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

. Purchasing
c. Handling, processing, assembling, re-packaging
d. An allocable portion of general and administrative costs attributable to the functions in (a)
through (c) above ("mixed service costs").
For an illustrated example of applying this section and the Simplified Resale methods introduced,
refer to Notice 88-86, 1988-2 C.B. 401.
The issue must be considered when circumstances warrant and a decision must be made regarding
allocation of resources.
Type B – Smaller New Vehicle Dealerships: Schedule C, Form 1120-S or
Form 1065
This middle class of dealerships may employ any range of inventory techniques with little
consistency among them. The dealerships range from small low volume motorcycle shops to
medium sized multi-vehicle type lots. Here it is important to make sure that all items that should
be inventoried are being correctly accounted for. It is not uncommon for a dealer of this size to
inventory vehicles and expense parts and accessories. In any case, the method of valuation should
be determined and inventory physically observed.
Example 2
ABC Rider is a new motorcycle dealership that was purchased 4 years ago and has shown
losses on Schedule C for each year since. In pre-audit it was noticed that "Other Expenses" of
$400,000 seemed high in comparison to gross receipts of $5,000,000. A schedule of "Other
Expenses" showed a miscellaneous expense of $20,000. When examined, the taxpayer
showed a schedule detailing $20,000 in rebate income and $10,000 of interest income, both
netted against an inventory write down of $50,000. When questioned, the taxpayer responded
that inventory was valued at yearend by him personally and that he assumed there was a
significant number of employee thefts. When prior years were examined, it was noticed that
this practice was employed in all years.
The agent should determine the actual physical inventory, compare it to the amount shown on
the tax return and make an adjustment for the difference. Also, all prior writedowns should be
disallowed under IRC section 481(a). This amount would then be rolled over into subsequent
years up through the current year. The Miscellaneous expense of $50,000 should be
disallowed in full, and $30,000 of Other Income should be reclassified as such.
Type C – Large Multi-Entity Dealerships: Form 1120, Form 1120-S or
Form 1065
For tax purposes the large dealerships may use LIFO for new vehicles, used vehicles, and parts
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