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Learn about the changes and limitations of the provision to limit interest expense in the Tax Cut and Jobs Act of 2017.
Did you know that changes came into play for the interest expense limitation in 2022?
As you recall, the Tax Cut and Jobs Act of 2017 included a provision to limit interest expense. The limitation is calculated by multiplying a taxpayer’s adjusted taxable income (“ATI”), which is similar to EBITA by 30%.
However, this limitation does not apply to floorplan interest. If floorplan interest expense does exceed 30%, all of the floorplan interest is deductible; however, the dealer will not be eligible for bonus depreciation.
In 2022, depreciation and amortization are not eligible to be added back in the ATI calculation. As you can see, there a few moving parts.
We have seen record profits and some pretty low-interest rates among the dealership groups in recent years. Therefore, we haven’t seen much interest expense limited.
If you factor in the answers to the above questions, your profits are probably down in 2023, interest rates have risen, your inventory levels are back, you borrowed for the blue sky amount for a new dealership and you have leveraged your real estate potentially for an acquisition.
Let’s think about what this might do. The ATI calculation starts with taxable income, which if profits are down, so is ATI. Your interest rate is the highest in recent years, which means that interest expense is up. You have vehicles to sell, which is great, but the inventory might not be moving as fast as before, which means it is costing you more interest. The newer dealers you have might have working capital loans and your blue sky is probably financed, which causes more interest. Then your real estate entity will not be able to add back that depreciation for ATI which means a lower limitation. All of this is a perfect storm for limited interest expense.
A perfect storm can always be calmed by some planning. Let’s dive into these concepts sooner rather than later. With five months left for the year, we can plan now to help reduce the limitation on interest expense.
Please reach out to me, Steven Barber, or any of our SD Auto Advisors.
The Schneider Downs Automotive industry group serves dealers of all sizes, from single-point locations to mega-dealerships. Our members cross departments and meet regularly to ensure efficiencies in the services provided to our clients and discuss issues, regulations and trends affecting the automotive industry.
To learn more, visit our Automotive Industry Group page.