The Tax Cuts and Jobs Act, (The Act), has brought with it many changes that impact business owners. Auto dealerships in particular, need to be aware of the impact of these changes, and plan for them accordingly.
Some of the most significant changes in The Act (aside from the qualified business income deduction), directly effecting automotive dealers, are the new rules which apply to interest expense and bonus depreciation. The Act allows for two notable changes as it relates to bonus deprecation. One: before the change in the law, bonus deprecation deduction was only 50% of the purchase price of tangible property, with the passage of the Act, that amount is raised to 100%. Two: prior to the Act, the bonus depreciation was only applicable to items purchased as new, now it applies to new and used tangible property. Unfortunately auto dealers will not be able to benefit from the additional bonus depreciation – as explained below.
As far as the deduction of interest goes, prior to the passage of the Act, interest paid or accrued by the dealership was generally fully deductible. Now, the deduction for most businesses with over $25 million in gross receipts is limited to 30% of the adjusted taxable income for the tax year. Auto dealers are exempt from this rule but at a cost.
Auto dealers use “floorplanning” to finance their new and most of their used vehicles purchased and the Act exempts the interest paid on such floorplanning from the interest deduction limitation. This is a great benefit to those dealerships that are not performing very well since they are the ones who have the most exposure to the interest limitation.
However, the cost of such benefit is that those that use floorplan financing are not allowed to use bonus depreciation effective for tangible property acquisitions after January 1, 2018. On the brighter side, the Sec. 179 deduction increased from $500,000 in 2017 to $1,000,000 in 2018 (with a phaseout for acquisitions in excess of $2.5M). For profitable dealerships, the increase in Sec. 179 expensing can offset some of the benefits lost due to the disallowance of bonus depreciation.
In addition, the first year deprecation for “luxury vehicles” is $10,000 (with bonus depreciation it would be $18,000 in the first year); this is an increase over the prior year amounts. This is most helpful for those that take depreciation on their loaner-fleet.
How MBAF Can Help
The passage of the Tax Cuts and Jobs Act has created or enhanced some tax breaks for auto dealers. It has also reduced or eliminated others. Specific to the changes discussed regarding interest expenses and bonus deprecation, we can help you to come up with tax planning strategies which make the most sense for you regarding ways to still make the most of the provisions in the new law. These could include plans such as considering placing real estate, improvements, and equipment in a separate entity that does not have the floor plan or interest limitation. In this way you could still take advantage of the bonus depreciation.
This is just one example of how we can help your automotive dealership to understand how to maximize any and all of the potential benefits to be found in this tax legislation.
Compliance with the new rules found within the Tax Cuts and Jobs Act can be quite complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Automotive Dealerships specialists, or call us at 1-800-239-1474.