Pub. 1 2018-2019 |Issue 2

10 for Dealerships The two main hot topics that currently affect dealerships are taxes and tariffs. The new tax reform law, which is called the Tax Cuts and Jobs Act (TCJA), and which was signed into law on December 22, 2017, has had a big effect on taxes for automobile dealerships because of tax changes for the following: • Individuals • Corporations • Pass-through entities • Trust taxes What changed? Start with a summary: • The cash method: Small dealerships (that is, those with less than $25 million in gross receipts) can adopt the cash accounting method when calculating their taxes. If there are commonly owned businesses then the $25 million in gross receipts is calculated for the entire group. You will need to evaluate the specifics for your particular dealership in order to determine whether a switch to the cash method wouldmake sense for you. • New pass-through income deductions: This deduction is for tax years between December 31, 2017 and January 1, 2016. Depending on the specific circumstances, it might apply to non-corporate taxpayers that have qualified business income from a partnership, an S corporation, or a sole proprietorship. It can reduce the effective tax rate you have to pay on the dealership’s taxable income from 37 percent to 29.6 percent. • Corporate tax rates have been reduced: The previous tax law used a graduated tax scale with a maximum of 35 percent. The current tax rate for C corporations is a flat 21 percent, a rate that is lower than the individual tax rate. • Changes in Section 179 expenses: Beginning with tax years after December 31, 2017, you can expense as much as $1 million as property in service. The phase- out threshold amount has been increased to $2.5 million. • Qualified business assets have a temporary 100 percent bonus depreciation: For new and used property that is acquired and placed in service between September 27, 2017 and January 1, 2012, there is a 100 percent first-year deduction for the adjusted basis. What this means is that the 50 percent allowance for property placed in service after December 31, 2017 has been repealed. Beginning with assets placed in service after December 31, 2022, the first-year bonus depreciation will phase down. As of January 2018, dealerships won’t be able to use the 100 percent bonus depreciation because they will be allowed to fully deduct the interest on floor plan financing instead. • Limit on business interest deductions: Beginning with the tax year that begins December 31, 2017, every business will be subject to a disallowance of a deduction for its net interest expense that is more than 30 percent of the adjusted taxable interest for the business. There are a few exceptions. If you look at the three-year tax period that ends with the previous tax year, determine whether the average annual gross receipts are less than $25 million. That’s the first exception. For the second exception, look at floor plan financing. Thanks at least in part to lobbying done by NADA, and despite efforts by the Consumer Financial Protection Bureau that was working to eliminate dealer discounts on auto credit, your dealership will still be able to deduct the interest expense for floor plan financing, but there may be limitations on any other interest that is incurred, such as for working capital loans or equipment.