Tax Strategies For the Auto Repair Shop

Tax Strategies For Auto Repair Shops

Shop owners who are focused on serving their customers and operating efficiently are taking a little extra time to also get their financial house in order. They realize the value of the ABCs of a well-managed business: A for attorney, B for banker and C for CPA. These trusted advisers could help you focus on your ­customers and your business, while also ensuring you operate legally, effectively and profitably.

auto care tax strategyShop owners who are focused on serving their customers and operating efficiently are taking a little extra time to also get their financial house in order. They realize the value of the ABCs of a well-managed business: A for attorney, B for banker and C for CPA.

These trusted advisers could help you focus on your ­customers and your business, while also ensuring you operate legally, effectively and profitably.

Seasoned shop owners know that to have long-term success they must have efficient ­accounting and shop management systems, but they also need to maintain and utilize them. This is where the expertise of your CPA can be a big help.

Keep your business and personal ­income and expenses apart; this starts with setting up separate bank accounts and your banker can advise you in this area.

Always retain your tax records and support documents for as long as they may be needed to support your tax ­returns. This is usually three years after the filing due date or when the tax return was actually filed (whichever is later).

Remember, some records need to be retained indefinitely. Examples would be copies of original tax returns, legal documents, asset purchase confirmations, asset purchases and real estate sales.

Become a cash manager by learning exactly what your cash position is at all times and what your daily, weekly, monthly and annual cash requirements are. You can do this by properly using your accounting system. Ask your CPA to develop your business model so that you ­understand the effects of price increases, labor cost changes, and the mix of labor and parts sales that maximizes your cash flow and profitability. You may want to consider using an ­accrual basis of accounting to ensure you know your future cash requirements at all times. Determine what your optimal cash position is and pay your vendors on a timely basis, taking advantage of ­discounts when available.

If your business is growing and you’re ready to consider limiting your legal liability, you should consult your attorney about possibly creating a ­corporation or operating a limited ­liability company.

Plan to file all tax returns on a timely basis including paying over-withheld payroll taxes when due. One of the most difficult problems to overcome is a failure to pay them. The penalties and interest on the taxes can overwhelm a small business.

The tax rate for Social Security ­remains the same, but the maximum deduction has been increased for 2014 to $117,000. Your CPA can again help with changing tax laws if you stay in frequent communication and describe potential changes in your business ­before they are scheduled to take effect.

Remember that if little things like W-2 and 1099 forms are not filed on a timely basis, they can trigger significant penalties.

Section 179 Expensing

In 2014, businesses can elect to ­expense (deduct immediately) the entire cost of most new equipment up to a maximum of $25,000 for the first $200,000 of property placed in service by Dec. 31, 2014. Keep in mind that the Section 179 deduction cannot exceed net taxable business income.

In addition, unless Congress reauthorizes it, the bonus depreciation expired at the end of 2013 and is not available for 2014. If assets are required that exceed your resources, consider financing or leasing your equipment. Your banker can help you with a loan and your CPA can determine the best alternative for you.

Tax laws change each year and 2014 and 2015 are no exception. The IRS standard mileage rate has changed for 2014 to $0.56 per mile, and will change again for 2015. Be certain you and your employees use an expense reimbursement system that documents the number of miles and purpose of the business travel.

Having operated effectively all year and realizing a profit, consider steps to legally minimize your tax liability. ­Accelerate expenses and defer income if you are a cash-basis taxpayer. ­Acquire assets that you know you’ll need next year anyway, and place them in service to utilize your available Section 179 deductions.

Consider an IRA or SEP if you’re a sole proprietor and invest in a 401k. When funded, these retirement accounts will reduce your current tax ­liability and provide a future taxable income stream when your tax bracket could be lower in retirement.

Consider your attorney, banker and CPA as essential parts of your business team. Each can bring a level of expertise to you on an as-needed basis that will give you an edge in managing your business. Successful shop owners know their knowledge limits in these areas and seek the help of subject-matter experts. The really good ones are team builders with dedicated employees, appreciative customers and trusted business advisers.

On a personal note, I started my shop out of my garage, and shortly after, I relocated to a dedicated building. Back then, I met my first adviser who is still my CPA today. In the 27 years we’ve done business together, he became the most valuable and trusted member of my ABC team. He has helped keep me on the right path over the years, and with his help our business ­continues to thrive. It was also with his help that I penned this article. Thanks Pat!

I hope you all have a successful and profitable 2015!

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Shop Equipment ROI – Tooled for Profit

Understanding how to calculate ROI can help your purchasing decisions.

I’m not a financial scholar by any means, but I know what return on investment (ROI) is. It’s a mathematical formula that yields a representation of the profitability of any type of investment. In the automotive repair industry, we primarily associate this with equipment. Admittedly, I’ve never used the term much, more often approaching things from the standpoint, “Am I making money with this or not?” As technicians and shops, our typical thought process centers on each individual job, how much time and money we have into it, so we’re used to thinking profit or loss, and also pretty good at knowing if we made money, or if we lost our “back quarters.”But over time I’ve learned that the thought process alone is not always the best approach, and making money doesn’t necessarily mean a good ROI. Even if you don’t go crazy with an exponentially long, complicated equation, if you understand the basic idea and process of calculating ROI, it can help you make good purchasing decisions. The base calculation would be dividing your net profits by the cost of the equipment. That’s your ROI. Then, if you want to take it further, you can divide that number to get a time-based ROI average.Let’s look at a basic calculation. You buy something for $10, then sell it for $14. Your profit is $4. Divide profit by investment, ($4/$10) and you get an ROI of 40%. Not bad, but if it took two years to make this profit, then your ROI would be 20% annualized, which is not as impressive. You can use this basic formula to compare products you sell as well, and it may help you decide what’s best to keep in stock or not.Now let’s try something with equipment. You have an old tire machine that’s paid for. You average one set of tires per week and it takes 1.5 hours to complete the job. You decide to buy a new tire machine that is much quicker and more efficient but it cost you $20,000. Now the same job only takes one hour. Based on the cost of technician salary, you calculate that it saves you $30 per job with this new equipment. In this case you would use the formula: savings (additional profit)/investment. At one set of tires per week, that works out to $1,560 per year. $1,560/$20,000 equals an ROI of approximately 8%. That’s not too good. It will take you almost 12 years to pay off the new machine.On the other hand, if you average five sets of tires per week, then your additional profit for the first year is $7,800. $7,800/$20,000 equals an ROI of 39%. That’s pretty good. A general rule of thumb is to pay off any piece of equipment within two to three years. This puts you right on track.But now, here is the problem. This is where we throw the proverbial wrench into the plans. Equipment is tricky. You should also calculate in installation and maintenance costs, as well as the cost of training for the new equipment, and factor in how long the equipment is going to be relevant. This is an especially important factor when considering a scan tool, the required updates and how long before it’s potentially obsolete. In the case of a tire machine, you can also calculate in savings from other benefits of a new machine, such as no more damage to wheels or tire pressure monitoring system (TPMS) sensors, which the new machine can eliminate.Some of this can be overwhelming, and it makes me realize why it’s easier just to fly by the seat of your pants and wonder, “Am I making money or not?” It’s an important business aspect, however, to know what is behind the idea because it can benefit you in so many ways. Even without math, you can almost visualize the numbers in your head.I’ll try it by leaving the formulas out to decide whether it makes sense to buy a dedicated TPMS tool when you already have a full-function scan tool with TPMS ability.If you get a TPMS problem every day and you use your full-function scan tool to diagnose it, most likely it takes much longer to boot and longer to navigate to the function. Even then, it may not cover all you need. Because there’s such a vast amount of information that a full-function scan tool has, it simply takes more for the manufacturer to keep everything current. Plus, you often must still rely on service information for certain procedures and then, if it’s the only scan tool for your shop, it ties it up for use in other diagnostics.Now, let’s compare that to a dedicated TPMS tool. Built with only one function in mind, they can make the process much quicker, have greater coverage, boot quicker and quickly walk you through all steps of any required TPMS resets. When you factor in the savings in time and the fact that your primary scan tool isn’t tied up, you can prove the value of a dedicated TPMS tool through ROI calculations. On the other hand, if you rarely work on TPMS systems, you can prove it wouldn’t make sense at all, since you do have the function on your primary scan tool.While you haven’t done any calculations, you’ve thought of it in that manner and can picture where the calculations might end up. If you’re on the fence, the math will give you the answer. Ultimately, your accountant could take the idea even further, with an undoubtedly more advanced knowledge of ROI, and almost certainly a way to calculate depreciation into the formula. That’s where I sign off, but you get the idea. It’s a great concept that represents fundamental business financials.

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