How to Leverage the Section 179 Deduction for Your Dealership

October 26, 2018 by Comerica Bank

The lowering of the corporate tax rate was one of the biggest highlights to the Tax Cuts and Jobs Act of 2017 (TCJA), but far from the only takeaway for businesses. Look closer at the reforms, and a near doubling of the Section 179 tax deduction could prove as advantageous for companies as a lower overall rate. 

Why? Because Section 179 allows businesses to fully deduct qualified purchases and expenses in their first year of tax service, allowing organizations like auto dealers to improve their operations immediately. Instead of deducting little by little through depreciation, dealerships can write off an entirely new piece of machinery, customer relationship management software solution or security system under the Section 179 tax deduction. The tax code can provide powerful leverage to dealerships, but they must know how to use it.

What is the Section 179 tax deduction?

Section 179 provides businesses with a way to deduct capital expenses on qualified business or personal property bought and placed into service that tax year. Some of the items covered by the deduction include financed new or used business equipment, computers, off-the-shelf software, office furniture and equipment, and certain real property. Vehicles are a popular deduction under Section 179, but auto dealers be aware, those cars have to be for business use, not inventory.

Still, the Section 179 tax deduction is highly useful for dealerships, and the TCJA made it even more so. The total allowable deduction in 2017 was $510,000, but in 2018 that limit jumps to $1 million. The reforms also opened up the possibility to deduct nonresidential property improvements under Section 179. The cap hike is permanent and will be indexed to inflation in future years.

One thing to note, however, is that the deduction begins to phase out at $2.5 million of qualified expenses. For every dollar after that, the $1 million allowable deduction is reduced in kind, meaning the deduction is negated at $3.5 million of purchases. The phase-out cap was also raised by the TCJA.

How dealerships can leverage the Section 179 tax deduction

Auto dealerships have a range of options when it comes to leveraging the Section 179 tax deduction. Thanks to increased flexibility in qualified expensing and the new maximum allowable deduction, these businesses can utilize the Section 179 tax deduction throughout operations. Section 179 deductions can allow dealers to:

  • Upgrade shop equipment: Auto repair is often a major part of dealer operations, meaning shop equipment is regularly and thoroughly used. Such high levels of use can lead to costly repairs, and maintenance only prolongs the inevitable. These repeated fixes eventually become less and less cost-effective than financing a new or used purchase. Dealers can leverage Section 179 in such situations to upgrade their critical machinery, as well as generate tax savings.
  • Install new car lot alarms or showroom HVAC units: Nonresidential property improvements now covered by the Section 179 deduction include roofing, heating, HVAC, security and fire protection improvements. The allowance for nonstructural renovations means dealers can invest in new alarm or security systems or opt to enhance ventilation in the main building.
  • Purchase brand-name software: Software is as important a business asset as any these days. The Section 179 deduction reflects that, allowing businesses to expense off-the-shelf solutions. While the costs of proprietary platforms aren't covered, businesses can buy any one of the several brand-name accounting, CRM or sales solutions on the market today and deduct its cost.

How to take full advantage of Section 179

With decades of experience in providing financial assistance to auto dealers, Comerica Bank knows the unique needs these businesses face. As the Leading Bank for Business1, Comerica Bank can help auto dealers navigate the Section 179 tax deduction and strategize accordingly, as well as finance inventory, acquisitions and real estate. Contact us today for more information about how dealerships can benefit from our full banking services.

 

1Comerica ranks first nationally among the top 25 U.S. financial holding companies, based on commercial and industrial loans outstanding as a percentage of assets, as of June 30, 2018. Data provided by S&P Global Market Intelligence.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, compliance or accounting advice. You should consult your own tax, legal, compliance and accounting advisors before engaging in any transaction.

 

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Looking Beyond Organic Growth in Dealer Services

October 19, 2018 by Comerica Bank

Growth is generally the primary goal of any business. It's a pervasive theme, often being both the impetus behind short-term moves and the end goal of long-term initiatives. For dealer services, the mandate is clear: gain new customers, offer new products, reinvest profits and improve sales productivity.

Yet organic growth such as the above examples can only take a dealership group so far. Make no mistake, organic channels can long be tapped, but when a business reaches a size or scale that demands more, and organic streams demonstrate diminishing or stagnating returns, where can the company turn? In other cases, a dealership might reach a plateau that requires thinking outside the organic box.

When these situations arise, dealers need to look at alternative modes of business expansion. In contrast to more internally-focused organic methods, inorganic growth often takes the form of seeking to acquire or combine with outside assets and can include joint ventures, partnerships and other forms of dealer finance.

Why inorganic growth for auto dealers?

Organic growth gives dealers many advantages, but as mentioned, there may come a time it cannot sustain scale. Sales promotions, for example, may only be a relative shot in the arm for a large dealership group that needs another gear. Dealers also pursue inorganic growth because such means often develop at an accelerated pace. Acquiring another dealership and its infrastructure enables access to immediate assets that might otherwise take time to deliver through an internally managed strategy.

The basic question auto dealers have to ask themselves is "build or buy?" If the resources are there and the levers of an acquisition process can be put in motion, dealers should consider the outcomes, costs, and timeline of organic versus inorganic opportunities. Do you have time to build? Does buying secure guaranteed returns? Probing the feasibility can help turn dealers toward the right occasions for manufacturing their own growth.

Mergers and acquisitions drive inorganic growth

Without question, mergers and acquisitions (M&A) represent the bulk of inorganic growth. Such deal-making can offer the immediate benefits that dealerships seek when looking beyond organic growth. Mergers and acquisitions allow for accelerated pathways to gains that organic means can't match. A dealer combining assets with a larger group immediately improves their business profile, credit lines and access to resources, while the other party in the merger may obtain diversely skilled personnel or revenue streams it desired but didn't have time to build up.

Acquisitions, once closed and settled, can grant an auto dealer exposure to new markets and customers overnight. Expanding into new geographic territories may be a riskier proposition for a dealer to approach from the ground up, but acquiring an established business can satisfy growth needs and expectations more readily. An acquisition can also be made to diversify a dealer's holdings, granting them exposure and market share in targeted areas.

Inorganic growth requires planning, and often financing

While M&A activity and other inorganic methods can quicken growth, the amount of planning and strategy involved are just as great as those dedicated to organic opportunities. Mergers and acquisitions can be particularly intensive processes, no matter the level of experience dealers have in deal-making, which spans everything from negotiating to tax planning to financing. Finding a bank to help finance M&A activity is important, and finding one with expertise in servicing auto dealers is crucial.

Comerica Bank is the Leading Bank for Business1 and, with roots in Detroit, knows the banking and financing needs of automotive businesses well. Contact Comerica Bank today for more information about acquisitions, dealer finance services and other tools to aid inorganic growth initiatives.

 

1Comerica ranks first nationally among the top 25 U.S. financial holding companies, based on commercial and industrial loans outstanding as a percentage of assets, as of June 30, 2018. Data provided by S&P Global Market Intelligence.

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice for your business.
 

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Preparing Your Dealership for the Cars of the Future

October 12, 2018 by Comerica Bank

The automotive industry has helped to define the economy and daily life since the dawn of the assembly line. It's also been on the leading edge of research and innovation, which is reflected in the level of technology and quality seen in automobiles today. This means auto dealers have to continually keep up to date with the latest trends, in part by securing car dealership loans to modernize their operations.

Preparing your dealership for the cars of the future is an expansive responsibility, but one that's crucial to address. The rapid pace of technological process has an impact on consumer markets, and prevailing culture is just as fast-developing. This reality underscores the importance in dealerships getting ahead of the curve to take advantage of these trends and position themselves for the future.

Approaching this mission is vital, but it extends beyond the understanding technology itself. Dealerships must evaluate modernization across their operations and consider how new technology may, for instance, require advanced service equipment or personnel skills. Taking this high-level, inclusive approach is the best way for a dealership to prepare for the future of cars.

EV early adopters may become leaders

The long arc of auto innovation is inevitably bent toward electric vehicles (EVs), and dealerships should begin planning targets centered around them. The trend has gained widespread attention in society, media, and government, but relatively few electric vehicles are on the road today. Price factors, availability, and equipment requirements have limited EV adoption by consumers, and in turn dealerships. The interest is there, but the frequency of EVs being featured on lots is low as a result of slow adoption and current demand.

However, those barriers to EV access will likely lessen with time, meaning dealerships that take advantage of the opportunity to prepare now can reap the benefits in the future. More cost-effective options will come to market, and charging infrastructure will be built up – a reality dealerships should ready their operations for. While things won't change overnight, some actions to take include:

  • Training personnel about EV and charging technology so they can more effectively serve customers or service automobiles.
  • Giving greater prominence to EVs on the lot and in the showroom, where the situation allows.
  • Educating salespeople about tax credits related to electric vehicles.

IoT, automation and beyond
The future of cars does not lie solely with EVs as the connected vehicle becomes more advanced by the day. Consumers not only expect GPS and Bluetooth functionality but increasingly look for the ability to control other aspects of their everyday lives from their car. The Internet of Things is fast becoming a standard of daily life, and as cars integrate that technology at a greater rate, dealerships will have to keep up. This may mean finding talent skilled in computer science or informatics to analyze data sent by customers.

While it offers many benefits to consumers, automation could also carry big consequences for dealerships. Whereas manufacturers may feel those impacts on the assembly line, dealers may experience automation through different means, like artificial intelligence (AI) assisted sales and marketing. Far from being a years-off prospect, AI is already widely used to automate certain steps and focus resources. Dealers may need to start investigating software platforms that can grant them such capability.

Whatever the future holds for auto dealers, it's important they prepare in every way they can. This may mean securing dealership loans to increase EV inventory or other financial services to plan for the long term. Auto dealers can look to Comerica Bank, the Leading Bank for Business1, when modernizing to help guide and support growth efforts.

 

1Comerica ranks first nationally among the top 25 U.S. financial holding companies, based on commercial and industrial loans outstanding as a percentage of assets, as of June 30, 2018. Data provided by S&P Global Market Intelligence.

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice for your business.
 

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5 Steps to Effective Succession Planning for Auto Dealers

October 5, 2018 by Comerica Bank

Businesses always need to keep one eye on the future, but for dealerships that can be a problem. There's a whole lot going on in day-to-day operations, from service departments to sales, compliance, and accounting, which can make it a challenge for these organizations to balance the needs of now with those of tomorrow.

However, succession planning is a critical point for these businesses to address. Dealers can be sprawling operations or small family affairs, and in either case, succession planning is highly important to the longevity of the business and financial security of those involved. Here are five steps to effective succession planning for auto dealers to consider:

1. Don't think of succession planning as retirement

Many decision-makers feel as if succession planning is giving in and avoid it because they don't want to entertain the notion of leaving the business. However, it's far from retirement planning: Drafting a succession plan is the essential long-term strategizing. Dealers have insurance for a lot of things, so why not for their leadership and internal structure? Moving past this perspective of succession planning synonymous with retirement is the first step dealers need to take in getting serious about securing a financial future.

2. Involve the relevant parties

The succession planning process is a collaborative effort, so dealers will need to decide who their core team of planners will include. Some tough decisions might need to be made at certain points, especially if dealerships are family-owned units or large operations with multiple leaders. Aside from internal stakeholders, owners will also likely need to bring in other professionals like a financial advisor or bank who can offer succession planning tools.

3. Assess the options

Once beginning the process, you don't have to decide on a plan of action right away. There's time to evaluate the available options and decide which is best for you, your business and your family. For instance, if not handing off to a second generation, owners will want to explore the viability of options like a buy-sell agreement, bringing on a partner or altering the corporate structure. Succession planning is about taking all factors into account to ensure the best possible future, so research is important.

4. Set a transition pathway

Succession planning doesn't just occur in theory on paper. Successfully pulling it off means establishing a transition pathway. A dealership doesn't have to pivot entirely in one fell, chaotic swoop, but may be forced to without a succession plan. Whatever your timeline is, deploy the plan through concrete steps like training up successors and handing over relationships and duties. A gradual phasing is ideal for business continuity, but only possible with a defined plan.

5. Keep the plan updated

Times change, markets fluctuate, consumers save and spend, and dealers are in the thick of it all. Beyond that, certain interpersonal changes and departures may throw a wrench in succession management planning, but that's hardly a reason to toss the blueprint out altogether. Keeping an actively managed succession plan is needed to ensure the business is always set on the best path forward. While it's still important to keep planning centralized, updating the design can allow for greater flexibility in identifying potential replacements or opportunities.

Succession planning can be a delicate process, but finding an experienced financial partner to guide your dealership can help solidify the best plan. As the Leading Bank for Business1, Comerica Bank not only has a wealth of expertise in succession planning but also extensive experience with auto dealerships. Contact us today for more information about how Comerica Bank can help your auto dealership set course for a secure financial future through succession planning.

 

1Comerica ranks first nationally among the top 25 U.S. financial holding companies, based on commercial and industrial loans outstanding as a percentage of assets, as of June 30, 2018. Data provided by S&P Global Market Intelligence.

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice for your business.
 

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Floor Plan Financing and the Role of Dealership Real Estate

September 28, 2018 by Comerica Bank

Auto dealers have limited real estate to work with, so filling their showrooms and lots with the right vehicles is essential to standing out in the marketplace. Car dealer floor plan financing can provide a financial edge for large dealers trying to stand out in what is an increasingly competitive landscape.

The role of floor plan financing

Auto dealers don't traditionally deal with consistency in the marketplace. An Ibis World study found that a variety of micro- and macroeconomic issues typically cause significant fluctuation and unpredictability in the sector. Recent economic stability has turned history on its head. From 2013 to 2018, the global market for car dealerships climbed to a value of $961 billion, which was made possible by expansion at a 3.9 percent compound annual growth rate. The sector won't continue to rise quite so quickly, but the next five years should still be marked by consistent growth.

As new opportunities take shape in a more stable auto dealership market, many businesses are looking for opportunities to get ahead and take full advantage of sustained growth. This is leading to significant changes in floor plan financial strategies. Research from the White Clarke Group indicates that the auto dealer floor plan financing market is poised for expansion in 2018, as a wide range of dealers and wholesalers explore the strategy as a way to stand out in the marketplace.

The opportunity for floor plan financing

In practice, a floor plan financing strategy is a fairly straightforward process:

  • An auto dealer works with a lender to establish a line of credit or loan specifically aimed at purchasing new inventory.
  • The vehicles are purchased and moved to the sales floor, leaving dealers with a certain amount of time to sell the automobiles before taking on extra fees.
  • Once the cars are sold, dealers use the income to pay back the loan or line of credit and are left with revenue depending on the cost of the vehicle, interest, fees and final sale price.

Floor plan financing is generally considered a relatively low-risk way to build inventory to meet new demands or support a specific operational strategy. As such, it can be used to serve as a catalyst to growth or to branch out to a new type of automotive stock for a pilot project. In most cases, however, dealers will want to use floor plan financing for vehicles with a fairly predictable sales cycle, as the clearer forecast can allow for a better funding arrangement and reduced risk.

What to look for in floor plan financing providers

Most of the risk associated with floor plan loans or credit lines stems from the negative consequences of not being able to sell new vehicle inventories in a timely fashion. As such, it is important to find a lender who will work with you to right-size your loan based on revenue projections and sales expectations. A lender that focuses on getting the largest or most profitable loan on the table or focuses heavily on interest rate can fall short here.

Instead, look for a lender that emphasizes working with clients by offering industry expertise and a willingness to impart advice on your dealership's financial situation, as well as an ability to handle any risk associated with a loan. At Comerica Bank, we've been recognized as the Leading Bank for Business1, something that stems largely from our emphasis on working closely with clients to help them grow their business and create a mutually beneficial lending relationship.

Floor plan financing can enable large car dealerships to advance their position in the growing marketplace by exploring new inventory strategies. Contact us today to learn more about how we can help you achieve your goals.

 

1Comerica ranks first nationally among the top 25 U.S. financial holding companies, based on commercial and industrial loans outstanding as a percentage of assets, as of June 30, 2018. Data provided by S&P Global Market Intelligence.


This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice for your business.
 

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