Buy Here Pay Here (BHPH) Accounting and Tax Review

Understanding the various income tax regulations and rules regarding BHPH dealerships and related finance companies (RFCs) can be difficult at times but necessary to your financial health. Your tax advisor should review the various tax laws with you on a regular basis to ensure your compliance with the various accounting and IRS income tax issues that pertain to your dealership and RFCs.

Discount Loss On Sale Of Installment Notes Receivable
If you have a BHPH dealership and RFC, then you are probably selling your notes to your RFC and recognizing a discount loss on the dealership. There are various IRS rules and conditions you must comply with to be able to sell the notes at a loss to your RFC.

In order to deduct a discount loss on your dealership, you should be setup as a C or S corporation. Your RFC should also be setup as a C or S corporation. The IRS regulations that let you sell your notes at a loss to your RFC are found in corporation tax law. This means if your dealership and/or RFC are an LLC or partnership taxed as a partnership, you need to file federal form 8832 with the IRS to elect to be treated as a C corporation for income tax purposes. If you instead want to be treated as an S corporation, you can file federal form 2553. Generally, this can be done without any tax consequences.

If you are a sole proprietorship, then you should form a corporation and contribute the assets and liabilities of the dealership to the newly formed C corporation. Again, if you want to be an S corporation, you will also need to file a federal form 2553.

As there are various IRS regulations and rules governing the above elections, you should consult with a tax advisor before considering any change in your income tax status.

Fair Market Value (FMV) Purchase of Installment Notes
When selling your BHPH notes receivable to your RFC and recognizing a loss, you should ensure you are selling the notes at fair market value. To do this, you should seek purchase quotes from various third-party note purchasers. This means that your loss on the sale of notes to your RFC should not exceed what an unrelated third-party vendor would pay you for the notes. IRS regulations also state that your loss cannot exceed the total gross profit you realized from the vehicle sale. This gross profit test should be performed on each vehicle separately.

Some dealerships sell some notes to unrelated third parties and may keep others to sell to their RFC. Actual sales are good documentation to keep with your income tax records to substantiate the loss you are deducting when selling the notes to your RFC. If you normally sell all of your notes receivable to your RFC, then you should obtain quotes on your entire note portfolio. Some vendors will only bid and purchase seasoned notes. They will normally pay you a higher price for these notes than notes that are less than three to six months old.

Vol. 3, Issue 2