Auto Shop Warranty Repairs

[Terry D EA]

An auto specialty (Transmission) repair shop has experienced a large number of part failures from one vendor throughout the year. The vendor will only replace the parts and will not pay the repair shop for any labor to replace the failed parts. The lion's share of these repairs are torque converter failures which requires the transmission to be removed along with other services. The specialty shop has employees that are paid an hourly rate and not commission or flat rate. I have found where if a sub-contractor was paid then no questions on the labor deduction. What I am asking is can the labor for in-house repairs be deducted? Essentially an employee is paid twice to do the same job.

[Slippery Pencil]

Yes.

Why do you think employee wages may not be deductible?

[Terry D EA]

Employee wages are definitely deductible. The shop charged labor by using the labor time guide. On the warranty repair order, they are writing the warranty labor repair at the same hourly rate using the shop hourly rate. That is what is confusing me. My opinion, is the warranty repair labor should be at the employee hourly rate and not the shop hourly rate yes or no?

[Lee B]

The actual wages paid plus employer payroll taxes, which I assume you would already be deducting anyway.

[Terry D EA]

Maybe I can make this easier. I am the shop owner. I repaired a vehicle and collected 2K parts and labor. The vehicle comes back due to a failed part. I file a warranty labor claim and the part vendor denies the claim and pays for the part only. Can I deduct (write-off) the labor on the warranty repair?

[Lee B]

Of course, it's wages and employer taxes that you have paid.

It doesn't matter whether it's for the original repair billed to the customer or for a repair of a parts failure or for general maintenance in the shop.

The only exception would be the capitalization of employee labor related to the installation of new shop equipment

You may be overthinking this

[jklcpa]

You deduct whatever gross pay you pay the employees, no matter what job they are working on. It doesn't matter if it's warranty work or a first time repair.  

[Slippery Pencil]

1 hour ago, Terry D EA said:

On the warranty repair order, they are writing the warranty labor repair at the same hourly rate using the shop hourly rate. That is what is confusing me. My opinion, is the warranty repair labor should be at the employee hourly rate and not the shop hourly rate yes or no?

What does that even mean?

1 hour ago, Terry D EA said:

Maybe I can make this easier. I am the shop owner. I repaired a vehicle and collected 2K parts and labor. The vehicle comes back due to a failed part. I file a warranty labor claim and the part vendor denies the claim and pays for the part only. Can I deduct (write-off) the labor on the warranty repair?

I don't think you're making it easier.

You had a sale of $2k.  The part was replaced under warranty.  The part manufacture replaced the part for free.  Thus there was no additional cogs for the part.  You paid your employees.  As Judy said, whatever dollar amount you actually paid your employees is a deductible expense.  Whatever the employee hourly rate and shop hourly rate are (and whatever you mean by those terms) is irrelevant.  What you actually paid gets deducted.  When they're paid to do the original job, the actual amounts paid are deducted.  When they're paid to replace the part under warranty, the actual amounts paid are deducted.  When they're paid to sit around twiddling their thumbs because there are no jobs in the shop, the actual amounts paid are deducted.

[BrewOne]

So, the labor charge submitted to the vendor was denied.  That leaves the business owner with the actual cost of the labor as an expense, not the "book rate."

Or maybe I missed the whole point.

[Terry D EA]

Thanks for all the replies so lets see if I can clear this up. The employee gets paid an hourly rate for whatever hours he/she works each day regardless of what the task is. If the employee performs an initial repair or a warranty repair, they are still paid for x number of hours per day. That gross pay is deductible regardless of what it was used for. So, for the warranty repair, there is no additional deduction for the shop owner simply because he did not pay anyone an additional wage to perform the warranty repairs. Therefore the shop owner cannot claim any lost time for the warranty repair. Correct?

This has been my thinking all along but somewhere along the line I managed to confuse the crap out of myself. I think I may have misunderstood the client and now that I see the repair orders and what took place it made a difference.

[jklcpa]

2 minutes ago, Terry D EA said:

Thanks for all the replies so lets see if I can clear this up. The employee gets paid an hourly rate for whatever hours he/she works each day regardless of what the task is. If the employee performs an initial repair or a warranty repair, they are still paid for x number of hours per day. That gross pay is deductible regardless of what it was used for. So, for the warranty repair, there is no additional deduction for the shop owner simply because he did not pay anyone an additional wage to perform the warranty repairs. Therefore the shop owner cannot claim any lost time for the warranty repair. Correct?

This has been my thinking all along but somewhere along the line I managed to confuse the crap out of myself. I think I may have misunderstood the client and now that I see the repair orders and what took place it made a difference.

That is all correct.

[jklcpa]

Just out of curiosity, are you trying to prepare a business return or Sch C using just the receipts, customer invoices, vendor invoices, and payroll records without having a complete set of books posted using double entry bookkeeping?

[Terry D EA]

No, this is an S-Corp that I maintain the books each month. I don't normally see the repair orders themselves just the income. I have the QB file setup properly. I enter all the bills and payments each month from the vendor invoices; etc. BTW, I also process the payroll. This business owner is and has always been very good at record keeping probably one the best that I have. For an auto shop of any kind, everyone loses on the dreaded comeback except the hourly employee.

Edited January 11 by Terry D EA
Correct spelling

[Terry D EA]

Judy just an additional bit. This shop owner is so meticulous, all invoices, receipts, payroll records are alphabetized in a file each month and put in a box at the end of the year and stored. There isn't an expense or item of income that cannot be accounted for. I've worked with this guy since 2007 without any issues. 

[jklcpa]

10 minutes ago, Terry D EA said:

everyone loses on the dreaded comeback except the hourly employee

Yep, I know all about comebacks and warranty work. Husband is a now-retired mechanic, worked commission for most and then flat rate, and then worked as service manager too. On my end I've done the accounting and tax work for more than a few repair shops, quite a few gas stations, a couple of parts stores too, and a car dealer.

Edited January 11 by jklcpa
added stuff

[Terry D EA]

Wow, well we really have a lot in common. I worked as a master auto tech for years in dealerships. Always got paid on the flat rate system. Drove my wife nuts when it came time to pay the bills each month. Never got to the service manager position but was shop foreman which I really didn't care for. Also taught auto tech at high schools and community colleges for 23 years. 

[Max W]

I think we have a little fraternity going here.  I owned an auto parts and repair shop for 24 years. I was put out of business by two chain stores each a block away.  This was about 6 years before I go involved with taxes.

[Tax Prep by Deb]

That's how I got my start too!  My dad owned his own auto shop and I did the books and later the taxes.  I've even done a few oil changes.