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PROFIT SHARING PROGRAMS
RETROSPECTIVE COMMISSION PROGRAM
Retrospective Commissions is the return of a portion of the premiums paid to the insurance carrier, usually based upon profits (i.e. not guaranteed). This requires no separate corporate structure. The insurance carrier (or provider) simply accounts for the service contract premiums and deductions and reimburses the automobile dealer either all or part of the profits on the business. The return of the premium is usually not guaranteed, but is dependent on the profitability of the business.
• No downside risk – This method also has little (or no) downside product liability risk to the dealer (or dealership).
• Simple structure – The only requirement for this type of revenue sharing method is to have a valid agreement putting forth the terms of the retrospective payment (i.e. no additional corporate structure or entity is necessary).
• Higher income than commission only – Since this is a profit-sharing mechanism, the dealer has the opportunity to make more income than with commissions only which don’t share a portion of the profits.
• Only partial sharing of profits – The normal retrospective commission agreement normally only shares a portion of the overall profits (i.e. investment income is not always included in the retrospective calculation).
• Additional taxes paid at the Insurance Carrier level – Because the premiums (and associated liabilities) are retained by the Insurance Carrier, a portion of the business is ultimately taxed while on the books of the Insurance Carrier. This is caused by the requirement to “discount” reserves for tax purposes and results in double taxation on a portion of the business (probably at the maximum corporate rate).
• Profits received as ordinary income – Once the business earns and the retrospective commission is payable, the income would be received as ordinary income, which is also usually at the highest tax rate.
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Albuquerque, New Mexico USA 87111
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