Rent to Own Auto Turn-Key Program Presented by Arceri & Associates, Inc.

Report
Rent to Own Auto
Turn-Key Program
Presented by Arceri & Associates, Inc
PRINCIPAL RTO ADVANTAGE
Increased CASH FLOW!
 No UPFRONT sales tax in most states
 RTO down payment can be a security deposit eliminating
income tax
 No sale, therefore no “gain on sale” profit recorded, so no
income tax
 Build profitable business sustainable through weak demand
periods.
 On a typical $4,000 cost vehicle sold for $8,800, AFTER
TAX CASH INCREASE > $1,300
BHPH Sale vs. RTO
Cash Flow Comparison
Assumptions:
Acquisition Cost
$4,000
Sale price / Cap Cost
$8,800
RFC Discount
35.00%
Down payment/security deposit $1,000
Income tax rate
40.00%
Sales tax rate
7.00%
”Related Finance Company.” To reduce the income tax liability on the “gain on sale”, typically the
dealer establishes a wholly owned “Related Finance Company” to which the vehicle can be sold at a
loss. However, the discount rate in the sale must reflect the true market value and cannot create a tax
loss.
BHPH Sale vs. RTO Cash Flow
Comparison – Cont’d
Calculations:
Initial Sales Tax
$ 616
Sale Price to RFC
$5,720
Profit on RFC Sale
$1,720
Income Tax on RFC Sale
$ 688
Total After Tax Cash Savings
(Only 100 vehicles)
200 vehicles - $260,800 Savings
300 vehicles - $391,200 Savings
RTO Cash
Flow Savings
$
616
$
688
$ 1,304
x
100
$130,400
Security Deposit vs.
Capitalized Cost Reduction
• Capitalized cost reduction (down payment) is
taxable on sales tax, and federal and state
income tax
• Security deposit is non-taxable on any level and
can be used to reduce tax exposure and increase
cash flow
• Security deposit can be used for default, excess
mileage/wear or for repairs/maintenance
State Sales Tax Options
• Monthly on payments collected: 33 states
• Upfront on Capitalized Cost (similar to sale): 9
states (CO, IL, MT, NC, SC, TX, VA, AL*, DE*)
• Upfront on monthly payments: 6 states (IO, ME,
ND, NY, OH, SD)
• Upfront on depreciation: 2 states (NJ, VT)
* Both on cap cost and monthly payments
Acceleration of Accounting Income
Accounting rules (FASB 13) allow RTO to be treated as a
“sale” for accounting purpose even though a RTO is (not a
sale) for tax purposes.
 HUGE acceleration of income
 Full $4,400 mark-up is immediate income with NO TAX
LIABILITY
Acceleration of Accounting Income
(cont.)
 BHPH sale: finance books are SAME as tax books
 RTO: finance books have ACCELERATED INCOME while
tax books have tax deferral from accelerated depreciation
 Banks and finance companies have used this tax deferral
advantage
Advantages of RTO
 No loss of prepaid sales tax on defaults (in most states)
 Eliminates the need for an Related Finance Company
 Better control of vehicle (e.g., increased security deposit
for excess mileage during the lease)
 Greater flexibility in program design (e.g. early termination,
collateral substitution, vehicle maintenance and repair)
Advantages of RTO (cont.)
 Bankruptcy protection
 Reduced customer disclosures
 Reduced State and Federal regulatory
requirements compared to Reg. Z and MVRISA on
sales
 No APR or Reg. Z disclosure
 No usury limits
RTO Implementation
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You Receive:
Program Handbook on all policies and requirements
including residual values
RTO agreement + all forms/documents
Marketing plan
Sales system, training and collateral
Insurance selection and purchase
RTO Implementation – cont’d
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You Receive:
Lessors Contingent Liability Insurance
Independent Insurance Tracking
Physical Damage Insurance to protect your collateral
Payment Assurance / Asset Tracking –Starter Interrupt, &
Payment Reminder
Getting Started
1. Complete, sign & return the RTO License Agreement
2. Complete, sign & return the Contingent Insurance
Application
3. Complete, sign & return the Physical Damage Insurance
Set-Up Form
Arceri & Associates
(504) 309-3087
www.arceri-insurance.com
[email protected]

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