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As car dealer principals look to transition away from operating a non-controlled foreign corporation (NCFC) due to the unknown outcome of the new tax law, many have set their sights on becoming a dealer-owned warranty company (DOWC). As part of this, dealers have been asking about the specifics behind the DOWC structure, and what a transition would look like.
The Federal Tax Cuts and Jobs Act (TCJA) was signed into law by President Trump in December 2017 and is effective for the 2018 tax year. While the legislation was designed to reduce income tax rates for individuals and corporations, it also affects the selection and profitability of participation programs for many dealers. This is noteworthy since dealer revenue is greatly influenced by the type of participation program dealers select.
Under the new tax law, auto dealerships have just a few months before having to make initial decisions on passive foreign income in connection with NCFCs. Many dealership groups participate in NCFCs as a way to defer tax liability and participate in underwriting results. As a result of the TCJA, dealership groups are now faced with a difficult choice – report passive foreign investment income or follow the advice of some NCFC advisors down another, potentially riskier path.
Transitioning to a DOWC has become a popular choice for many dealers. However, once this happens, what can they expect? Besides the tax benefits, there are other significant benefits dealers may not be aware of.
What is a DOWC?
A DOWC allows a dealer to own, market, sell and support their own branded F&I program by owning their own company. Besides greater profit potential on F&I sales, another advantage is that dealers can actually tailor and customize their own F&I offerings. For example, a dealer can build a portfolio of F&I products that caters to a variety of branded vehicles, not just one. These F&I products can range from service contracts to ancillary products.
How Does a DOWC Operate Post-Transition?
Even though there is great profit potential, a DOWC often means the dealer must own and operate the program as well, this includes administrative and compliance duties. Fortunately, when dealers partner with the right provider, these administrative duties and support are handled by the provider, leaving the dealer to focus on offering their own branded F&I products to the customer – something they currently do.
Given the fact dealers are entrepreneurs, a DOWC will actually feel natural to them since it’s their opportunity to offer an F&I product that is merely an extension of the brand they’ve worked hard to establish within their own communities. It’s critical that dealers find the right DOWC administrator, especially when the customer depends on the integrity of the product in times of need. The right DOWC administrator can ensure the dealership lives up to its F&I product when the customer needs it the most, which can go a long way toward building a longer lasting relationship with that customer.
Lastly, DOWC programs mean that the dealer must remain in compliance with all regulatory obligations. Trusted DOWC administrators have full legal and compliance departments to help each dealer ensure they remain in full compliance on all F&I offerings. In addition, dealers must consider the company that insures the products offered under their DOWC program – making sure they are working with a stable and well-established insurer.
The right program facilitator can make this transition simple. There’s a lot at stake here, especially when a recent survey concluded that 53% of dealership owners have been utilizing an NCFC for their participation program. This transition can take place, without disruption, through an experienced DOWC administrator. With the right DOWC administrator, dealers can be sure of their new branded F&I programs offered to customers will secure long-term satisfaction, they will enjoy larger profit potential, and they will no longer gamble on the uncertain future of NCFC tax structures.
Editor’s Note: Matt Gibson is a Vice President at Protective Asset Protection, a full-service provider of F&I programs offering vehicle protection plans, GAP, ancillary products, training and other services through vehicle dealerships. For more information visit http://www.protectiveassetprotection.com/