In a DOWC, the dealer forms a separate c-corporation specifically for the purpose of underwriting service contracts. This new entity becomes the provider of the contracts, providing an alternative to using a third-party administrator to hold reserves. The most complicated, and arguably greatest, benefit of a dowc vehicle service contract is that the tax-deferred nature allows the dealer to use it as a wealth-building tool. Dealers are taking advantage of the same tax laws that insurance companies have been operating under for decades. Essentially, the company has no taxable income for an extended period of time as a result of numerous expenses. The expenses of administering and acquiring sales of the DOWC are deductions in the current tax year, and net operating losses are carried forward. Dealers who switch to a DOWC structure are now filing the same tax returns as Property & Casualty companies, which account for the tax deferral created by the compounding NOLs.
