On Friday, September 13th the Treasury Department and Internal Revenue Service released final regulations and additional proposed regulations under IRC Section 168(k) that address guidance for 100% bonus depreciation that may be available to auto dealers.
The Tax Cuts and Jobs Act (TJCA) created new law for 2018 that limits the deductibility of a business’s interest expense under IRC Section 163(j). There was a provision specifically related to the auto industry that allowed dealers to deduct all floor plan interest expense without limitation, however as a trade-off the prior proposed regulations stated that those dealers were precluded from taking 100% bonus depreciation. This created an imbalance in the internal revenue code where a dealer who may not otherwise have an interest expense limitation under 163(j) were not allowed to utilize 100% bonus depreciation. The new proposed regulations provide specific guidance and clarification for the industry that is favorable for dealers.
The new proposed regulations now allow dealers to utilize 100% bonus depreciation in certain situations. The proposed regulations clarify that if the total business interest expense (including floor plan financing interest) does not exceed business interest income plus 30 percent of adjusted taxable income, then the dealer is eligible for bonus depreciation. This decision by the Treasury corrects the imbalance noted above. The regulations provide that the determination for a dealer’s eligibility for bonus deprecation is evaluated on an annual basis.
Additionally, the new proposed regulations provide that a taxpayer that leases property to a trade or business with floor plan financing indebtedness described by Section 168(k)(9) is eligible to claim the additional first year bonus depreciation.
Our Auto CPA Group worked closely with NADA to interpret the new legislation and arrived at this new proposed regulation. The new guidance and clarification is great news for dealers and the industry.
Please contact Bart Haag, Auto Dealership Practice Leader for further information.
Written by Matthew Pore