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Dealer Wealth Programs

A profit-sharing program puts your dealership in control and gives you the ability to do what is best for your customers.  Are you looking to have full control over your F&I products? Our focus is to bring products to match your dealership's exact needs built on top of industry-leading tax-friendly profit-sharing programs.

Business Meeting

Profit Sharing Programs 

  • Controlled Foreign Corporation (CFC) is taxed as a U.S. company though also domiciled in an offshore country. The company assets are maintained in U.S. financial institutions. There is more flexibility wherein you can work with investments of your choice, take a loan against the investment, and pay yourself back. You can use the money for capital improvements, floor planning, and business investments. This type of reinsurance plan becomes your book of business.

  • Dealer Owned Warranty Company (DOWC)  is an administrative corporation (C Corp) designed to be the obligor for non-insurance F&I products such as vehicle service contracts (VSC). The company is not regulated as an insurance company but typically qualifies as an insurance company for federal income tax purposes. The DOWC is generally owned by a dealer or a dealer group and is administered by a third-party provider, and it often purchases excess of loss insurance provided by a third-party insurance company.

  • Noncontrolled Foreign Corporation (NCFC) is where money is domiciled in an offshore country and claims are paid out of it. This type provides the least amount of flexibility to control the investments. Premiums may be subject to excise taxes. With this type of plan, you may take dividends, which become surplus, and repatriate the money. This provides the lowest risk, but also the lowest returns. 

Retro Profit Sharing Program

These are profit-sharing agreements between you and the administrator in relation to the sale of F&I products. Profits are paid at defined intervals based on how well your portfolio is performing.

Retro Programs allow you to participate in the underwriting profits on the business you write. Typically, the percentage of shared profits will increase as the volume of your dealership business increases.

Dealer Owned Warranty Company

DOWC Benefits:

  • Domestic U.S. C-Corp formation.

  • Stand-alone warranty company.

  • Open an account with almost any U.S. bank.

  • No 8886 – form Filing is needed. (Reportable Transaction Form)

  • No 8938 – form filing is needed. (Foreign Financial Assets Form)

  • No foreign domicile fees.

  • No 953 (d) re-domestication election necessary.

  • Possible access to unearned cash. (Loan against unearned premium reserves)

  • Potential for greater investment income based on higher return investments. (Higher risk)

DOWC Tax Difference:

  • Most DOWCs utilize retail-cost accounting, which recognizes the retail cost of the VSC as premium, and expenses dealer commissions and administrative fees up front, which generates a large tax loss for the first 5-7 years of the program.

  • DOWC stand-alone warranty company typically does not make IRC Section 831(b) election until it is placed in runoff status, and this is assuming the new program is not part of a controlled group with runoff DOWC.

  • DOWC stand-alone warranty company files both state and federal income tax returns, with no premium tax paid.

  • DOWC stand-alone warranty company federal taxation is as a P&C insurance company. (TAM 9601001)

  • DOWC stand-alone warranty company pays state taxation, which will vary, but most states start with federal taxable income and adjust for various items, except for California.

  • DOWC is a domestic stand-alone warranty/insurance company whose revenue meets the IRS requirements for an insurance company.

  • DOWCs file a 1120-PC and are only taxed on a prorated amount of earned premiums.

  • Within the DOWC structure, the F&I department’s profits/commissions are a written off as an expense, creating a long-term net operating loss (NOL) carry forward. As a result, the DOWC enjoys deferred tax liability for years.

DOWC Advantages:

  • Potential for higher profit margins base on retail cost accounting method.

  • Risk is limited to the initial capital invested. ($50,000-$500,000 FL)

  • DOWC is usually tax deferred for the first 5-7 years of the program due to retail cost accounting.

  • Dealer controls funds, although, backend insurance may require some funds to be invested in trust for expected claims.

  • Potential for deferral of taxation to shareholders.

DOWC Disadvantages:

  • DOWC stand-alone warranty company is a more dealer-involved, hands-on and labor-intensive program.

  • Much higher initial capital requirement than the CFC, and this investment is at risk.

  • Limited to non-insurance products – no ability to add insurance products that require reinsurance.

  • Earnings are subject to additional layer of taxation.

  • Regular P&C company taxation may be excessive.

  • May require additional capital investment from the dealer based on losses.

  • Significantly greater ongoing operating costs.

  • Greater IRS scrutiny of captive programs. (IRS Notice 2016-66)

  • Additional regulatory requirements.

  • May have limited ownership rights of the next formation. (May be limited to 50%)

  • Midyear transitions with greater than 2.3 million ceded premiums may create ownership issues for the next formation. (Retail cost accounting plays into the concern)

  • Potential negative tax status once the initial tax loss is exhausted.

  • Program may have hidden costs if the dealer decides to change administrators.

  • No portability of the program.

  • Limited life span of the program.

  • Uncertain exit strategy, when leaving the program and moving to the next strategy.

dowc

CFC Reinsurance

  • Administrator Obligor (AO) or Dealer Obligor (DO) options.

  • Virtually no initial capital requirement necessary.

  • Low liability.

  • Domicile of economic convenience for insurance product flexibility.

  • US Tax Payor. (953(d) election status)

  • Programs qualify for preferential tax treatment.

  • Shareholders are not taxed until distributions are declared.

  • Money remains in the country in a U.S. bank that is usually FDIC insured.

  • TPA involvement – loss controls, fraud protection, professional guidance with professional cession review, investments and loans. Total global wealth management.

  • First dollar loss insurance CLIP/stop loss Insurance.

  • Professional Investment advisors that are vetted and capable of working in the reinsurance space and are familiar with the statutory and trust requirements.

  • Dealer may self-direct investment strategy within in the trust guidelines.

  • In some cases, the dealer may borrow unearned premiums in lieu of profit distributions.

  • Reserve guidelines to protect the dealer from insolvency.

  • Very few product restrictions.

  • No restrictions to work with specialty partners.

  • Program portability.

  • No exit strategy issues.

cfc
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