Auto Dealerships - Audit Technique Guide - Uncle Fed's Tax*Board

2. By owner
A dealer may own dealerships in different locations of the same region (e.g. different cities of
Southern California) and may promote the dealers name even though different makes of
automobiles are sold. Typically, advertising will be solicited that best aid the growth and sales
of any dealership attached to that name. An advertising association may be created that
receives payments from all related dealerships and then uses the funds as stated. Such
advertising is in addition to manufacturer sponsored programs described above.
3. By geography
In the last several years, auto centers have been the option of choice for establishing
dealerships. The theory is that by placing competing dealerships in one large auto park, many
potential customers will be lured that will help sales of all auto center tenants. Additionally,
cities may offer attractive land leases and perks to increase their sales tax revenue. Centers
may be owned by the tenants, completely independently owned, or jointly owned. The tenants
of the auto park will typically pay fees to an association that will advertise the park as a
whole. Again, this advertising form will be in addition to the manufacturer’s programs.
Regardless of the form of the dealership you are examining, chances are advertising is
structured in one of the aforementioned advertising methods. The key to determining the
correctness of expenses taken at the dealership level lies in the answer to questions related to
the advertising entity, as follows:
a. Was the money actually spent on advertising?
b. Who ultimately spent the money on advertising?
c. When was the money spent on advertising?
It is paramount in the examination of advertising expenses that these simple questions be
answered thoroughly. However, obtaining simple answers often becomes a complex process.
Many structure variations can be used which cloud the issue. For example, advertising
associations typically deal with large dollar amounts. Errors by the association in the
processing of this money may result in either "unreported income" or "double deductions"
making it necessary for the Service to verify the correct tax treatment of the fund.
Association Tax Returns
The tax returns filed by the associations are usually not complicated, but may not show all of the
years activity. They may reflect the following:
1. Gross receipts less rebates to the dealerships which are reflected as sales returns and
allowances. A "schedule" may be attached reflecting the same. "Other income" is usually
interest. The remaining income is offset by advertising expense and other deductions which
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