IRS issues safe harbor rules for motor vehicle dealerships
December 16, 2010
On November 9, 2010, the Internal Revenue Service issued Rev. Proc. 2010-44, which provides safe harbor rules motor vehicle dealerships ("MVD") may use for capitalizing costs under IRC Section 263A.
These safe harbor provisions are taxpayer-favorable and apply to the following types of MVDs:
- Automobiles
- Light-duty trucks
- Medium-duty trucks
- Heavy-duty trucks
- Recreational vehicles
- Motorcycles
- Boats
- Farm machinery and equipment
- Construction machinery and equipment
MVDs should review their 263A methods and consider filing an automatic accounting method change to adopt either, or both, of the following safe harbors:
Retail Sales Facility Safe Harbor Method
An MVD may treat its entiresales facility from which it "normally and routinely conducts on-site sales to retail customers," including any vehicle lot that is an integral part of its sales facility and that is routinely visited by retail customers, as a retail sales facility. Furthermore, a motor vehicle dealership using this retail sales facility safe harbor method is not required to capitalize handling and storage costs incurred at its retail sales facility.
Reseller Without Production Activities Safe Harbor Method
This second safe harbor provides that the activities that an MVD, or a contractor, perform on dealership-owned vehicles and customer-owned vehicles are handling activities. However, the costs of these handling activities, other than the cost of vehicle parts, are not required to be capitalized to the extent incurred at the MVD's retail sales facility.
In most cases, an MVD will want to adopt this safe harbor in conjunction with the retail sales facility safe harbor discussed above. An MVD adopting this safe harbor method may also use the simplified resale method for its vehicles and other eligible property.
Filing for an Automatic Change
An automatic change if made by filing Form 3115 by the due date of the tax return for the year of the change, including extensions. No user fee is imposed. A second copy must be filed separately with the National Office of the IRS.
Please contact Kevin Cherney (920.662.2860, kcherney@wipfli.com) or your Wipfli relationship executive with any questions.
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