By Peter A. Salinas
Changes to 2021 U.S. Tax Laws that will result in large increases in tax refunds for consumers on the lower-end of the income spectrum — millions of which are special finance and deep subprime automotive customers — present a number of financial and financing challenges to buy here-pay here (BHPH) dealers.
Bill Neylan, president and CEO of Florida-based Tax Refund Ser-vices (TRS)Tax Max, a provider of early tax refund and tax preparation programs for automotive retailers for more than 25 years, said he fully expects a very strong tax season for car dealers this year. A variety of tax law changes, he said, can result in some consumers with families getting as much a $15,000 in tax refunds or credits.
David Brotherton, a dealer trainer and business development specialist with Buckeye Dealership Consulting, a national provider of reinsurance products and dealer training, said that’s good news and he expects a strong, but short time frame for the 2022 tax season, but he tempers the enthusiasm with caution and a large dose of reality.
HIGH INVENTORY PRICES
“Computer chip shortages on the new car manufacturing side and parts replacement on the used side have driven used car wholesale values to records in recent months,” Brotherton said.
“Quality used vehicles, especially those that fit most BHPH business models are in short supply. If you want to fill up your lot in anticipation of what could be a record tax season you are going to have be that last person with his hand up in the lane or online. It’s going to be a costly proposition to secure the inventory you need.”
TAX LAW CHANGES
Neylan pointed to a number of changes in tax law that will result in a 33 to 50 percent increases in tax refunds for millions of Americans.
Notable tax law changes include*:
The refundable portion of the Child Tax Credit has increased from$1,400 to up to $3,600 for 2021. A large portion of this —$1,500 — was already advanced to taxpayers be-ginning in July through December of 2021, but there will still be an increase in refunds because of the increase in this credit.
- The Earned Income Credit (EIC) increases from 3 % to 5%
- The EIC for taxpayers with no dependents is increasing
- The Day Care Credit is the most substantial increase. The credit was a maximum of $1,200 that could only go towards taxes due. Now the Day Care Credit is fully refundable like the Earned Income Credit. Taxpayers can get up to 50% of their day care expenses added towards their refund with a maximum credit of $8,000 against $16,000 in day care expenses.
Refunds can be more than $15,000,” Neylan said. “It’s unprecedented.
Standard deductions have increased, and some lower-wage earners who never qualified for the earned income tax credit before are now eligible for a $500 to $1,500 refund.”
He said the day care credit is by far the largest increase. “Fifty percent of the day care costs are now added back to the refund,” Neylan said. “This was part of the American Rescue Act passed in the spring of 2021.”
BUSINESS MODEL CHALLENGES
The billions more dollars in the marketplace and dealers vying for a limited number of used vehicles will continue to place upward pressure on used car values, Brotherton noted.
“Obviously dealers have varying resources and how much emphasis they place on securing inventory to attract those tax refund dollars will depend on how much they are willing to spend and how increased inventory prices affects their business models,” Brotherton said.
As increased federal unemployment subsidies ended in many states in mid- to late-summer and across the country in the fall, there was an uptick automotive BHPH delinquencies and automotive finance delinquencies in general.
“Some people have stopped making payments and others have stopped making repairs as well,” Brotherton said. “You have to make the inventory prices fit within your business model, and with older vehicles, extending the finance term isn’t the answer.”
GET CREATIVE TO FIND INVENTORY
Neylan who works with hundreds of dealers across the country said many dealers he works with have gotten creative when it comes to finding inventory. Brotherton agrees.
“Go outside of your lane to find the inventory you need,” Brotherton said. “Go to the physical auction, buy online, buy off the street, try the new online-only auctions, look for cars on social media, and try working with buyers and wholesalers. Take an all-of-the-above approach to getting the cars you want. Beggars can’t be choosers.”
As far as the business model is concerned, Brotherton noted that protecting your collateral is vital. He said to do what you must to ensure that you can locate it when you need to, and find it should the consumer try to skip or hide the vehicle.
VERIFY, VERIFY, VERIFY
“Be sure to verify all stips, make sure you know where they work, where they live, and verify everything else in terms of income and expenses,” Brotherton said.
Neylan’s TaxMax program has a Fourth Quarter program, and determines a consumer’s anticipated tax refund months in advance of its delivery, which should come in mid-to-late February through early March this year, Neylan noted.
“We have some major national chains using our program and they’ve been selling cars since November 1 using the anticipated refund as part of the down payment,” Neylan added.
Brotherton noted that there is mixed feelings in the dealer community about using money that hasn’t yet materialized as a down payment, though, he said, many have been successful with the program.
“Dealers who take the time to understand how the program works, dedicates staff time to training, and educating the consumer, have been successful with the program,” Brotherton said. “It’s the individual dealer’s call, but it should be made with full information.”
Brotherton and Neylan agree that dealers will be challenged with higher prices for fixed costs, inventory, staffing, health care and more.
“You shouldn’t take on insurmountable debt or can’t exceed your capital or outrun your cashflow,” Brotherton said. “But for those dealers who can get the inventory they need, they can definitely benefit from tax refunds in the first quarter of 2022.”