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Change in Treatment of Trade Discounts May Provide Accelerated Deductions for Dealers!

Summary:
Dealers receive trade Discounts (finance credits, advertising credits, fuel discounts, prep. and conditioning reimbursements, etc.) when they purchase new vehicles. For example, a dealer may purchase a new car for $12,000 with the agreement that the manufacturer will rebate $200 of the purchase price to the dealer at year end. Many dealers record the $12,000 as the purchase price of the new car and report $200 in income when the rebate is received. The proper tax treatment is to record the purchase at $11,800 and report now income when the rebate is received.

What Does it Mean to Auto Dealers?

An automobile dealer must record the cost of automobiles in inventory reduced by the amount of manufacturer's rebate, which represents a trade discount. Changing the way it accounts for these discounts requires IRS prior approval and could result in a $110,000* tax benefit for the dealership
(* - on average).
Dealers that change their treatment of trade discounts must take the entire deduction in one year.
Most dealers can change automatically by attaching an application to a timely filed return for the year of change and sending a copy of the application to the IRS National Office. Thus, an automatic change can normally be made after year end.
Dealers that change to a new tax method of deducting trade discounts may continue to use their old method for internal management and financial statement purposes.

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