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February 2010
IRS Moratorium on Sec 263A Calculations for Auto Dealers
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By Sean McKiernan, CPA 
Principal, Auto Dealership Team Leader
The IRS recently issued a moratorium until January 1, 2011 on auditing auto dealerships §263A calculations. This moratorium was enacted to give auto dealers time to understand and implement the new §263A guidelines issued by the IRS in Technical Advice Memorandum (TAM) 200736026. The IRS guidance marks a strong departure from current industry practice and unfortunately will mean additional time computing the §263A calculation as well as additional costs capitalized to inventory.
Some of the key differences between current §263A methods and the method outlined in the TAM include:
- Installation on dealer owned vehicles will likely be considered production activities.
- Repair/installation activities on customer vehicles will likely be considered handling costs.
- Vehicles sold at wholesale to another dealership and leased vehicles are not on-site sales to retail customers. As such, a portion of dealers’ storage and handling costs must be capitalized.
In a webinar sponsored by NADA, Terri Harris, IRS Motor Vehicle Specialist, recently talked about the TAM and what it means to dealers. Key points included:
- The IRS currently believes that all dealers are not in compliance with the §263A methodology set forth in the TAM. As such, they expect every dealer to conform to the TAM guidance by filing a Form 3115, Change in Accounting Method, to formally switch to the TAM §263A method.
- The change in §263A method will be covered under the automatic change provisions of Rev Proc 2008-52 and its updates such as Rev Proc 2009-39. This means that dealers will not have to pay a user fee and will have up to the extended tax filing due date to submit the Form 3115.
- The auto dealer §263A issue has been designated as a Tier III issue, meaning the IRS will have a coordinated program and process for auditing dealers’ §263A calculation.
- The new methodology will almost assuredly require more time in gathering the necessary information and performing the actual calculation.
The IRS has set forth a computational methodology on its website and will be adding more content and context in the coming months. It is expected that a complete and comprehensive Audit Techniques Guide addressing data and computational nuances will be issued by late 2010. We will continue to monitor correspondence from the IRS and keep auto dealers informed of updates and guidance as they are released.
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