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

Holdback Charges
Chapter 19
Other Prevalent Auto Practices
When dealers acquire their new car inventory from manufacturers usually the invoice includes a
separately coded charge for "holdbacks." Dealer holdbacks generally average 2-3 percent of the
Manufacturer’s Suggested Retail Price (MSRP) excluding destination and delivery charges. These
amounts are returned to the dealer at a later date. The purpose of the "holdbacks" is to assure the
dealer of a marginal profit.
During the examination the agent should verify that the dealer is not booking "holdbacks" as part
of purchases, cost of sales, in valuing inventories, or as any other deduction for Federal income
tax purposes.
1. Example
From "window sticker":
MSRP $10,000
Destination Charges 400
MSRP Retail Total $10,400
From Dealer Invoice:
Vehicle Factory Wholesale Price $9,000
Destination Charges 400
Advertising Association 100 1% of MSRP
Holdback 300 3% of MSRP
Total Invoice Price $9,800
Holdback: coded amount is (300) 3% of MSRP
Inventory Cost to the Dealer $9,500
Dealer makes the following entry on its books:
Inventory 9,500
Accounts Receivable ("Holdback") 300
Accounts Payable 9,800
Dealer makes the following entry on its books upon receipt of "Holdback" payment from the
manufacturer:
19-1