The Tax Cuts and Jobs Act (TCJA) made substantial changes to the Internal Revenue Code with many of those changes specifically impacting automotive dealerships and their owners. As you work through your 2018 business and individual tax returns, pay special attention to the following items.
Qualified business income deduction (QBID)
One of the most significant aspects of the TCJA was the creation of a new deduction in Section 199A, the qualified business income deduction (QBID). For auto dealerships, this deduction will be claimed by owners either as individuals, through their trusts or estates, and will generally be equal to up to 20 percent of qualifying domestic business income from S corporations, partnerships, and sole proprietorships. This deduction is subject to various limitations, including those based on the W-2 wages and assets of each business entity. However, regulations issued by the IRS and Treasury Department provide opportunities to aggregate businesses that are operated by separate entities under common ownership. In the case of auto dealers, several separate businesses may operate the auto dealership itself, the real estate used by the dealership, and other similar businesses. In these situations, the aggregation elections may be helpful in allowing the owners to treat those businesses as one consolidated business for QBID.
Business interest limitations under Section 163(j)
Businesses are now subject to a new limitation on the deductibility of their business interest expense pursuant to newly enacted Section 163(j). This rule limits annual interest expense deductions to an amount equal to the sum of: (1) business interest income, (2) 30 percent of adjusted taxable income, and (3) floor plan financing interest. Floor plan financing interest is interest paid or accrued with respect to debt used to finance the acquisition of motor vehicles held for sale or lease, and that is secured by the inventory acquired. This generally means that auto dealers that have pledged their vehicle inventory as collateral for their debts will have floor plan financing interest. The Section 163(j) limitation allows floor plan financing interest to be fully deducted, but prevents the dealership from accelerating deductions methods with 100 percent bonus depreciation.Aggregation could provide a benefit to auto dealerships in their ability to combine the operating business, self-rental property, and other similar businesses.
For some auto dealerships, the trade-off allowing floor plan financing interest deductions at the expense of accelerated tax depreciation may result in higher federal income tax. It may be necessary to evaluate existing debt financing and business structures in those cases. For example, there may be alternatives to separate the auto dealership from the real estate and equipment used by that dealership. In addition, there has been some discussion about interpretations of Section 163(j) that might allow auto dealers to retain the ability to claim accelerated depreciation under certain fact patterns.
One piece of recent guidance describing Section 163(j) suggests that auto dealers may not be restricted in their depreciation deductions. The Congressional Joint Committee on Taxation released the Bluebook during late 2018. The Bluebook is not official legislative history, but does provide an analysis of the provisions included in the TCJA. In particular, the Bluebook suggests that auto dealers might not be limited in their depreciation methods to the extent that they either: (a) have sufficient capacity to deduct business interest expense due to business interest income and 30 percent of adjusted taxable income, or (b) choose to suspend interest deductions that would otherwise be deductible as floor plan financing interest. The Bluebook is not authoritative guidance for tax filing positions, so that document should be viewed with an appropriate degree of skepticism. However, auto dealers should consult their tax advisors to discuss the impact of Section 163(j) and the potential for regulations or other interpretative guidance that might follow the Bluebook.
Tax reform restricts tax deductions for meals, entertainment, and fringe benefits
Are you capturing necessary information to accurately determine your eligible expense deductions? The TCJA made a number of changes related to meals, entertainment, and employee fringe benefits incurred or paid after Dec. 31, 2017. In general, the changes disallow deductions for entertainment, reduce the deductible portion to 50 percent for most meal expenses, and limit the deductibility of qualified transportation fringe benefits (QTFs). QTFs includes items such as parking and transit passes. This not only applies to employers directly paying for these items but also to costs incurred by employers who have a parking lot at an owned or leased building. Find out how this will impact your business.
Time to revisit your estate and succession plan?
The TCJA increased the exclusion from gift and estate taxes from $5,490,000 to $11,180,000 per individual (which will increase to $11,400,000 in 2019). This increase applies to gifts made during 2018 through 2025, and the increase is set to expire in 2026. With the increase in exemption, dealers may want to revisit their estate/succession plan and explore additional gifts to minimize estate tax for the next generation.
For more information or to discuss how tax reform impacts your dealership, give us a call.