Vehicle rebates are a selling tool car dealerships and manufacturers use to drive more business, even when most consumers are paying above sticker price on vehicles. Since rebates are not discounts or coupons, dealerships receive the funds from the rebate after the vehicle has been purchased from the manufacturer and sold to a consumer.
This means accounting teams at the dealership must make adjustments once the rebate is received. When rebates are not paid for promptly, it can create over-aged accounts receivables. So how can a dealership’s accounting team deal with outstanding rebates?
Manufacturing rebate practices in auto sales
Rebates have long been a part of the auto sales supply chain. Manufacturers use them to encourage increased sales of their vehicles, create a sales boost, and move products that may be going “stale” with new models and technology coming out.
Typically speaking, the rebates fall into one of two categories:
- Volume-based rebates provide money back when a dealership reaches a specific threshold in sales or vehicle purchases from the manufacturer. This can be a quantity or dollar value and often is tiered to provide a greater rebate for a larger number of sales.
- Consumer-facing rebates often are marketed directly to consumers through advertising via television commercials, newspaper ads, and signage within the dealership. These are rebates for specific car models taken off the vehicle’s purchase price when the consumer works to settle the deal with the finance department.
Outstanding rebate impacts on auto dealerships
While waiting for payment on an item, that payment usually is considered an accounts receivable item. The accounting team cannot use the rebate amount to discount the cost of goods sold until payment has been received.
If the manufacturer hasn’t paid the rebate because they have a backlog of requests, paperwork was lost, or myriad other reasons, the item can become over-aged and must be reconciled to satisfy the dealership’s accounting and reporting requirements.
Dealerships should consider the following questions when dealing with over-aged rebate receivables:
- Was the rebate a factor in calculating sales tax for the vehicle purchase?
- What attempts, if any, have been made to follow up with the manufacturer to collect on the rebate?
- Was the rebate issued to the client out-of-date with the manufacturer? If so, will the dealership be liable to eat its cost?
- Is the over-aged rebate item eligible to be converted to “bad debt” and written off as a loss on the dealership’s books?
Dealerships should also consider how over-aged rebates will affect the data presented on the income statement and balance sheet.
Reviewing these questions with the accounting team and management team and a trusted accounting professional can help shape policies that will help keep accounting records up-to-date with current rules and regulations.
Please contact Keith Laudenberger via our online contact form for more information.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.
