Reinsurance Options Available to Dealers

Dealership Participation Programs

By: Matt Gibson, Protective Asset Protection

Real and personal property tax abatements | Brady Ware Dealership Advisors

Warning: You're about to receive some great advice. This is new information based on the tax law that went into effect in 2017. But before you take it to heart, as a business you need to consult with your tax preparer on the following information.

Dealer participation programs allow participation in underwriting profits and investment income that come from different products sold in your Finance & Insurance department.

Every dealer and their business have unique needs. As you consider your dealer participation program options, you need to review your objectives. Some key areas to consider:

  • Flexibility and Control – how important is it to have the ability to control aspects of your F&I program and what level of flexibility do you want?
  • Risk vs. Reward – is there an appetite for greater potential return, understanding with this often comes a higher level of risk?
  • Access to Capital vs. Long-term Wealth Building – does your business need additional cash flow or is there more of a 401k mindset that provides for wealth-building opportunities?

Once you answer some of those questions, you'll start to understand what might be best for you.

The Tax Cuts and Jobs Act (TCJA) that went into effect December of 2017 had an impact on some of these programs and that’s the next part you should consider before choosing which program is right for you moving forward.

First, there are Retrospective Programs. This is an opportunity for dealers that wouldn’t normally qualify for dealer participation because they don’t have enough production. Smaller, independent dealers and specialty lots would fall into this category. There are little start-up costs to this model, but it’s not an ideal program when you’re looking at minimize your tax burden.

There are also Controlled Foreign Corporations. It takes approximately $5,000 to start this program as participants must put some money down- just like buying stock. This is a good option for dealerships that are writing under $2.3 million in premium on an annual basis.

There is also something called a Non-Controlled Foreign Corporation, where there is shared risk within the program and you must have at least ten dealers participating.

The language in the recent tax law changes have had an impact on NCFC's. If you have ownership in one of these, you need to determine if your program still qualifies as an NCFC based upon the new tax law changes or if you need to close it down and choose something else.

The TCJA changes how a dealer profits from his participation program. The language included in the new Tax Act changed the definition of US Shareholder and the criteria for passing what's called the PFIC Exemption. This has caused a tremendous amount of uncertainty about how the NCFCs will continue to enjoy the tax deferral that they have benefited from for decades.

We've seen research that 43% of NCFC shareholders had no clue that the changes in law could have an impact on their NCFC. There could be a true impact on the dealer's bottom line, and it could ultimately jeopardize one's wealth-building opportunities or cash flow.

We recommend NCFC shareholders use this opportunity to review their F&I program and ensure that their current F&I provider's offering, including their choice of participation program, continues to align with their objectives.

The program that is most positively impacted, considering the tax changes, is the Dealer Owned Warranty Company. This is new to a lot of people and it’s becoming a popular choice throughout the industry. It’s getting attention currently because it has tax deferral like an NCFC, and the cash liquidity of a CFC. You get greater flexibility and control and the option to use profits for wealth-building or access to capital to use for other needs.

All participation programs contain certain risk factors and should be reviewed with your tax advisor and/or legal counsel to determine which program is best for you based upon your current and future needs.

To learn even more about your options and what to do next, we suggest watching the webinar attached to this blog.

 

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