Chris Henderson, VP, Operations
The IRS recently announced that it will suspend the examination of auto dealership Code Sec. 263A issues until further guidance is published. Originally, these examinations had been suspended for the September 15, 2009 – December 31, 2010 period. Now, however, it appears that additional guidance will not be issued until sometime after the end of the year, so the suspension has been extended.
UNICAP Code Sec. 263A requires auto dealerships to include in their inventory costs all direct and indirect costs properly allocated to property that is inventory. The IRS rejects auto dealers self-developed methods of capitalizing additional Code Sec. 263A costs. Specifically, the IRS detailed in Technical Advice Memo PLR 200736026 (TAM) how auto dealers should handle costs.
- Installation by the dealer or a subcontractor of parts to new and used vehicles owned by the dealer constitute production activities.
- Repair or installation of parts on customer-owned cars should be treated as handling costs.
- Leased vehicles constitute non-retail transactions
Auto dealership Code Sec. 263A issues are classified as Tier III due to a high level of taxpayer noncompliance. To encourage voluntary compliance, in October 2009, the IRS announced the current suspension of examinations. The IRS expects that all auto dealers will be required to make an accounting method change (i.e. file Form 3115) to conform to the methodology outlined in the TAM. Due to a lack of clear guidance and onerous information gathering requirements, many auto dealers have been reluctant to revise existing UNICAP calculations.
The forthcoming IRS guidance is expected to address many of the more ambiguous issues outlined in the TAM. Prior to this announcement, SourceCorp expected to have a comprehensive solution to market by late 2010. We continue to develop the offering and revise as necessary, as soon as further guidance is published, in order to provide a turn-key solution once the audit suspension period is lifted.
Please feel free to ask questions or leave comments on this blog, or join our Cover it Live discussion on September 1, 2010 at 2:00 p.m. CT.
