In an era of rising interest rates, new tariffs, growing trade disputes and ever-changing statutory requirements, automotive dealers have far more to be concerned with than just vehicle sales. The pace of change in the automotive space and related industries, combined with increased regulatory scrutiny and recent developments in trade and M&A, forced dealers to face several unique challenges in 2019. As the new year approaches, re-examination of the legal landscape and related tax implications is in order. Review and analysis of not only fundamental automotive regulations, but also finance and insurance laws is highly recommended.
While various overarching federal laws govern aspects of the sale of F&I products, most products are subject to the statutory framework in place in each state. Regulators and policymakers seek to ensure a competitive and fair market that is first and foremost protective of consumers. As a result, disclosure and financial security requirements are ripe for action by the legislature and may be pitfalls for dealers who are unaware of changes. Dealers should leverage the many resources available to them to ensure continued compliance. An F&I administrator with regulatory and tax counsel should be able to provide guidance; and first-hand education is available through many dealer associations.
As we enter 2020, conscientious risk and wealth management are also essential for the success of dealers. Familiarity with the broader tax changes affecting the industry will allow for informed decisions about participation in the F&I segment of the business.
The Federal Tax Cuts and Jobs Act prompted many car dealers to consider the formation of a domestic c-corporation (a dealer owned warranty company) to serve as provider of their F&I products as a means of shifting away from the uncertain future tax implications of operating as a non-controlled foreign corporation and insulating themselves from newly mandated disclosures required from controlled foreign corporation owners. The tax structure and benefits afforded a dealer owned warranty company effectively meet the wealth building needs of dealers while satisfying regulatory compliance concerns.
Dealers who have not explored or transitioned to this structure over the last 12 months will find it beneficial to do so prior to year-end in order to ensure enough time for discussion of tax benefits, formation and registration of the entity and to ensure all regulatory requirements are met. There is great profit potential and risk mitigation opportunity with a dealer owned warranty company structure.
That said, the dealer is the true owner and operator of the company and is responsible for compliance with all applicable laws as provider of its F&I products. As a result, it is recommended that dealers work with a trusted DOWC administrator who has knowledgeable legal and tax departments to ensure the most prudent and effective administration as allowable by law, and protection of the benefits achieved through the structure.
