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

educes taxable income to zero or negative taxable income.
2. The face of the tax return shows a "schedule" with little else of any consequence. The
schedule will list amounts received from the dealers less amounts disbursed for advertising.
Potential Issues
Some issues that may arise during the examination of advertising associations are illustrated
below:
1. Diversion of income
A portion of the advertising funds are spent, the remaining balance is sent back (diverted) to
the dealership or shareholder via a straight distribution, management fee, travel and
entertainment reimbursement, or some other vehicle.
2. Double deductions
Double deductions may occur when the dealership is expensing the vehicle purchase invoice
amount under Cost of Goods Sold. Each purchase invoice is charged an amount for
advertising which the manufacturer collects, then forwards to an advertising association. The
advertising association will then spend the dealership funds to advertise for themselves which
a dealership might deduct as an expense for the same amount.
3. Timing of deductions
The agent should ensure the dealership advertising expenses are deducted considering
economic performance. See IRC section 461(h). Also see the chapter on Extended Service
Contracts in this Guide.
4. All events test
An issue may arise where the dealership accrues advertising association rebates prior to "all
events" having transpired under IRC section 451.
5. Segregation into member and nonmember categories
Expenses attributable to furnishing services or other items of value to members can only be
deducted with respect to member income. General and administrative expenses, not
associated with furnishing services or other items of value to members, may be deducted with
respect to nonmember income such as interest income. IRC section 277 member and
non-member income and expenses.
Thus, it is typical for advertising fund amounts to go from entity to entity to entity, being
partially used, rebated or reused. It is important to follow the dollars.
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