Three Ways the TCJA Will Affect Your Dealership
The Tax Cuts and Jobs Act (TCJA) had significant changes that will affect your business and personal tax returns in the upcoming tax filing season. Over the next several posts our goal is to provide information that will help you better understand the implications of these changes. Here are some things to keep in mind when tax planning post-TCJA.
Business Interest Expense
The TCJA enacted additional limitations on the deductibility of business interest. For years beginning after December 31, 2017, all businesses will be subject to a disallowance of a deduction for interest expense in excess of 30% of the business’s adjusted taxable income. “Adjusted taxable income” for purposes of the limitation is calculated as taxable income with regard to business interest expense, business interest income, depreciation, amortization, or depletion. If any interest amount is disallowed, it will be carried forward indefinitely at the entity level.
How does business interest limitation affect your dealership? Correspondence by national, regional, and state associations led to the TCJA carving out floor plan financing interest as fully deductible. Floor plan financing interest that is exempt from the limitation is defined as interest paid or accrued on floor plan financing indebtedness for the following types of motor vehicles: automobiles and trucks, boats, recreational vehicles, motorcycles, and farm machinery or equipment. This is bad news for construction equipment dealers, who will not be exempt from the business interest limitations.
Under prior law for 2017, taxpayers could elect in the first year to deduct 50% of the cost of qualified property placed in service. The TCJA allows a taxpayer to immediately expense 100% of the cost of qualified property acquired and placed in service after September 27, 2017. This was previously only allowed for new property but is now allowed for both new and used property. It is important to make sure your tax preparer has considered this election before finalizing your 2017 tax returns.
A key nuance of this change in the law is that property used in a trade or business with floor plan financing is not eligible for bonus depreciation starting with the taxpayer’s first year beginning after December 31, 2017. Most dealerships will no longer qualify for bonus depreciation. There is a small business exemption if your dealership’s average gross receipts for the previous three years are under $25 million. If your dealership had a large rental or loaner fleet as of December 31, 2017, it will be important to begin planning now to offset income from turning over that fleet, which previously could have been offset with bonus deprecation.
An election can be made by taxpayers to expense eligible property that was used in a trade or business up to a certain dollar amount each year. This amount can be limited if the amount of eligible property is over a certain threshold. Prior to the TCJA, businesses could elect to expense up to $500,000 if the eligible property placed in service was below $2,000,000. For eligible property placed in service more than $2,000,000, the deduction was reduced dollar for dollar. The §179 limitation on the annual amount that could be expensed under the TCJA increased to $1,000,000. The phase-out threshold now begins at $2,500,000.
The TCJA broadened the definition of qualified property to include the following improvements to nonresidential rental property: roofs, HVAC property, fire protection and alarm systems, and security systems.
Unlike bonus deprecation, there is currently no provision which would disallow businesses from using §179. This increase in §179 depreciation will be an additional tool to offset the loss of bonus deprecation for most dealership entities.
The Bottom Line
The TCJA has many intentional and unintentional impacts to your business. Business interest limitations, bonus depreciation, and §179 Depreciation are just the beginning of changes to your business and personal tax returns. Each business situation is unique, so it is important to review how the TCJA affects you on a case-by-case analysis. Under the new tax law changes, planning with your tax preparer is even more important.
Contact us to begin your tax planning. We can answer any questions you have about how the TCJA may affect your dealership.
Chad Goodman, CPA / email@example.com / 423-702-8146