On November 3, HBK's Rex Collins, CPA, CVA, was asked to join a conference call of the directors of several regional and national dealer associations. Natalie Higgins of the Equipment Dealers Association (EDA) had secured an opportunity to address the U.S. House of Representatives' Ways and Means Committee as they prepared their proposed tax legislation for a full House vote. The conference call participants asked Collins, who heads up HBK's Dealership Industry Group practice, provides financial counsel to dealers exclusively and is called upon regularly to address dealer conventions and meetings, to present the dealers' position before the Committee.

"We were scheduled for a half-hour phone call that afternoon," Collins reported. "It turned into an hour and a half discussion, as the Committee was eager to understand our issues and to find a fix for the problem."

While there are several items of impact to dealers in the proposed House tax reform bill, the issue of greatest concern was the deductibility of dealers' annual interest expense. A provision in the House bill would have limited the deduction to 30 percent of the dealer's adjusted income, which includes normal taxable income plus depreciation, amortization and interest.

"Given the amount dealers typically spend each year on interest, this item was clearly the most damaging in the proposal," Collins explained.

Collins provided the Committee with two hypothetical examples:

For an S Corporation:
• Dealer has $185,000 in taxable income
• Has $23,000 in depreciation
• Paid $480,000 in interest
• These three numbers total $688,000
• Deduct 30% = $206,000
• Dealer’s taxable income increases $274,000 ($480,000 - $206,000)
• Dealer’s taxable income is now $459,000
• Dealer’s new tax rate is 25% (assuming all income qualifies for proposed reduced rate, which is not likely)
• Dealer’s taxes increase to (at least) $115,000 from $73,000 under current tax code

For a C Corporation (at current top tax rate):
• Dealer has $185,000 in taxable income
• Has $23,000 in depreciation
• Paid $480,000 in interest
• These three numbers total $688,000
• Assuming tax rate of 34%
• $62,000 in taxes under current tax law
• $92,000 under proposed tax rates with interest deduction limitation

"Most impacted are those dealers who have been struggling and those who are growing," Collins said. "Dealers on the low end of the profitability spectrum would be severely compromised; unable to deduct their interest expense, their taxes could exceed their total profits. Dealers looking to grow by acquiring debt would also be severely punished with the loss of the deduction.

"The Committee became convinced of the inequity and potential harm to so many American businesses, and they agreed to carve dealers out of the interest expense limitation as proposed in their tax reform bill."

There was, however, as one would expect in such negotiations, a trade-off.

"In exchange," Collins said, "we will not be allowed to directly expense the cost on fixed assets purchased during the year. However, that does not restrict our ability to take advantage of existing depreciation and Section 179 expensing election. As a matter of fact, the legislation provides for the doubling of the current benefits of Section 179."

While Collins and the dealer associations won the day, the battle on behalf of dealerships continues, he pointed out.

"The Senate bill is similar to the original House bill in how it addresses this issue," he said. "There is still work to be done."