25 Braintree Hill Office Park • Suite 102 • Braintree, MA 02184 • Tel. 617.471.1120 • Fax 617.472.756027 Church Street • Winchester, MA 01890 • Tel. 781.729.4949 • Fax 781.729.5247 • www.ocd.com

F o r E x e c u t i v e s o f A u t o m o b i l e D e a l e r s h i p s

DealerDetailsO’Connor & Drew, P.C.

has been providing

accounting, tax and

business consulting

services to the automobile

dealership industry for over

50 years. Our passion for

dealerships is the hallmark

of our commitment to

the industry. We have

built our firm on the trust

and integrity we have

earned from automobile

dealerships of all sizes

throughout the country.

In This IssueDo You Know How Your Transactions

Are Recorded?

A Review of 2013’s Top Ten Tax Topics

Top Common Mistakes Made in 401(k) Plans

25 Braintree Hill Office Park Suite 102Braintree, MA 02184

FIRST CLASS U.S. POSTAGE

PAID Permit No. 54394

Braintree, MA

Top Common Mistakes Made in 401(k) PlansAre you inadvertently putting your 401(k) Plan in jeopardy by not knowing or following all the rules of both the plan and government agencies? You should be doing periodic self-inspections of your plan to make sure you have the proper internal controls in place and that your plan is operating in accordance with your plan document. The Internal Revenue Service (IRS) has a list of the top mistakes that occur in 401(k) plans to help you get started.

1. You haven’t updated your plan document within the past few years to reflect recent law changes.

2. You didn’t base the plan operations on the terms of the plan document.

3. You didn’t use the plan definition of compensation correctly for all deferrals and allocations.

4. Employer matching contributions weren’t made to all appropriate employees.

5. The plan failed the 401(k) ADP and ACP nondiscrimination tests.

6. Eligible employees weren’t given the opportunity to make an elective deferral election (exclusion of eligible employees).

7. Elective deferrals weren’t limited to the amounts under IRC Section 402(g) for the calendar year, and excess deferrals weren’t distributed.

8. You haven’t timely deposited employee elective deferrals.

9. Participant loans don’t conform to the requirements of the plan document and IRC Section 72(p).

10. Hardship distributions weren’t made properly.

11. The plan was top-heavy and required minimum contributions weren’t made to the plan.

12. You haven’t filed a Form 5500-series return, and you haven’t distributed a Summary Annual Report to all plan participants this year.

You can find more information on ways to find, fix and avoid these mistakes by going to the IRS website (http://www.irs.gov/Retirement-Plans/401(k)-Plan-Fix-It-Guide) or contacting your plan administrator or O’Connor & Drew, P.C. at 617-471-1120.

September/October 2013 – Volume 17

DealerDetails DealerDetails

The cornerstone of interpreting financial results starts with a clear understanding of how transactions are recorded. A primary tenet of recording transactions is matching revenue with expense in the proper period. This can be accomplished when transactions are recorded on an accrual basis. The incorrect use of cash basis of accounting can distort financial results making a great month look average, or an average month look great.

Generally, revenue transactions are recorded on the accrual basis. A sale should be recorded when the following four criteria are met:

1. Persuasive evidence of an arrangement exists 2. Delivery has occurred or services are rendered 3. The price is fixed or determinable 4. Collectability is reasonably assured

When these criterias are met, the revenue can be recorded in the appropriate month, even though the cash may not be collected until the following month. In our experience, most office managers are recording revenue correctly. We see meaningful financial results break down in the recording of expenses.

Recording Expenditures Properly There are several expenditures that dealers should key in on to determine how they are recorded. The first and likely the one with the biggest impact on the quality of financial information are employee bonuses. Most employees in the automobile dealership environment are paid based on a payment plan typically tied to profitability and/or performance measures. When a dealership has a great month, the related bonuses due on those results should also be recorded. Often times, we have seen employee bonuses paid and expensed in a subsequent month, rather than accrued in the correct period. This mismatching of revenue and expense could produce inaccurate results and can seriously distort the financial results for that period.

Another area to be concerned with is advertising expenses. Many office managers expense advertising bills when received. Consideration should be given to setting-up a monthly accrual in order to capture advertising expenses in the proper period. In this situation, it is imperative that the office manager be provided with all of advertising bills at the end of the month that are both received and expected to be received. Utility bills, real estate tax bills and other recurring bills should also be accrued, if practical.

While most operating bank account fees are not material enough to be concerned with accruing them in the proper month, we have seen a rise in credit card transaction fees that now can skew financial results. A higher sales month will likely produce a higher volume of credit card transactions. Office managers should review these expenses and determine if they should be accrued for in the appropriate month.

While some dealerships set-up monthly accruals for recurring bills, others utilize prepaid expense accounts to smooth out the impact of a large bill that may have come in a given month. While some bills should be spread over time, (e.g.: insurance and real estate taxes) others should likely be expensed in the period incurred. Owners should understand both what has been posted to prepaid expense, and over what period of time the office manager is expensing the item. Over utilization of the prepaid expense account not only adds confusion to the expenses, but it is often a way for an automobile dealership to show a profit when actual results are much lower than what is shown.

True Profitability As noted above, the key tenet is to match the revenue with the expense. True profitability can only be determined when all expenses incurred to generate the revenue are recorded in the same period. Proper matching will also allow for better benchmarking and planning analysis. So if you do not know how items are recorded, it would be beneficial to inquire and make sure that what you are looking at is real.

Do You Know How Your Transactions Are Recorded?

A Review of 2013’s Top Ten Tax Topics

1. The top personal income tax rate has exceeded the corporate tax rate for the first time in a decade. A 39.6% tax rate will now apply to taxable income over $400,000 for singles, $425,000 for heads of household, $450,000 for married couples filing a joint return and $225,000 for married couples filing a separate return. This top tax rate of 39.6% will also apply to trusts and estates on taxable income over $11,950.

2. The 0.9% surtax on higher income earners is also in effect. This surtax would apply to wages and self-employment incomes. The surtax applies to earnings that exceed $200,000 for singles and head of households, $250,000 for married filing joint, and $125,000 for married filing separate.

3. The 3.8% Medicare surtax on net investment income was also rolled out in 2013. Net investment income includes some of the following: interest, dividends, annuity distributions, capital gains, passive rental income, royalties and other income derived from passive activities. The 3.8% is applied to the lesser of Net Investment Income or modified adjusted gross income (MAGI) over the threshold amount. Threshold amounts are $200,000 for singles, $250,000 for married filing joint, and $125,000 for married filing separate. This will also apply to trusts and estates with a threshold amount of $11,950.

4. Capital gains and qualified dividends rate has increased from 15% to 20% for those taxpayers in the 39.6% tax bracket.

5. Estate, gift and GST tax exemptions increased to $5,250,000 per individual. The annual gift tax exclusion rose to $14,000 per individual.

6. New excise tax on issuers of health insurance and sponsors of self-insured plans. The tax for 2012 was $1 multiplied by the average number of lives covered under the plan. The tax is reported on Form 720 and was due July 31, 2013. The tax is set to double for 2013.

7. Donating IRA distributions to charity is set to expire at the end of 2013. If you are 70 ½ or older, and you have required minimum distributions, you can do a direct distribution of up to $100,000 to a charity, which minimizes your MAGI for purposes of determining if you are subject to the 3.8% surtax.

8. Supreme Court strikes down the Defense of Marriage Act. All legal spouses are afforded same federal tax treatment. Same sex couples now have the right to file a joint return, and transfer unlimited amounts of assets to the other spouse, free of gift tax, amongst other benefits.

9. The 50% bonus depreciation is set to expire at the end of 2013. Section 179 deduction is set to go back to $25,000, which begins to get phased out at $200,000 of acquired property. The 15 year life for qualified leasehold improvements will revert back to 39 years.

10. Repairs versus Capitalization regulations – it will most likely affect all businesses. These regulations will take effect in tax years beginning after January 1, 2014. They will provide rules for distinguishing between expenditures that are repairs and those that are improvements.

The Internal Revenue Code has seen a lot of changes this past year that will impact many taxpayers.

DealerDetails DealerDetails

The cornerstone of interpreting financial results starts with a clear understanding of how transactions are recorded. A primary tenet of recording transactions is matching revenue with expense in the proper period. This can be accomplished when transactions are recorded on an accrual basis. The incorrect use of cash basis of accounting can distort financial results making a great month look average, or an average month look great.

Generally, revenue transactions are recorded on the accrual basis. A sale should be recorded when the following four criteria are met:

1. Persuasive evidence of an arrangement exists 2. Delivery has occurred or services are rendered 3. The price is fixed or determinable 4. Collectability is reasonably assured

When these criterias are met, the revenue can be recorded in the appropriate month, even though the cash may not be collected until the following month. In our experience, most office managers are recording revenue correctly. We see meaningful financial results break down in the recording of expenses.

Recording Expenditures Properly There are several expenditures that dealers should key in on to determine how they are recorded. The first and likely the one with the biggest impact on the quality of financial information are employee bonuses. Most employees in the automobile dealership environment are paid based on a payment plan typically tied to profitability and/or performance measures. When a dealership has a great month, the related bonuses due on those results should also be recorded. Often times, we have seen employee bonuses paid and expensed in a subsequent month, rather than accrued in the correct period. This mismatching of revenue and expense could produce inaccurate results and can seriously distort the financial results for that period.

Another area to be concerned with is advertising expenses. Many office managers expense advertising bills when received. Consideration should be given to setting-up a monthly accrual in order to capture advertising expenses in the proper period. In this situation, it is imperative that the office manager be provided with all of advertising bills at the end of the month that are both received and expected to be received. Utility bills, real estate tax bills and other recurring bills should also be accrued, if practical.

While most operating bank account fees are not material enough to be concerned with accruing them in the proper month, we have seen a rise in credit card transaction fees that now can skew financial results. A higher sales month will likely produce a higher volume of credit card transactions. Office managers should review these expenses and determine if they should be accrued for in the appropriate month.

While some dealerships set-up monthly accruals for recurring bills, others utilize prepaid expense accounts to smooth out the impact of a large bill that may have come in a given month. While some bills should be spread over time, (e.g.: insurance and real estate taxes) others should likely be expensed in the period incurred. Owners should understand both what has been posted to prepaid expense, and over what period of time the office manager is expensing the item. Over utilization of the prepaid expense account not only adds confusion to the expenses, but it is often a way for an automobile dealership to show a profit when actual results are much lower than what is shown.

True Profitability As noted above, the key tenet is to match the revenue with the expense. True profitability can only be determined when all expenses incurred to generate the revenue are recorded in the same period. Proper matching will also allow for better benchmarking and planning analysis. So if you do not know how items are recorded, it would be beneficial to inquire and make sure that what you are looking at is real.

Do You Know How Your Transactions Are Recorded?

A Review of 2013’s Top Ten Tax Topics

1. The top personal income tax rate has exceeded the corporate tax rate for the first time in a decade. A 39.6% tax rate will now apply to taxable income over $400,000 for singles, $425,000 for heads of household, $450,000 for married couples filing a joint return and $225,000 for married couples filing a separate return. This top tax rate of 39.6% will also apply to trusts and estates on taxable income over $11,950.

2. The 0.9% surtax on higher income earners is also in effect. This surtax would apply to wages and self-employment incomes. The surtax applies to earnings that exceed $200,000 for singles and head of households, $250,000 for married filing joint, and $125,000 for married filing separate.

3. The 3.8% Medicare surtax on net investment income was also rolled out in 2013. Net investment income includes some of the following: interest, dividends, annuity distributions, capital gains, passive rental income, royalties and other income derived from passive activities. The 3.8% is applied to the lesser of Net Investment Income or modified adjusted gross income (MAGI) over the threshold amount. Threshold amounts are $200,000 for singles, $250,000 for married filing joint, and $125,000 for married filing separate. This will also apply to trusts and estates with a threshold amount of $11,950.

4. Capital gains and qualified dividends rate has increased from 15% to 20% for those taxpayers in the 39.6% tax bracket.

5. Estate, gift and GST tax exemptions increased to $5,250,000 per individual. The annual gift tax exclusion rose to $14,000 per individual.

6. New excise tax on issuers of health insurance and sponsors of self-insured plans. The tax for 2012 was $1 multiplied by the average number of lives covered under the plan. The tax is reported on Form 720 and was due July 31, 2013. The tax is set to double for 2013.

7. Donating IRA distributions to charity is set to expire at the end of 2013. If you are 70 ½ or older, and you have required minimum distributions, you can do a direct distribution of up to $100,000 to a charity, which minimizes your MAGI for purposes of determining if you are subject to the 3.8% surtax.

8. Supreme Court strikes down the Defense of Marriage Act. All legal spouses are afforded same federal tax treatment. Same sex couples now have the right to file a joint return, and transfer unlimited amounts of assets to the other spouse, free of gift tax, amongst other benefits.

9. The 50% bonus depreciation is set to expire at the end of 2013. Section 179 deduction is set to go back to $25,000, which begins to get phased out at $200,000 of acquired property. The 15 year life for qualified leasehold improvements will revert back to 39 years.

10. Repairs versus Capitalization regulations – it will most likely affect all businesses. These regulations will take effect in tax years beginning after January 1, 2014. They will provide rules for distinguishing between expenditures that are repairs and those that are improvements.

The Internal Revenue Code has seen a lot of changes this past year that will impact many taxpayers.

25 Braintree Hill Office Park • Suite 102 • Braintree, MA 02184 • Tel. 617.471.1120 • Fax 617.472.756027 Church Street • Winchester, MA 01890 • Tel. 781.729.4949 • Fax 781.729.5247 • www.ocd.com

F o r E x e c u t i v e s o f A u t o m o b i l e D e a l e r s h i p s

DealerDetailsO’Connor & Drew, P.C.

has been providing

accounting, tax and

business consulting

services to the automobile

dealership industry for over

50 years. Our passion for

dealerships is the hallmark

of our commitment to

the industry. We have

built our firm on the trust

and integrity we have

earned from automobile

dealerships of all sizes

throughout the country.

In This IssueDo You Know How Your Transactions

Are Recorded?

A Review of 2013’s Top Ten Tax Topics

Top Common Mistakes Made in 401(k) Plans

25 Braintree Hill Office Park Suite 102Braintree, MA 02184

FIRST CLASS U.S. POSTAGE

PAID Permit No. 54394

Braintree, MA

Top Common Mistakes Made in 401(k) PlansAre you inadvertently putting your 401(k) Plan in jeopardy by not knowing or following all the rules of both the plan and government agencies? You should be doing periodic self-inspections of your plan to make sure you have the proper internal controls in place and that your plan is operating in accordance with your plan document. The Internal Revenue Service (IRS) has a list of the top mistakes that occur in 401(k) plans to help you get started.

1. You haven’t updated your plan document within the past few years to reflect recent law changes.

2. You didn’t base the plan operations on the terms of the plan document.

3. You didn’t use the plan definition of compensation correctly for all deferrals and allocations.

4. Employer matching contributions weren’t made to all appropriate employees.

5. The plan failed the 401(k) ADP and ACP nondiscrimination tests.

6. Eligible employees weren’t given the opportunity to make an elective deferral election (exclusion of eligible employees).

7. Elective deferrals weren’t limited to the amounts under IRC Section 402(g) for the calendar year, and excess deferrals weren’t distributed.

8. You haven’t timely deposited employee elective deferrals.

9. Participant loans don’t conform to the requirements of the plan document and IRC Section 72(p).

10. Hardship distributions weren’t made properly.

11. The plan was top-heavy and required minimum contributions weren’t made to the plan.

12. You haven’t filed a Form 5500-series return, and you haven’t distributed a Summary Annual Report to all plan participants this year.

You can find more information on ways to find, fix and avoid these mistakes by going to the IRS website (http://www.irs.gov/Retirement-Plans/401(k)-Plan-Fix-It-Guide) or contacting your plan administrator or O’Connor & Drew, P.C. at 617-471-1120.

September/October 2013 – Volume 17