Reduce Tax Liability on Core Inventory By Dean A. Falk As Lawoke ona fresh, sunshiny late winter day last month, with expecta- tion I reached for the Automotive Parts Rebuilders Association’s Global Con- nection to familiarize myself with what’s new and what is considered the world’s problems to rebuilders. This is my quiet time. A time when I solve problems the best. At times I also ven- ture out to solve the world’s problems as well. On page two was an article en- titled “APRA Continues to Contest Faulty IRS Position on Core Valua- tion.” In a nutshell, the government wants to tax the rebuilders on cores in inventory at the same price as the pub- lished core charge in his price sheet. The dilemma is that those core charges are higher than the fair market value of that core, such as what it costs when it comes time to go out and purchase that core from a core supplier for our in- ventory and eventual rebuilding pro- cess. The core charge to a customer or end user is anywhere from two to 20 times higher than the actual cost of that core to the rebuilder. The government wants to tax us on the published core charge price instead of the actual value of that core. This is an internal account- ing/tax problem for our inventory. The solution for this dilemma comes from analyzing the reason for the higher core charge in the first place. One reason for the higher core charge is to actually profit by the charge in the case that the customer does not return it. The second reason for higher priced core charges is to impress to the cus- tomer that you want… .need.. .that core back. Again the actual value of a core to the rebuilder has nothing to do with the core charge price he charges to his customer. After understanding the reason for the difference in price we can better access a solution. The answer here, my fellow rebuilders, is to reduce our core charges to the same as our core cost. Before you have a heart attack, read on, we’re not done yet! Reducing our core charges relieves the high tax liability incurred with our inventory of cores. Now here is the good part. In addition to charging a core charge of the same value as the cost of replacement or fair market value, charge an additional charge to that customer called simply a “deposit.” The charge for this “deposit” which is also returnable, just like a core charge, will make up the difference in cost be- tween the actual value of the core and the previous core charge of old. The difference is that the deposit is not charged until the time and point of sale when the customer is invoiced and the charge never enters or exits our inven- tory. An accounting move like this can reduce our tax liability for inventory on hand by an average of 25 percent or more. While this method introduces one more step for your computer-pricing schedule and invoicing, its savings in taxes more than pays for the effort. With an effort to always improve our bottom line, I wish my fellow rebuilders amore profitable and rewarding year. Dean A. Falk is owner of Electrical Rebuilders, Inc., Waukesha, WI. MARCH/APRIL, 2000 Page 1 of 1