Hills, Calif., says he has seen many collision shops overpay or make significant errors on their taxes with this less-is-more attitude.
He cited a recent automotive client who, after switching from a less engaged accounting firm, shaved $3.5 million off his tax bill in just two years.
“Someone who has a collision business should be concentrating on their business and leaving other professional stuff to the professionals,” Frankeberger says. “They’ve been under-represented over the years with taxes or financing or internal control, and that has resulted in overpayments and significant errors as a matter of fact, and oversight of benefits that are out there.”
Louis Stratton, a CPA and director at Illinois-based Porte Brown Accounting and Consulting, agrees there are many business owners in the collision repair industry who overpay on their taxes by skimping on accounting services.
“There are business owners who, in an effort to save money on professional fees, tend to overpay,” he says. “They’re not getting good advice or doing what they’re supposed to—those are the businesses that are less strategic.”
Both say the first step to smarter tax oversight is relatively simple: Find an accountant or firm that is truly a part of your team, examining every aspect of the business for tax savings and newfound opportunities.
With that endgame in mind, here are six tips for sending less of your dough to the taxman:
Tip #1: Be the right kind of business.
While most businesses are properly set up at their founding to be a C corporation, S corporation or LLC, Stratton says it’s common for circumstances to change, making it advantageous to change how a business is listed.
“A lot of older businesses established many years ago have chosen a particular form of an entity based on what the laws were at the time,” Stratton says. “But because things have changed, maybe it’s better to be a different type of entity.”
It can be expensive to change the structure of a company, with all of the paperwork and accounting legwork required, but it could be worth the cost in ongoing tax savings. Examples making it worthwhile to change the structure of a company include changes in tax laws or ownership structure, like an owner passing the business off to multiple children.
Tip #2: Perform a cost segregation study.
If your company has built a new facility, acquired another location, or undertaken a significant remodel within the last decade, a cost segregation study separating various assets for tax purposes could shave tens of thousands of dollars off your tax bill, Frankeberger says.
According to cost segregation specialists Ernst & Morris Consulting, building components “such as electrical installations, plumbing, mechanical components and finishes can be identified and reclassified into shorter-lived asset classes” in a cost segregation study for both new and existing properties.
Frankeberger has seen small-business clients use cost segregation to claim more than $3 million in tax savings in a single year.
While the process requires hiring an engineer to conduct a full study, as well as accounting fees, it has the potential to depreciate certain facilities expenses in a much shorter window than the standard 39-year term. Even if years have passed since the construction or acquisition, accountants may be able to do a “look-back” to take advantage of the shorter depreciation schedule.
“We’re able to go in for seven or eight years and review the project and look at it as if the cost segregation had been performed seven years ago,” Frankeberger says. “We’re able to then bring that forward for seven years and the IRA allows us to take a one-time catch-up for all seven years—it’s huge.”
Tip #3: Separate your assets.
While this may be one to please your lawyer, separating the company’s assets—like separating off the real estate for the business, as one example—can be a major opportunity to better protect the company from a legal perspective, as well as providing potential tax savings.
“If there was a lawsuit, things could be separate,” Stratton says. “So if the operation was sued, the land and buildings are protected under a different entity, so they’d have to sue different entities.”
Tip #4: Utilize tax credits.
Tax advisors that are truly looking under every couch cushion for your business may discover potential tax credits that may apply to your existing business, or a future expansion that’s on the table.
One example, originally introduced in 1993 by the Department of Housing and Urban Development, are Empowerment Zone tax credits, which are designed to stimulate economic growth in distressed communities through the use of federal tax incentives. Other benefits are available for hiring veterans, disadvantaged youth, needy families, food stamp recipients and ex-felons.
Frankeberger says one of his clients, by strategically located within an Empowerment Zone, is able to save approximately $50,000 per year on his tax bill.
Tip #5: Get a second opinion.
While there are seemingly infinite ways to lower your business’ tax burden, like minimizing inventory, accelerating depreciation of fixed assets and writing off equipment investments, Stratton and Frankeberger assert the most important step is finding an informed, engaged tax advisor.
“If you’re getting audited periodically and you have significant adjustments, you’re not being well represented,” Frankeberger says.
To seek a second opinion, he recommends interviewing your current accountant about some of these subjects, or asking a reputable CPA to give your company’s taxes a second set of eyes.
Stratton adds that advisor-type firms tend to have quarterly meetings with clients to keep in touch and find out if there are any changes that can be applied before it’s too late in the fiscal year. Another good sign, he says, is an accountant that is always looking for ways to take advantage of small changes in the tax code—meaning they are staying up to speed on the changes as they happen.
“I don’t know that [you] need second opinions on an annual basis,” Stratton says. “I think that’s excessive, but if they’re in a situation where they suspect they’re not working with an advisor, but more of a preparer, then they should take their last three years of tax returns to a firm that has references ... [and that] is up to date and current with what’s going on.”