What the New Limitations on Business Interest Deductions Means for Dealerships
By Tom O’Connell, CPA
Director of Dealership Services
You are likely already aware that the passage of the Tax Cuts and Jobs Act trigged new limitations on business interest deductions. Effective for tax years beginning after December 31, 2017, businesses will have limited ability to deduct their interest expense unless they can meet special criteria that will allow them to avoid the limitation. Fortunately, the IRS exempted floor plan interest from the limitation.
For auto dealerships, this is a controversial and highly complex subject. Below we have highlighted what this means and how it can impact your dealership. There are two notable changes regarding bonus deprecation.
- Bonus depreciation deduction rises to 100 percent, up from 50 percent, of the purchase price of tangible property.
- Bonus depreciation now applies to new and used tangible property
Unfortunately, when the IRS exempted floor plan interest from the interest limitation, they offset this benefit by eliminating the availability of bonus depreciation for most dealerships.
If your dealership is planning to renovate its showroom or purchase a big-ticket item for the service department, the elimination of bonus depreciation should warrant your attention.
What does this mean?
You cannot take a bonus depreciation if:
- your dealership has more than $25 million in sales,
- your dealership has floorplan financing interest, and
- your dealership floor plan financing interest has been exempted from the limitation calculation.
You still have full deductibility of interest and bonus depreciation if
- your dealership, including any aggregated businesses, is under the $25 million dollar in sales threshold
If you own multiple businesses, you will need to look at the aggregation rules for the purposes of the $25 million gross receipts threshold.
Consider this scenario. If your dealership purchases a piece of equipment for the service department, going forward the write-off must be spread over the life of that asset. In the past, this would have been a 50 percent deduction under bonus depreciation, unless purchased between September and December 2017, in which it would have been a full deduction.
Tom O’Connell, CPA, is Director of Dealership Services at Purk & Associates, where he helped found the nationwide Dealership division, which provides accounting and tax services for all dealership types including new car and truck franchises, used vehicles, heavy duty trucks, motorcycles and recreational vehicles. For more than 30 years, automotive and franchised dealers have relied on Tom’s knowledge of their industry, coupled with his tax and financial expertise. Tom and his team are responsible for client development, development of tools to maximize tax planning, help clients maximize profits, buy and sell their dealerships and works with them on their succession plans. For more than 30 years, automotive and franchised dealers have relied on Tom’s knowledge of their industry, coupled with his tax and financial expertise.
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