There has been a lot of praise for the National Automotive Dealer Association (“NADA”) for lobbying for the 100% deductibility of floorplan interest expense and rightfully so. There was much panic when we saw that “floor plan interest expense is not deductible” in a version of the tax reform. The NADA took charge and fought for the dealers nationwide. However, there has not been much talk regarding the item the dealers might be giving up.
We need to first talk about 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. More detail regarding the mechanics of this limitation can be found on our Tax Reform Blog at Business Interest Deduction.
Per the above limitation, if the floor plan financing interest was taken into account, the taxpayer will not be eligible for 100% bonus depreciation on capital expenditures for the year. This statement does not go into any further detail. Most interpret this as if you deduct one dollar of floorplan interest, the taxpayer cannot utilize bonus depreciation. We are waiting for the IRS to issue more guidance.
The most asked question from dealers is “can we offset the interest expense with the floorplan credits?” Please know that this is not allowed. The credits are known as a discount from the manufacturer and not a reimbursement. The gross floorplan interest expense will be considered for the limitation. Dealers should consider separating floorplan interest expense, floor plan interest credits and other business interest into three different general ledger accounts. This will help at year-end to determine the new tax law impact regarding potential business interest deductibility and the eligibility of bonus depreciation.
Auto dealers have relied on this accelerated depreciation over the past decade and half which may be potentially coming to an end for some. Please keep in mind that this depreciation deduction is not lost but just deferred.
We need to plan accordingly regarding the effect of this potential limitation on bonus depreciation. Before we panic, please note that there are other tax advantages that may offset this limitation such as the 20% qualified business deduction, increase in section 179 expense, lower tax rates for individuals and corporations. Please stay tuned as more information and guidance are provided.
Please contact Steve Barber of our office if you have any questions.