Clarification on 100% Bonus Depreciation for Dealership Owners

The Internal Revenue Service released proposed regulations on utilizing 100% bonus depreciation for dealerships that deduct floorplan interest expense.  Even though the rules were released on Friday the 13th, the rules proposed weren’t scary at all.  Dealers can use this deduction if their interest expense, including floorplan interest, is less than 30% of adjusted taxable income.

We need to first revisit the mechanics of the interest expense deduction limitation.  The business interest expense deduction shall not exceed the sum of business interest income, 30% of the adjusted taxable income, and the floor plan financing interest.  Per the limitation, if the floor plan financing interest related to such indebtedness was taken into account, the taxpayer will not be eligible for 100% bonus depreciation on capital expenditures for the year.  This “if” statement did not go into further detail until these proposed regulations were released. 

While some originally interpreted the 100% bonus depreciation being ineligible to dealers who took $1 of floorplan interest expense, we read the original rule as being more taxpayer-friendly.  We did take the 100% bonus depreciation expense for our dealers that did not exceed the 30% limitation. 

Per these new proposed regulations, we choose wisely regarding treatment of bonus depreciation for dealers.  These new proposed regulations were released three days before the extended deadline.  This prevented what could have been a very stressful weekend leading up to the deadline.

Please note that dealers are not out free and clear.  We recommend that dealers monitor their debt to equity ratio as they manage facility upgrades and during the course of business.  Starting in 2023, the adjusted taxable income cannot addback depreciation expense to the calculation, which means that more taxpayers will exceed the 30% limitation, while floorplan interest expense will not be limited, which then will make them ineligible for the bonus depreciation expense. 

For further detail on the interest expense limitation deduction, please email [email protected].

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