Is a DOWC Right for your Dealership?

According to Agent Entrepreneur, “A 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).”

It is not regulated as an insurance company but does qualify as an insurance company for federal income tax purposes. A DOWC is generally owned by a dealer or a dealer group and is administered by a third-party provider.

What the difference between a DOWC and a CFC?

A DOWC is a domestic onshore vehicle whereby you, the dealer, has control and captures the highest percentage of after-tax profit (underwriting profit and investment income) available to the dealer market. It requires a much higher initial capital requirement than the controlled foreign corporation (CFC). A DOWC is also limited to non-insurance products with no ability to add insurance products that require reinsurance.

Benefits of a DOWC

In a traditional service contract transaction model, a large portion of the profit is held by a third party that controls the funds to its own benefit. Under a DOWC, those profits are transferred to the dealership, which could lead to lower overall fees per contract.

In addition:

• Dealers can take advantage of the same tax laws that insurance companies have been operating under for decades.
• The company has no taxable income for an extended period of time as a result of numerous expenses like administration, acquisition costs, and net operating losses.
• You have 100 percent control over your F&I program, including rates, coverages, and marketing materials, and company name.
• Dealers can build a portfolio of products that caters to a variety of vehicles and consumer needs.
• Underwriting profits and investment income are retained solely by the dealer’s DOWC.
• The structure allows dealers to stay onshore and benefit from domestic formation that can provide significant cash flow.
• You can also borrow for virtually any purpose.

How to form a DOWC?

To create a DOWC formation, you must first form a separate C-corporation that controls the entire service contract transaction and all funds, including investments. The new entity becomes the provider of the contracts, providing an alternative to using a third-party to hold reserves.

The new entity is treated as an insurance company for tax purposes and will be treated as a “per se” corporation for federal income tax purposes.

The DOWC formation could be a good program for an experienced dealer, or the dealer group looking for a Non-Control Foreign Corporation (NCFC) option. However, it’s not for every dealership.

If you want to look into making this move, reach out to Brady Ware for guidance.