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Legitimate Uses of a Related Finance Company

Chapter 11 - Related Finance Companies (12-2004)

New Vehicle Dealership Audit Technique Guide 2004 - Chapter 11 - Related Finance Companies


Chapter 11 - Table of Contents
How does it work?
Issue Identification
Initial Document request
Supporting Law

A "Related Finance Company" or RFC, is a financing company owned by an automobile dealership. It provides financing for customers that cannot obtain financing through normal channels. The customer is required to make payments usually at the dealership's location. This type of arrangement is usually advertised by the dealership as a "buy here pay here" plan. The "buy here pay here" plan is common with stand alone used car dealerships, but many new car dealerships utilize this type of plan for their used car sales.

How does it work?
Dealerships involved in this practice establish a financing entity (herein referred to as a "Related Finance Company" or RFC), typically an S Corporation, which acts as the lender in the dealership's financing arrangement. The same shareholders that own the dealership usually own the S Corporation.

When the vehicle is sold, and it is determined that the customer needs special credit assistance, the dealership writes the note at term (high interest rate) with recourse to the RFC. The note is sold at a significant discount to the RFC substantiating the discount by citing high risk. The dealership books a current and deducted loss for the difference between the full contract and the discounted contract. The RFC accrues income as it becomes earned, subject to IRC section 162 deductions.

Legitimate Uses of a Related Finance Company
There are several valid business purposes for establishing an RFC. An effective RFC removes the collection burden from the dealership; allowing dealership personnel to operate the dealership.
Sourced from the IRS Web Site read the entire article here.

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