Retail automotive dealerships historically have often taken advantage of significant depreciation deductions due to the high cost of their facility improvements and their rental fleet which is typically not subject to luxury auto limits. The 2017 Tax Reform Act has significantly expanded accelerated depreciation methods under Section 168(k) (bonus depreciation) and Section 179. Under the new Act assets placed in service after September 27, 2017 are now eligible for 100% bonus depreciation (i.e the entire cost of the assets can be deducted in the year it is placed in service). Additionally, previously owned property now qualifies for this bonus depreciation provided that the taxpayer has not previously used the property being placed in service.
The Act also raised the annual Section 179 depreciation limit from $500,000 to $1,000,000 for tax years beginning after December 31, 2017. The Act expanded property eligible for Section 179 depreciation to include improvements to nonresidential real property such as roofs, HVAC equipment, fire protection and security systems. Finally, the Act increased the phaseout threshold to $2,500,000. If the total Section 179 property placed in service during the tax year exceeds $2,500,000 the deduction is reduced dollar for dollar by the excess amount.
While these accelerated depreciation methods potentially offer substantial tax savings the Act includes a provision that will have a substantial effect on retail automotive dealerships. Under the new code a taxpayer’s interest deduction is limited to 30% of the taxpayer’s taxable income. This 30% limitation does not apply to taxpayers with floorplan financing and such floorplan interest will remain fully deductible. While the floorplan interest will remain fully deductible, taxpayers with over $25 million of average gross receipts and floorplan interest will be prohibited from taking bonus depreciation on any assets.
As such given the high cost of automotive inventory and the reliance on floorplan financing many dealers will be prohibited from taking bonus depreciation. While the new Act does offer tax relief in several areas it is important for business owners to be aware of the changes in the tax code when they make decisions regarding investments in their business assets. It is also important to remember that although accelerated depreciation may not be available the cost of the investment will be recovered in following years. Additionally, general business decisions need to be weighed against tax minimization strategies.
Obviously, the complexities surrounding the new tax code can be formidable. Please reach out to your Hertzbach tax professional with any questions regarding how the new tax act might impact you.