Confusion remains over changes to the federal tax code that directly impact dealerships who have set up what is known as captive insurance companies.
The Protecting American from Tax Hikes (PATH) Act was enacted nearly two years ago, but financial advisers are warning that provisions aimed at combating potential fraud are unclear and that the IRS has not issued guidelines,
In a video posted on YouTube, two accountants with Kansas City-headquartered MarksNelson, Tammy Siegrist and David Kaseff who specialize in working with dealerships, delivered their thoughts on how the PATH Act might impact dealers.
The most important provisions for dealers in the PATH Act are those linked to captive insurance companies, entities formed by a business to insure against future risks. The two accountants are recommending a product offered by Zurich Insurance that should offset any problems with potential future investigations by the IRS regarding captive insurance companies.
Dealers that wish to generate underwriting profits and transfer various warranty risks to customers rely on these captive insurance companies and finance and insurance (F&I) products as well as some reinsurance program strategies.
When a customer purchases the product, such as a warranty, a portion of the premium is sent to the captive insurance company. Underwriting profits from these products are not taxed, and that aspect is what has attracted the attention of the IRS.
The PATH Act upped the amount of premiums a business can send to its captive, to $2.2 million from $1 million. But in doing so, legislators added diversification tests, limiting the amount of premiums a single policyholder can send to the captive insurance company.
It also limits a spouse's, child's or grandchild's cross-ownership of the dealership and its captive insurance company.
These rules are essential to ensure these non-taxed profits do not flow to the dealer personally, or to relatives, either directly or via estate planning.
Financial experts argue that many of the details contained in the new rules are unclear and that the IRS has failed to issue guidelines.
In their video, Siegrist and Kaseff argued that there is a risk that the IRS will start looking at the ownership structures of dealerships and come to conclusions that differ from financial planning experts.
They recommend a product offered by Zurich Insurance that should offset the risk if the IRS takes a different position sometime in the future after the agency issues those guidelines.