Dealer-Owned Warranty Company — Have You Made the Switch? - AutoSuccessOnline

Dealer-Owned Warranty Company — Have You Made the Switch?

In addition to increasing profit potential on F&I sales, the ability to tailor and customize their own F&I offerings means a dealer can build a portfolio of F&I products that caters to a variety of vehicles.

Beginning in the 2018 tax year, the Federal Tax Cuts and Jobs Act (TCJA) prompted many car dealers to consider the formation of a domestic c-corporation (a dealer-owned warranty company or DOWC) as a means of shifting away from the uncertain future tax implications of operating as a non-controlled foreign corporation (NCFC) and insulating themselves from newly mandated disclosures required from controlled foreign corporation (CFC) owners. The tax structure and benefits afforded a dealer-owned warranty company to effectively meet the needs of dealerships while ensuring regulatory compliance. 

Some dealership owners have not yet made the switch because they simply do not understand what a dealer-owned warranty company is or how it functions, or because shifting gears after so many years can be scary. In order to clarify what a dealer-owned warranty company is, let’s first take a look at what it’s not. It is not the same as an NCFC or CFC — it is not a foreign company at all. Many dealership groups participate in NCFCs as a way to defer tax liability and participate in underwriting results. While the TCJA legislation was designed to reduce income tax rates for individuals and corporations, it also affected the selection and profitability of participation programs for many dealers. Under the new tax law, dealership groups now need to either report passive foreign investment income or follow the advice of some NCFC advisors down another, potentially riskier path.

In a DOWC, the dealer forms a separate c-corporation specifically for the purpose of underwriting service contracts. This new entity becomes the provider of the contracts, providing an alternative to using a third-party administrator to hold reserves. The most complicated, and arguably greatest, benefit of a DOWC is that the tax-deferred nature allows the dealer to use it as a wealth-building tool. Dealers are taking advantage of the same tax laws that insurance companies have been operating under for decades. Essentially, the company has no taxable income for an extended period of time as a result of numerous expenses. The expenses of administering and acquiring sales of the DOWC are deductions in the current tax year, and net operating losses are carried forward. Dealers who switch to a DOWC structure are now filing the same tax returns as Property & Casualty companies, which account for the tax deferral created by the compounding NOLs. 

Another clear advantage is that underwriting profits and investment income are retained solely by the DOWC, as opposed to in other structures where premiums may be exempt from tax, however, investment income returns are taxed at normal corporate rates. In addition, a dealer-owned warranty company structure allows dealers to stay on-shore and benefit from domestic formation, as opposed to having to maintain foreign companies. This means dealers can choose to open bank and investment accounts at institutions of their choosing instead of being forced to invest with money managers preferred by the administrator. This can provide significant cash flow and a dealer can also borrow for virtually any purpose.

Shifting to a dealer-owned warranty company provides significant tax benefits and additional advantages that help optimize their F&I program. When a DOWC serves as its provider, the dealer immediately has 100% control over their F&I program. Rates, coverages, marketing materials, as well as the company name are all at the discretion of the dealer. In addition to increasing profit potential on F&I sales, the ability to tailor and customize their own F&I offerings means a dealer can build a portfolio of F&I products that caters to a variety of vehicles.

There is no substitute for knowing the law and working within federal regulations and state statutes to craft customized solutions. To truly maximize the potential benefits, it is critical that dealers seek out a partner who will provide assistance during the formation and implementation of their dealer-owned warranty company, as well as regular performance monitoring as a trusted administrator.

You May Also Like

One of the Best Kept Secrets to Building Wealth & Creating Passive Income

The collaborative nature, diversification opportunities and potential for accelerated wealth creation make syndications an attractive option for investors seeking to harness the power of real estate.

One of the Best Kept Secrets to Building Wealth & Creating Passive Income

Real estate has long been heralded as a steady and lucrative investment avenue, but within this realm lies a lesser-known path — real estate syndications. Often considered one of the best-kept secrets to building wealth and creating passive income, real estate syndications offer investors a unique “hands off” approach to property investment. Real estate syndications can help investors achieve the benefits of owning an investment property (cash flow, appreciation, tax breaks) without the work or stress of being a landlord themselves.

Cybersecurity for Dealerships

Now is the time to take a proactive approach to protecting your dealership’s and customer’s most sensitive information by adopting a comprehensive approach to your cybersecurity.

Cybersecurity for Dealerships
Why Dealers Should Care About the Coming Auto Insurance Recovery

The anticipated upswing of the auto insurance market in 2024 — and lower insurance rates that come along with it — should have dealers celebrating.

Why Dealers Should Care About the Coming Auto Insurance Recovery - Polly
F&I 2024 Dealer Outlook: How Online Options Will Help Dealers Better Serve Customers

Dealers must find ways to maximize F&I sales opportunities, because in this highly competitive landscape, dealerships rely on the sale of these products to enhance their bottom line and remain competitive.

F&I Outlook from Protective Asset Protection
Is a Vehicle Test Drive Still Relevant Today?

An important part of the process, the test drive is the strongest opportunity to build the customer’s positive emotions around the vehicle.

Is a Vehicle Test Drive Still Relevant Today?

Other Posts

Critical Thinking for Great Success

Articulate people whose thoughts and ideas are well organized are the most powerful, important and successful people in the world.

Critical Thinking for Great Success
Data Is the New Oil: Revolutionizing the Automotive Industry with Integrated Solutions

Dealerships that harness the predictive power of data can anticipate maintenance schedules, predict the optimal time for car replacements and personalize marketing to reach customers with the right message at the right time.

Data is the new oil - Velocity Automotive
High-Tech Solutions: A New Way of Thinking About Paint Touch-Up Products

The automotive paint chip repair products’ journey from simple touch-up solutions to sophisticated repair kits reflects not only the technological progress the industry has made, but also the changing demands of today’s consumer.

Dr. ColorChip paint repair
Understanding Your Market: Insights on Customer Retention and Conquest Opportunities

Brand retention and defection numbers can be tough to look at, but they can be a great guide to finding new customers.

Insights on Customer Retention and Conquest Opportunities