IRS has issued confusing guidelines on Captive Insurance; some taxpayers now in limbo

When members of Congress travel to Oklahoma this week, we hope they hear one message loud and clear: The IRS needs to stop targeting honest small-business owners and farmers who use the 831(b) tax code, also known as Captive Insurance.

Small businesses around the country successfully protect themselves through this tax code, helping them through events and financial losses that traditional insurance does not cover. But now, those small businesses are being forced to hire lawyers to defend themselves from the IRS, which has unfairly singled them out.

This issue directly affects the Modoc Nation, where some providers of 831(b) captives are domiciled. Fees paid to those plans help benefit the Modoc Nation’s wide range of social assistance for our members, such as child care assistance, scholarships for higher education, and improved housing. With our commitment to conservation, we’ve also reintroduced a herd of 200 bison to the Modoc range.

We’re proud to help facilitate 831(b) captives and know organizations need to mitigate unforeseen risks. This was no more apparent than during the COVID-19 pandemic when organizations faced unprecedented financial challenges.

Unfortunately for many, traditional insurance plans did not cover the wide range of business disruptions and expenses the pandemic brought.

This is where the 831(b) tax code comes in. Congress showed foresight nearly four decades ago when it created 831(b), a special section of the tax code that allows individuals and small businesses to set aside tax-deferred funds for unforeseen or catastrophic events.

This tax code can provide risk coverage not normally available in the traditional insurance market. For instance, an 831(b) captive can help when unpredictable events hit — such as the avian flu, which recently devastated the poultry and egg industries, or prolonged downturns in the oil and gas markets.

Similar to 401K individual retirement accounts, an 831(b) captive allows business owners to put aside pre-tax dollars that can be used to cover unforeseen business disruptions in the future.

This form of self-insurance enables small- to mid-sized businesses to sustain cash flow, generate investment income, and alleviate the burden from losses. During the COVID-19 pandemic, 831(b) captives helped small businesses navigate widespread business and supply chain interruptions.

Unfortunately, the IRS has recently taken a different view of 831(b) captives. This has been especially true since 2016 when the agency began a systematic campaign of audits relating to the 831(b) tax code.

Since then, the IRS issued confusing guidance on how 831(b) is treated for tax purposes, leaving some honest taxpayers in limbo or facing unreasonable audits and penalties. Alternatively, many small businesses are afraid to participate and use this great risk mitigation tool because of the IRS’s confusion on guidance.

Aside from its wide-ranging audit program, the IRS also imposed burdensome new reporting requirements.

The IRS has not been fair to small businesses with 831(b) captives and has made it impossible for us to follow the rules when they won’t even explain the rules they’re expected to follow.

We hope the committee will urge the IRS to end its un-American campaign against small businesses and farmers.

Original posting by The Oklahoman.

Why there may be no return to ‘normal’ for the U.S. used vehicle market

All new vehicles become used cars and trucks once they’re sold.

It’s an obvious statement, but one that needs to be laid out to explain the root cause for ongoing inventory and pricing issues in the U.S. used vehicle market, which has been a barometer for the country’s inflation levels.

During the onset of the coronavirus pandemic in early 2020, automakers shuttered factories for weeks to stop the spread of Covid-19. It was an unprecedented action that eventually led to additional supply chain problems, such as an ongoing semiconductor chip shortage, causing factories to cease production again for weeks, if not months, at a time in recent years.

The lack of production meant fewer new vehicles would become used models for consumers to purchase, leading to inventory constraints in both the new and used vehicle markets, as well as record prices due to resilient demand.

It’s been three years since those initial plant closures, but American consumers — as well as the Biden administration — hoping for the used vehicle market to return to “normal” pre-pandemic levels shouldn’t hold their breath.

notable decline in used vehicle prices toward the end of last year has been roughly cut in half in 2023, as inventories remain significantly down following vehicle-production disruptions. There’s also been an uncharacteristically large number of consumers buying out leases to avoid sky-high car prices and increasing interest rates.

“It looks like it will persist for some time,” said Chris Frey, senior industry insights manager at Cox Automotive. “It’s really a function of this hole in new production, creating a dynamic where wholesale or general used values are higher because there are millions of fewer new vehicles that would eventually turn into used.”

Cox Automotive reports wholesale used vehicle prices are up by 8.8% this year through mid-March, according to the Manheim Used Vehicle Value Index, which tracks vehicles sold to dealers at auction. The prices are trending higher, and the index is heading back toward a record of 257.7 basis points set at the start of 2022. It was 238.6 as of mid-March.

Used vehicle inventory is down 21% from a year ago and off a whopping 26% from pre-pandemic levels of 2.8 million available vehicles in 2019. Cox Automotive doesn’t expect the total number of used sales to return to pre-pandemic levels of about 38.2 million units until at least 2026, Frey said.

Adding to the production hole is a change in leasing. Cox reports a 20% increase in consumers who leased their vehicles buying them out instead of trading them in from 2019 to 2022. The increase occurred as residual values of the vehicles in some cases were far above expectations, making it significantly cheaper to buy the vehicle than lease another amid inflated prices and rising interest rates.

“It’s still under a lot of pressure, just like it was last year,” said Benjamin Preston, an autos reporter for Consumer Reports. “Prices came down a little bit … but the bottom line is they’re just way higher than they were before the pandemic.”

Cox Automotive previously forecast wholesale prices on the Manheim Used Vehicle Value Index to end 2023 down 4.3% from December 2022. The company has not revised that forecast but may need to do so amid the increasing wholesale prices.

Cox reports the average listed price of a used vehicle was $26,068 in February, the most recent data available, down from records last year of more than $28,000 but significantly higher than the roughly $22,000 average it reported two years ago. Retail prices for consumers traditionally follow changes in wholesale prices.

So, what’s the solution? There’s no other course but an increase in new vehicles being produced in order to boost the number of future used models. Automakers are expected to lift production this year, but they’ve also pledged to not overbuild like they have in the past.

“We’re unlikely to go back to pre-pandemic levels. Vehicles cost way more now,” Frey said regarding used car pricing. “The landscape has changed. [Automakers] are not manufacturing as many as they have because they got the taste of gold — huge profits from not having so many vehicles in manufacturing.”

Originally on CNBC.

Number of US Dealerships Rises in 2022

Automotive News’ annual dealership census shows the number of U.S. dealerships increased 0.4% last year, though new-vehicle sales per franchise fell 8.8% because of new-vehicle inventory challenges and other factors.

The census ranks 42 brands for throughput, a measure of dealership network health. The new census is the first to include Polestar, which had 29 franchises as of Jan. 1.

The research shows Ford Motor Co. shed 35 dealerships last year—a 1% decline. The brand had 2,967 franchises as of Jan. 1. It gained 19 exclusive stores last year but shed 31 franchises. Its Lincoln brand lost 54 franchises and four exclusives to land at 637 franchises on Jan. 1.

Overall, the number of exclusive dealerships across the industry rose 1.6% to 12,151. Import-badged exclusive dealerships also grew by 2%.

Hyundai added 80 stores, Mazda 21, and Kia and Mitsubishi each more than 10. Jeep more than doubled its exclusive store count, and Cadillac’s dealer network grew by two to 564 franchises, according to Automotive News.

Throughput was a mixed bag, falling for 30 franchised brands and increasing for 11.

Toyota ranked No. 1 for throughput, with 1,494 vehicles sold per franchise. However, inventory constraints tempered its throughput by 8.8%.  

Lexus captured the No. 2 spot with throughput of 1,060 vehicles. That represents a 15% decline as dealers struggled with record low inventories for most of the year.  

Though BMW’s throughput declined 1.6% to 947 vehicles, it still climbed one spot to third place. The third place finisher in 2021, Honda, dropped five spots to No. 8, with throughput falling 33% to 826 vehicles. Acura throughput fell 35% to 378 vehicles.

Automotive News reported Mercedes-Benz was the only brand in the top 10 whose throughput rose. The brand jumped four spots to No. 4 as its throughput jumped 6.4% to 916 vehicles. Kia moved from the sixth spot in 2021 to the fifth spot, despite a 2.2% decline in throughput to 892 vehicles.

The research found Cadillac dealers sold 240 new vehicles per franchise, up 45% for the industry’s largest percentage gain.

Article originally written by ADT.,1.6%25%20to%2012%2C151%20in%202022

April Newsletter

Spring has Sprung!

Wow, there is sure a lot going on in our industry, the sports world, and of course here at ADS! As we head into April we notice flowers blooming, trees budding, opening day for the MLB (pay attention to the new rules) and of course one of our favorites, The Masters!

In the recent issue of GOLF Magazine, the Editor In Chief beautifully laid out the history of the phrase ‘Rite of Spring’ and how it ties to golf and The Masters. It made me think how the phrase also correlates to our industry. Spring is seen as a rite of passage due to graduations, growth, and of course the blossoming of flora and fauna all over the world. In other words, Spring is an awakening!

Our industry also sees this time of year as an awakening; one that sees us transition from the slower winter months into the madness of the prime selling season we all love. We are also witnessing a type of awakening with transitions in our business. There are more dealerships this year than last year, which is a good sign knowing how many points were closed due to demands of electrification, etc. We also see the consolidation continue across all spectrums of the industry. Dealer groups are getting bigger (although more than 94% of dealers are owned by groups with 1-5 rooftops), product administrators are buying F&I agencies, insurance companies are buying product administrators, etc. With each of these transactions, just like flowers blooming in Spring, up pops a new dealership, new product administrator or a new F&I agency. Here’s to the 2023 version of the awakening!

Here are some items worthy of sharing:
Number of US Dealerships Rises in 2022
No Return to Normal for the US Used Vehicle Market
IRS Issues Confusing Guidelines on 831(b) Election
IRS Raises Section 831(b) Premium Limit

And some stuff that is just good to know…
How to watch The Masters
New Rules for MLB

Bob and Ryan

Click to view Full Newsletter.