Hello, everyone, and welcome to the year-end tax planning session presented for AED. I'm Rex Collins. I head up the dealership industry group for HBK CPAs and would like to, I guess, just get started and go through things. You can see there's my picture. Many of you may know me. My bio there, very briefly, I joke with people I'm probably the strangest CPA you're going to meet. I'm probably the only CPA you're going to meet that's run a service department, was a GM at a branch at a location, and I owned a Nissan car dealership, not a forklift dealership. So I've got deep roots in the industry operationally and a great wrapper from a financial perspective. So let's move forward. That's it for the commercial. And let's talk about some things that have changed as a result of the Trump Tax Act. And these are just reminders. I'm not going to go deeply into everything. There are some things that you're going to see about slide 19. I'm going to slow way down, talk through a lot of things in detail. But I thought I would lay the groundwork. Furthermore, there are a lot of slides. These are intended for you to use as resources, especially when we get at the end. There are a number of slides there on a specific topic that we just don't, we've allotted five minutes for probably a two-hour topic. So let's just move forward. You see some of the things that were impacted by the Trump Tax Act, and generally, overall, it was good news for the dealers. One of the questions, or one of the issues that changed was the tax rates. So C-Corp rates went down to 21%. We get the question frequently, hey, I'm an S-Corp. Should I change to C-Corp status? Well, as you're going to see in a few minutes, both rates dropped pretty much in proportion to one another. So if it made sense, generally speaking, if it made sense to be an S-Corp before, it still makes sense. In our practice, we've got about 400 dealer clients, and I don't think we've made any changes to S-Corp status as a result of the Trump Tax Act. The next slide talks about just what I was talking about, the S-Corp, or the flow-through entity impact, and the Act does allow for a 20% deduction of pass-through business income. That's for S-Corps, partnerships, and proprietorships. There are some exclusions to that. The dealers aren't excluded, so you guys are good. It's a maximum of 20%. I will also tell you that because the dealers have such heavy payroll, that's one of the factors in determining whether you will get to the 20%. There are others, but because your payroll is so high, you're going to be at 20%. Because in essence, the S-Corporation's first 20% of their income is taxed at a rate of zero. It's a great benefit from the Tax Act. There are some other nuances to this, and we'll probably touch on those a little bit. Of more significance is like-kind-exchange treatment. Like-kind-exchange treatment is gone except for real estate. They're going to be allowed for real property only in ... Well, it started in 18, so 18, 19, and beyond. Not personal property. It's a tremendous blow to dealers with rental operations, but your association did a good job of working with Congress, and I'll talk a little bit more about the workings there and some of the work that I did, but there's another aspect of the law that kind of gives you a little bit of poor man's like-kind-exchange, and I'll talk about that in a few minutes when we get to that section. All right, next is more slides on like-kind-exchanges. I wanted everyone to get the information, so again, there are slides that we're not going to talk about. Now, we are going to talk about this slide, the business interest expense limitation. For many dealers, this is ... We've got some great news to share. The new law created a deduction limitation of 30% of the business's adjustable ... Adjusted taxable income, which is essentially earnings before interest depreciation and taxes. Any interest amounts not deducted, so any interest amounts that fall above that 30% threshold can be carried forward indefinitely. There are, however, various exceptions. The business interest limitation will not apply to dealership floor plan financing and debtors used to finance the acquisition of inventory held for sale and secured by the inventory. However, it's specific dealers that this carve out applies to. It applies to dealers of automobiles, so car dealers and trucks, farm equipment, so if you're an ag equipment dealer, it applies to you, RVs, motorcycles, boats, et cetera. You can deduct the interest expense on your floor plan financing without regards to the 30% limitation, but there was something conspicuously absent in the list I just read. Construction equipment dealers. Construction equipment dealers are subject to the 30% limitation, and there's a reason for that. Again, it gets back to the lifetime exchange going away and the impact on all the construction dealers that have such large rental inventory fleets. Now, in addition, businesses or another point that I'd like to make is that businesses with average gross receipts of $25 million or less are exempt from the 30% limitation. However, I want to point out that this gross receipts threshold of $25 million is lower than the average gross receipts for the average dealer, average AED member, so not everyone's going to get to take advantage of that carve out either. All right, here's a point that I would like to make. Dealers with multiple lines of business, so an ag dealer, an ag equipment dealer, I mean an ag dealer, we see where they fall, okay? They're not going to be limited on the deductibility of their floor plan interest. However, what if the ag dealer sells skid steers? Skid steers typically are falling under a construction equipment contract, not under an ag equipment contract. So now is the dealer an agricultural equipment dealer or a construction equipment dealer? And there are some solutions to this. We don't have enough time to go into all the different possibilities. I would encourage anyone on the call or who listens to the recording and would like to contact me, I'm happy to walk through their specific, no cost, their specific situation and walk through maybe the way to remedy or solve the situation for your specific dealership. I have additional slides here that talk about, do the definitions of adjusted taxable income. I kind of already talked about that and other items that I have already addressed. Let's move on to section 179. The Trump Tax Act allows dealers to continue to use section 179 expensing in addition to taking the dealership floor plan financing interest exemption. Section 179 is limited by the taxable income of dealers, so it could be used to reduce taxable income to zero, that's no change, it's always been that way. The amount of qualifying property that can be expensed, however, increased from $500,000 to $1 million and the phase out amount or the phase out level doesn't start until you have placed $2.5 million or more in assets and service for the year. The list of real property items that qualify for 179 was expanded significantly. To include qualified improvement property, dealers with large rental fleets really are not going to be helped by 179 financing as they typically have more than $2.5 million in equipment and service and they're going to be phased out of the deduction. Another note, many subsequent improvements to commercial buildings will now qualify for 179 treatment and therefore immediate expensing. These include roofs, heating and air, fire protection, security systems. And I've got kind of what I just talked about in a little more detail there. Now let's talk about 100% bonus depreciation and now I'm going to come back to the concept of poor man's lifetime exchange. The Tax Cut and Jobs Act, the Trump Tax Act, allows for 100% expensing of the cost of qualified property acquired and placed in service after September 27th of 2017 and before January 1st, it phases out 2023. Now that replaced the 50% bonus depreciation that we've been working with in some form or fashion since 2003. It applies to used property as well as new and that is a major change from previous law regarding bonus depreciation. Dealerships using the 100% floor plan interest deduction cannot use 100% bonus depreciation. Maybe. There's been, on September 13th, it was a Friday, there was a ruling issued by the IRS that in certain circumstances dealers can deduct their floor plan interest and deduct their, or take advantage of bonus depreciation. Those instances are when a dealer's total interest, including floor plan and all other interest expense, falls below the 30%. They can use bonus depreciation at that point. That's a big win. There was a lot of drama about that. I'm not going to go into that right now. It was an unexpected, it was an asked for ruling. It came down in a lot of people's minds unexpectedly, really in favor of the dealers. That's a good thing. All right. Other than the situation I just mentioned, the only dealerships that can use the 100% expensing provision are those with under $25 million in gross receipts and construction dealers who do not qualify for the floor plan financing carve out because you're a construction dealer. You can use the 100% expensing deduction. What's that do for us? As a construction equipment dealer with a large rental fleet, it gives us the same result as if we were still using like kind exchange, pretty much. However, we've got a problem because as you see on the slide, starting in 2022 and it completely sunsets in 2026, there's a phase down of the deduction. Your poor man's like kind exchange is going to get poorer and poorer and poorer over time. Now, we would not be surprised if there was further legislative action at that point to extend some provisions or something like that along those lines. The not so fast is the great news regarding the revenue ruling issued in September that I just mentioned where certain dealers are going to get both floor plan interest deductible fully and bonus depreciation. When the law was and I guess I'll back step so you know how important this is. I was asked on behalf of various state, regional, and national associations to testify before the Ways and Means Committee on the Trump Tax Act specifically relating to the deductibility of floor plan interest. And we were successful in getting the carve out for those dealers that I lined out earlier with the exception of construction equipment dealers because construction equipment dealers, many of you have large rental fleets and your leadership determined that that was something that needed to be protected or we needed to get poor man's like kind exchange as I've mentioned. During that testimony, I asked specifically the Ways and Means Committee to give the dealers a choice. Let us take bonus. Let us take floor plan interest. And it was basically no. If you're in these NAICS codes or what used to be called SIC codes, you are going to be either deducting or not deducting floor plan interest. That's it. End of story. Well, the Joint Committee on Taxation issues what's called the blue book after any tax changes are made. And it's basically their interpretation. However, their interpretation cannot be relied upon in the case of an audit. It doesn't set precedent. It's just an opinion. When they wrote their opinion, they went 180 degrees contrary to what was black letter law. The black letter law says if you're in these SIC codes, NAICS codes, you can't deduct. You can't get both. They had the illustration and I walked through it. If your floor plan interest and total interest is below 30%, then you can take bonus depreciation. We were waiting on this revenue ruling because, as I said, the blue book isn't precedent setting. We can't rely on it. A revenue ruling, we can. So we did get that. It conflicts with the black letter law, but we have substantiation and we're in good shape there. Very good shape there. All right. Moving on quickly. Net operating loss deduction. The NOLs are now limited to 80% of the taxable income with any remaining of the 20% that are remaining carried forward indefinitely. So even if you have lost carry forwards, NOLs carrying forward, you will pay some tax is kind of the impact of this. But you don't lose your NOL. It just offsets tax in future years down the road. This only applies to losses generated after January 1st of 18 with private NOLs still eligible to offset 100% of the dealer's taxable income. Entertainment expenses. A very important thing. Entertainment expenses that were previously subject to a 50% deduction limit are now fully non-deductible. Look at that. No deduction for it. Meals with associated business purposes still have the 50% allowance. Another change has to do with the employer-provided meals that typically were 100% deductible. As the minimus fringes, these are now limited to a 50% deduction and will be fully non-deductible after 2025. The reason I think that I say this is important is I've got construction equipment dealers that pay for customers to go on hunting trips and fishing trips and expensive outings, golf outings. Maybe not as expensive as a hunting trip to Africa, but none of those things are deductible. The tickets – I happen to be sitting in Cleveland today doing this presentation outside of a dealership in my car – so the tickets to the Cleveland Cavaliers games are no longer deductible. I'm just going to mention qualified opportunity zones. These are important. If you are looking to relocate or add a location, you must look at these maps. Qualified opportunity zones are not necessarily in bad areas where you don't want to be located. And I would certainly not want to be the dealer who located across the street or one block away from where the opportunity zone is because of the tremendous tax breaks as you see on the screen in front of you. All right. Moving on. The net investment income tax, this is the Obamacare tax. Maybe what you know it by. It is still there. Many people think that it's not. It is still there. The reason that they think it's not is because on a personal level, the teeth were taken out of the requirement that you have personal insurance. However, the Obamacare tax applies to anyone with passive income. Rental income by definition is passive. Yes, you worked very hard. You have a lot of staff. You have a lot of technicians working on your equipment. But the rental of personal property is by definition passive. Therefore, that income is potentially subjected to the net investment income tax. If you have a rental operation and want to talk further about how to get around that, I'm happy to do that. I'm going to give you an overview right here. So it's not like just call me with every question. It's just we can get into the nuances, and it's going to get very complicated and be dealer-specific. But so there are different types of leases and rentals. And if you provide an operator, it falls into one category. So there are four categories, four or five categories, of leases, seven days, 30 days, so forth. You need to categorize all your leases under those terms. Point that I'll make. Having a 29-day lease that is automatically renewed every 29th day, the IRS doesn't view that as a 29-day lease. We've already basically, the dealers are smart. We try, but to no avail. And then even if you are, you don't get, so some leases are going to be excluded. So that's why you want to categorize. Some are going to be excluded. Once you go through that, even before you go through that, I would caution every dealer to look at the expense allocation for the rental department. It is frequently incorrect or maybe could be tweaked is a better way to say that. This is a net investment income tax. If you have a loss from your rental, you don't have any net investment income to be taxed. So look at your expense allocations. That's first. Then look at the different classifications of leases. Then there's a case. It's an old case, but it applies. It's a Candelaria case. And basically, in that case, it was specifically an equipment dealer. And the judge in that case ruled that 20% in that case, less than 20% of the dealership's revenue was related to rental. And the judge considered that de minimis, so the dealer was not subjected. And we apply that case to the Obamacare tax. And we take the position that the dealer is not subjected to that tax. I'm slowing down here to talk about a few items that are items to concern yourself with, dealership specific. And so personal use of company vehicles, 100% likelihood, if you get audited, that this question will be raised with regards to, at a minimum, the owner, probably everyone. Now, there's a second step to that. They will 100% of the time ask, are you taxing? If you say yes, most often there's a follow-up question, let me see how you're taxing. So my advice is, put something on the W-2s of the owners and the employees who don't meet the exceptions. And we've got a memo that we've put out that addresses how the dealers need to deal with this and addresses their exceptions. So anyway, that's that. Unicap, if you notice, that's a 2010 ruling, 2010-44. We are picking up dealers today, currently. Look at the calendar. It's about to be 2020. This is 10 years ago. I will also tell you, in the mid-'90s, we started filing changes in accounting method for dealers to adopt zero unicap. And I'm going to explain what that is. So we started it in the mid-'90s. The IRS, they were approved, no problem. And then finally, about 13 years later, the IRS issued 2010-44, which in essence says, in most cases, now, we've got to look into the specifics, but in most cases, dealers will not be subject to Code Section 263A, which is also known as the Uniform Capitalization Rules, which is also known as Unicap. We are in the process of working with a dealer for the first time this fall. And there is approximately $1.2 million of taxable income that shouldn't have been there if we hadn't been doing the work since the 90s, but clearly shouldn't have been there since 2010. So just talk with your tax preparer and make sure that they're aware of this. If they are not, feel free to call me. Get them on the phone. Have them call me directly. We can walk through it. Dual-use property, dual-use property is an issue that has slowed down a little bit. What it amounts to is, when I ask a dealer, you've got rental equipment here, right? Yeah. Is it for sale? Yeah. So is it rental equipment, or is it inventory? Inventory for sale, or rental equipment? Yes, it is. And that's the problem the IRS has, basically. Which one is it? Well, we've been successful in pushing back with them on what they've proposed. And what they've proposed is, if you've got dual-use property, it's for sale, but you're collecting rental income on it, too. So you rent it, but it isn't listed for sale on a website or anything else. What the IRS would like to do is fully tax the rental income with no deductions against it. No depreciation, no deductions. And then, ultimately, when you sell that, you will sell it for a lower price, because it's got hours on it, it's got use on it, so forth. And you'll get your deduction then. Well, I don't like that. I don't want to pay tax now and try to get it back in a future year. So we've pushed back, and we've pushed back successfully on that. LIFO, LIFO issues and challenges. We're not getting any challenges for LIFO. I can tell you that most of the privately-owned dealers are on LIFO relative to the new inventory. And basically, the way I explain it is you get a non-cash deduction relative to the inflation on the inventory. So if you've got a $10 million inventory that you carry, and inflation is 3%, you're getting a $300,000 deduction. So that's the benefit. There are some rules that you have to abide by. Trade discounts, prepaid advertising, buried in your invoices are some costs that can be deducted. You have to file an election to be able to deduct them. But basically, this falls into what I call a permanent temporary difference. Your inventory level is going to change every year. But buried in the invoice are some items that we can pull out of inventory and take a deduction for. Well, when I sell that inventory, that means I pulled costs out of there, took a deduction the year before. So when I sell it the next year, for tax purposes, I got a lower cost. So I'm going to recognize it again. But guess what? At the end of the following year, end of that second year, you're going to have inventory again. And you're going to have costs in there that you're going to pull out of the inventory and deduct. And if your inventory stays about the same, that's where it becomes this permanent temporary difference. So if the programs stay the same and the inventory levels stay roughly the same, you're going to get pretty much the same deduction going forward kind of forever. It will fluctuate from year to year. So that is something that you should look at and be aware of as well. The repair versus capitalized regs, most of you are aware of that. We're able to expense things that formerly used to be required to be set up and depreciated over time. Used write-downs, I'm amazed at the number of calls I get from CPAs that are working with equipment dealers. And they are telling the dealer that they cannot take a deduction on their taxes for used equipment write-downs. Basically, a lower of cost for market adjustment. There's a ruling out there from 1967 that allows this. So it is right down the middle. Parts obsolescence. OK, with regards to your obsolescence, you cannot take a deduction for obsolete parts until you scrap them. There's a case law on this. So I see that's straightforward. However, let me ask a different question. Is the market value on a wholesale basis? So dealer to dealer, not retail. Dealer to dealer. Is the market value lower on obsolete parts? Certainly is. So we've got a lower cost of market adjustment that we can make there. Can't go to zero, but you can make a significant deduction. Lifetime exchange, wonderfully gone. So lifetime exchange is gone. F&I chargeback. What we do, your finance and insurance department or people, if you don't have a dedicated group of men or women for the finance and insurance, not your sales staff. You don't have a dedicated group doing that, you need to consider that. You're most likely leaving money and significant money on the table. But what we do on the chargebacks, we typically, when you get notified of a chargeback, you get notified in January for what occurred in December. So we'll accrue those and take the deduction basically a year early is what we're doing. Facilities assistance payments, there's special rules on this. Yes, they happen. So if you are building a facility, you might ask for some assistance. If you get it, depending on the contract and how the monies were used, you may have some tax advantages. Dealership facilities expenditures, we've got opportunities with the capitalized versus repair regs with cost segregation studies, which most of you have heard about, to really increase the deductibility of those expenses. Without properly doing the studies, you've got a 39 and a half, you know, it's, I mean, I was born in 1962. I won't be here by the time we get to the write-off period, 39 years, all right? So, and most dealers won't, OK? So what we like to do is accelerate all that. Well, we do that through the use of these things that I just mentioned, the repair versus, capitalized versus repair regs and cost segregation. Typically, for a dealership, we're ending up with the low 40% of the cost of the facility or of the improvements that are pulled forward into either year one deductions, three year, not a lot, five year, a lot, seven year, some 15 year, quite a bit. But that's a whole lot shorter than 39 years. So we're, anyway, so you need to look at that. Gross profit on reconditioning. When a dealer takes a unit in on trade, they typically run it through the shop. The shop will, the labor will be added to it, and parts will be added to it. Good question. Does the parts department make money doing internal work? Absolutely. Now, you may be at door rate with your labor. You may be at some other rate with your labor. You may be at a flat percentage markup on your parts, whatever. But there's gross profit that's being recognized there in the parts department and in the service department because we have a markup. And the service department deserves that we're doing work. They deserve to show that profit. Here's the issue. That is still sitting in your used inventory at the end of the year for any units you have on the ground. Why are we paying tax on profit that is not with a third party? We shouldn't be. The gross profit on the reconditioning should be eliminated. Roughly, and this is very rough, you're going to end up with, we have a markup typically of roughly 30% on the parts for internal. Roughly, we've got a 70% gross profit margin on our labor if you're using your door rate, which the majority of dealers are, actually. Over 50% of the dealers are using the door rate, with others well over 50%. So anyway, if you blend those because, and again, I'm blending them, often, clearly not always, but often, if you've got a large enough pool of repair orders for reconditioning, it's roughly about $1 of labor for $1 of parts. Not always. Depends on the special equipment. Depends on a lot of things. But if you assume that, you've got about a 50% gross margin blended. So if I put $10,000 into a piece of equipment and spill on the ground, I've got $5,000 in gross profit. Well, I shouldn't pay tax on that. So that's kind of the point there. Prepaid. Most of the prepaid at a dealership, while they're correct and good for your books, we can take a deduction for those right now instead of next year. PORCs, retros, and over remits, those relate, as do the SWIM versus the TAM method, those relate to your F&I endeavors. And there are great tax advantages there and great business profit enhancement opportunities there. So again, if you're not a producer-owned reinsurance company, you might consider that. And then we've talked about it. Domestic production activities are gone. So that's no longer an issue. Termination payments. These others I'm just going to mention. Termination payments received from the manufacturers, absolutely, that happens. There are some tax advantages potentially for that. If you're doing a buy-sell, we need to get involved, help you with that. Electronic record keeping. If you look, that goes back to 1998, 98-25. You are required and you need to verify in writing with your DMS provider that they comply with 98-25. I will give you a hint. Many of the DMS providers do not comply with 98-25. The IRS, I'm currently in the Cleveland area. It's not a Cleveland dealer, but it is an Ohio dealer that was threatened with a $250,000 fine because he did not provide the information to the IRS in 98-25 acceptable format. Basically, the IRS wants your data, data, raw data, so they can slice it and dice it however you want. And some of the DMS providers don't provide it in a sufficient format. Tools plan. Basically, this is a scheme. You could say scam to avoid payroll taxes on your mechanics. What I would say is if you get, they're typically promoted by insurance providers. And about every five years, they'll make a run through your home state. And I get a lot of calls from the dealer association, to talk to a dealer or an insurance agent on behalf. And basically, I point out to them that they don't meet the accountable plan rules and that they are promoting a tax avoidance scheme. And they personally are subject to penalties. And all at once, they're no longer wanting to talk about the plan. Spiffs received from the manufacturer by the employee. That can be the dealer. Dealer's an employee. So spiffs received directly by them. Prizes, awards, trips, Visa cards, whatever it is. There's a, goes back to 1970, a specific ruling that says it is not subject to payroll taxes. So the dealer doesn't need to add it to payroll, subject it to payroll taxes. But guess what? It's also not subject to self-employment tax. We pick up returns all the time where this is not being handled properly. And then the Work Opportunity Tax Credit, I got news for you. Or I don't have news for you. You guys know this. You live and breathe it every day. Toughest position to find is mechanics. The Work Opportunity Tax Credit will provide, in certain circumstances, a tax credit for the dealer for hiring veterans. A lot of these veterans have worked on, have skill set that translates over to your shop. And it's very difficult to find technicians. So maybe this is a way to do it and get a huge tax benefit. It is very significant. Dealership audit activity, whoops, there we go. Dealership audit activity, I've just mentioned some things here that are coming up. Cost segregation studies, you have to do them. It can't just be a back of the napkin. They'll want to see it. We're not getting them disputed, or I haven't had any disputed. But they do want to look at it. Basis is a big issue. Your basis should be tracked by your accounting firm, this is my opinion, every year. It's easy. It's super easy once a year, annually, as they're doing the return to update the basis schedule. The problem comes when the CPA firm doesn't do that on an annual basis. And 5, 10, 15, 20, 25 years later, you need your basis schedule because you had a loss, because you're selling, because of a number of reasons. And it's not there. It is a monumental task. Not impossible, it's just a very large task to recreate that. So what I would do if I'm at a dealership sitting in your seat, I would ensure that the basis schedule is kept up to date every year, and I get a copy of it. I like the proof. It's easy to say, yes, of course we are showing. Related party transactions, so officer owner notes, rental, those kind of things are being scrutinized during the audits. Yeah, so I'll move forward a little bit. I want to spend a few minutes here talking about doing business. Ignore what's on the slide, because I'm going to explain what this means. Dealers do business with customers all the time from states other than the dealer's home state, or a state in which the dealer has a physical presence. State of South Dakota, so this ruling, Wayfair versus South Dakota, the only dealers in the country that didn't care about this ruling were the South Dakota dealers. It's every other dealer in other states that did care about it. Well, it's now gone further than that, because there are only five states right now that have not enacted legislation identical or similar to what South Dakota had. So dealers doing business in other states are receiving assessments today, already, the way this decision was released in June of 18. It dealt with sales tax. It dealt with sales tax and not income taxes, because South Dakota doesn't have an income tax. It is my opinion that if South Dakota had had an income tax, they would have had similar rules on the books that created this term called economic nexus, and I'll get to what that is here in a second, whereby dealers, businesses, really went after the internet is what it was doing. This untaxed, it was $53 billion estimated of untaxed, or excuse me, $53 billion of uncollected, unremitted sales tax to the various states and jurisdictions, and that's a big number. It is $53 billion with a B. It was going to get some attention. We've been talking about this for seven years. Things have changed. I didn't think it was going to come through a Supreme Court ruling. I thought it was going to be legislatively on a federal level, where we would get some clarity and movement. The states have been aggressively trying to tax these transactions through many different methodologies. Colorado had a really good methodology. Louisiana tried one. At any rate, and it worked to a limited degree. This ruling in June of 18 changed the playing field for every dealer in the United States, I believe. Very few exceptions. I have talked, told you, we've got a lot of dealer clients. I've talked to many of them and many non-clients. The biggest reason we're getting calls on behalf of routed either directly to us or routed through the association is on this issue. I'm getting audited by this state. I don't have a physical presence there. How can they do this? Well, this is how. There is to stack on top of the physical presence test, which we've had for 50 years. If you've got a physical presence in a state, you have an obligation to collect and remit sales tax in that state. Now let's add to that economic nexus. You no longer have to have a physical presence. You just have to do enough business. And enough business depends on what the state decides is enough. South Dakota, I think it was $100,000 or 200 transactions. And so you sell a large piece of equipment. You're going to be over $100,000. I will make a side comment. In most of these states, all of them except six, I believe, if you've got tax-exempt sales in those states, they still count towards the threshold, even though they're exempt. Other states, it's just the taxable sales that count towards the threshold. But here's the rub, a major rub. We've got it. Well, let me give you a resource. We've got a chart. It's on the slides here. You've got a ton of slides after this. I'm not going through those slides at all. They are resources for you. I'm kidding. The high points wrap up in the next five minutes, six minutes probably. Dealers are constantly doing business with customers from other states, and they're getting themselves in trouble. We've got dealers with half a million dollar assessments. We've got dealers with, we've got multiple dealers with half a million dollar assessments. We got a call from a dealer with $110,000 assessment from the neighboring state. So I've got some advice for you, and we'll get to that in a minute. I want to talk about some other things. So you do enough business. You have an economic nexus. You qualify for economic nexus. You have to collect and remit sales tax. But what did I say? It also impacts income tax, because these states that do have an income tax have, by and large, also enacted economic nexus thresholds for income taxes. Now, they're higher, typically, slightly higher. They're either the same or higher. They're typically higher. Then the sales tax economic nexus rules. But here's the deal. You're going to be now subject to income tax filings in those states. If you're an S corp or a float through entity, your shareholders are going to have to be paying income taxes and filing income tax returns in those states. You're going to pay franchise or registration fees. You're going to have to get a dealer license, potentially, depending on the state's rules. You might have to get a bond to get into that state. New York, this fall, issued regulations on how dealers or how businesses, because it affects. They went after the internet-based businesses, but they got the brick and mortar guys, too, that are doing business across state lines. Pardon me. New York issued new regs this fall regarding income taxes. Well, guess what? Sales tax. Start with sales tax. How many sales tax rates? It's not 50. You've got county rates. You've got in Colorado. Colorado is a fairly low state sales tax rate. But they've got municipality rates. They've got county rates. They've got fire district rates. When you add it all up, they've got a pretty high rate. But here's the problem. You don't know off the top of your head what that rate is that you need to charge. If I'm in Ohio, Cleveland, Ohio, and I'm doing business with somebody in Colorado, I don't know what fire district they're in. I better find out. I don't know what the rate is. Here's what I will tell you. If I'm standing on a corner, an intersection, and I buy stuff at the local CVS, right there on that corner, on the northwest corner, and then I walk over to the Walgreens on the southeast corner, because these guys are always opposite corners of one another, at the same intersection, I go buy the exact same stuff. I'm going to pay potentially different sales tax rates, because that's how many jurisdictions there are. We're not talking about 50 jurisdictions. We're talking about thousands of different rates. It's a huge compliance issue. Now, add to that, on the income tax side, you've got city income tax returns that you've got to file and pay. If you're in Ohio, you've got cap tax. And just to tell you, this economic nexus issue has been up since the early 2000s, because that's when Ohio prevailed in creating the concept with regards to their cap tax. And then furthermore, if you're doing rental, now, this is beyond economic nexus, because you've got physical presence there. It's your equipment rented someplace. When you rent it, where is it? Do you know that it stayed at that job site, that the contractor that took it didn't take it across state lines to someplace else? You would have personal property tax obligations there. All right, let me talk about Kansas. Well, let me talk about Alaska first. Alaska has no sales tax. And these are just examples of the things we're dealing with. Alaska has no sales tax, state sales tax, none. They are considering allowing the city to assess, to enact sales tax rules, to get you guys, to capture the economic nexus dollars. That's the only reason they're doing it. Let's go to Kansas. Kansas, on October 1st, issued Notice 19-04, in which they stated your first dollar and first transaction in Kansas subjects you to all, all of Kansas's rules. When the South Dakota ruling was issued, very quickly, I made the statement, as did many others, OK, that's at $100,000. Some state's going to drop it to $50,000. Is that going to be OK? Another one's going to drop it to $30,000. Is that going to be OK? So now Kansas just rushed to the bottom line. I mentioned two thresholds. The first was dollars, $100,000. And the next was number of transactions, $200,000. Issue, your DMS system probably isn't tracking this for you. You need to know, as I said, what fire district to enter. You've got to track all this. You have to have it. You've got to look to your DMS to do it. You also, it's a 365-day look back. So think about it. I may have had a big deal in Colorado 365 days ago. I do another one. I'm over the threshold. I do a small, one part, one part. I send a part to Colorado. It's subject to sales tax. But tomorrow, that large transaction drops off. It's not subject. And then the next day, it could be subject again, depending on if I did a big deal. The other issue that we're finding is your parts department is probably going to get caught up, not on the dollars, but the number of transactions. So they want to track that. Your sales department is going to get caught up, not in the number of transactions, but in the dollars. Your gatekeeper, the controller, has to track all this. And you've got to have a daily on or off switch as to whether it's taxable or not. And these thresholds, $100,000. So if I've done transactions that give me up to $80,000, and then I do a transaction for $40,000 or $35,000, that gets me up to $115,000. I'm over $100,000. Let's assume that my threshold's $100,000. Question has come up. So do I only tax $15,000? No. That is one transaction that got you over the threshold, the entire $35,000 transaction, is subject to sales tax. And then don't forget, you've got income tax requirements. All right. The last thing that I want to comment on is, OK, what do you do? So I've created a lot of grief. You're scratching your head. You're probably saying my name and spitting right after it. I mean, this is frustrating. I got news for you. It's frustrating for us as well. We have a chart, as I shared with you, as I said earlier. It's in here. That was dated, I think, October 14. We are updating it constantly, because the rules for these states, again, think about it. A year and a half ago, basically, we had one state. Well, we didn't. Because the afternoon that the ruling came out in the morning from the Supreme Court of the United States, that afternoon, North Dakota had enacted identical legislation to South Dakota. So they've been jumping on the bandwagon, as we anticipated. So what I want to talk about is, how do you limit your exposure? You have to put a fence around it. So what do I mean by put a fence around it? On your sales document, clearly indicate where ownership will transfer. I typically will say title. I don't mean title in the sense of you get a title document. I'm just saying, where did ownership transfer? Have that signed on your sales document. That puts a fence around it. Is title transferring in Colorado? At least I know about it, and I can do what I need to. Is it in Cleveland, Ohio? Where is it? And put a fence around it that way. But don't forget, you still have the physical presence rules. And physical presence has no minimum. So I would ask you, if you sell a piece of equipment to somebody five years ago, you sold it to them five years ago, five months ago, or five minutes ago, and they're in a different state than what you operate in, a neighboring state, will you send your technicians over to work on that equipment out at the job site? And I'm going to tell you, most of you are going to say, absolutely. Guess what? That's physical presence. You may not have a facility there. You may not have a salesperson there. You may not have inventory stored there. But you sent your guy over there. That created physical presence. That is being aggressively gone after. Specifically, I can give you examples of Illinois doing that and Florida doing that. So they are aggressively going after this. This is a major issue. I would encourage you to get a hold of, we've written probably half a dozen articles on this because of the changing landscape, specifically for dealers. It deals with drop ships. If you're doing a lot of drop ships, I mean, I can't talk about everything. And it's the end of the hour. There are a lot of issues. I didn't touch on everything in the first part on the Trump Tax Act in the last 10 minutes or so on the most significant change in state and local taxation in my career. And as I told you, I was born in 1962. So you figure out how old I am. Thank you, one and all. My contact information, I'm going to move forward to that slide so that you have it easily available to you. There's my contact information. You can certainly contact AED. And they will get a hold of me. And thank you, one and all, for listening. And give me a call any time.

tax planning

dealership owners

Trump Tax Act

tax rates

C-Corporations

pass-through business income

like-kind exchange treatment

business interest expenses

economic nexus

sales tax