IRS Issues Regulations Favorable to Dealers

On Friday, September 13, 2019 the IRS issued proposed regulations that clarify bonus depreciation and interest expense for dealerships with floor plan financing. To the extent that overall interest expense, including floorplan interest, is below 30% of adjusted taxable income, a dealership will be eligible to take 100% bonus depreciation. Further, eligibility to take bonus depreciation is determined on an annual basis. Therefore, even if a dealership has to use the floor plan exception one year in order to deduct all of its interest expense (thereby losing the ability to take bonus depreciation in that year), it may still be eligible to take bonus depreciation in subsequent years if overall interest expense falls below 30% of adjusted taxable income in that given year. This is great news for dealers who may have thought that bonus depreciation was lost forever.

When issued, the Tax Cuts and Jobs Act of 2017 ushered in the most comprehensive and sweeping tax reform since The Tax Reform Act of 1986. Among the many changes that resulted was an interest expense limitation equal to 30% of adjusted taxable income. Another notable outcome was the increase to bonus depreciation. Prior to the 2017 act, bonus depreciation was to drop to 40% of the cost basis of the asset. The 2017 act increased the rate to 100% for assets placed in service from September 27, 2017 to December 31, 2022.

What was the impact of these changes on dealerships? Rex Collins, HBK CPAs & Consultants (HBK) Dealership Industry Group Principal, had an audience with the House Ways and Means Committee during the development of the bill proposals. As a result of his testimony, the House version of the bill included language that allowed dealerships with floor plan financing to deduct all floor plan related interest expense, even if that expense ultimately exceeded 30% of adjusted taxable income. However, dealerships would also not be able to benefit from 100% bonus expensing. Originally, the law as passed was interpreted as allowing a full deduction of floor plan interest while excluding a dealership from 100% bonus depreciation.

Subsequently, the Joint Committee on Taxation issued a Blue Book interpretation of the interaction between floor plan interest expense and bonus depreciation that was much more favorable to dealerships. Essentially, it suggested that if interest expense including floor plan interest was less than 30% of adjusted taxable income, the dealership may be eligible for bonus depreciation expensing. However, the interpretation also held that once a dealership used the floor plan exception, the dealership would not be eligible to use bonus depreciation in subsequent years.

Friday’s announcement by the IRS of the new final and proposed regulations clarifies the conflicting language in the act and the Blue Book interpretation and is welcomed good news for dealers with floor plan financing.

Contact the HBK Dealership Industry Group today to discuss planning opportunities related to bonus depreciation as well as many other items that impact your dealership.

Rex Collins is a Principal at HBK CPAs & Consultants. He directs HBK’s Dealership Industry Group, which provides tax, accounting, transactional and operational consulting exclusively to dealers. Rex can be reached by email at rcollins@hbkcpa.com, or by phone at 317-504-7900.

About the Author(s)
Rex is a Principal of HBK CPAs & Consultants and directs the firm’s Dealership Group. He has worked extensively in the dealership industry since 1984 as a department manager, a general manager and an owner, as well as providing tax, accounting and operational consulting services exclusively to dealers as an independent CPA. This experience includes working closely with hundreds of dealers from coast-to-coast since 1987 on creative tax planning and financial statements issues. He provides clients with a wide range of transaction work services, and consults for them in specialty areas such as operations, government regulatory compliance, valuations and M&A feasibility studies. Rex is active in many professional associations. He is the current Chairman of the BDO Dealership Industry Group, contributes articles and commentary to dealership industry publications, is frequently called upon to speak to industry associations and conferences, provides expert testimony, and is regularly quoted by industry and the general media.
Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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