Unfortunately, when dealers were allowed to exclude floor plan
interest from the 30% interest limitation (discussed earlier), the
service included a related provision stating that businesses that
use the floor plan interest exclusion are not eligible to use bonus
depreciation for the year. All purchases made from 9/27/17 –
12/31/17 will qualify for bonus depreciation since the floor plan
interest limitation doesn’t apply until 2018.
For trailer dealers, since the “floor plan exclusion” does not
currently exist, such dealerships will be able to fully expense
fixed asset purchases.
If we don’t get bonus depreciation, can we still claim
Sec 179 expense?
Yes, section 179 expensing, which allows for the direct expensing
of new and used equipment purchases, has been increased from
$500,000 to $1,000,000, effective 1/1/18. If more than $2.5
million of qualified property is purchased, then the $1 million-
dollar amount is phased out.
The new law also makes more building improvements eligible for
Sec 179 expensing. Now “qualified real property”, for which Sec
179 can be claimed, includes roofs, heating, ventilation and air-
conditioning (HVAC) property, fire protection and alarm systems,
and security systems.
Are entertainment expenses affected?
In the past, entertainment that was business related was
deducted at 50%. Under the new law, business related
entertainment is non-deductible. Baseball tickets given to
employees or customers, luxury boxes at stadiums, etc. are
now non-deductible. Business related meals continue to be
deductible at 50% (going to dinner with the factory rep, etc.).
Business meals on site for the employer’s convenience (including
Saturday salesperson lunches, etc.) are 50% fully deductible.
Holiday parties remain 100% deductible.
Since the C Corporation rate is lowered to 21%, should
a dealership switch from an S Corporation to a C
Corporation?
While an existing pass through entity (S Corp or LLC) might
have a unique circumstance that switching would be prudent, in
most situations, a pass-through entity will provide the greater
long-term benefit.
While the tax rate is lower on any one year’s income, a pass-
through entity escapes the double taxation that occurs when
taking money out of the company. To get earnings out of a C
Corp, typically a dividend or a bonus would need to be declared.
The dividend would incur an additional federal tax up to 23.8%
while a bonus would be at ordinary tax rates (plus payroll taxes).
Again, each circumstance is unique and there will be situations
where conversion to a C makes sense.
If I plan to sell my dealership in the near future,
does a C corporation now make sense more than an S
corporation?
Generally, no. While the rate will be 21% in the C corporation,
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the double taxation of C corporations results in another level of
tax. This results in an overall federal tax rate of about 40% for C
corporations versus 29.6% for flow through entities.
I own an S Corp, what will my tax rate be?
The effective rate on your pass-through income will vary each
year based on your circumstances. Instead of establishing a pass-
through tax rate (like was the case with C Corps), Congress
settled on pass-through entities being taxed at ordinary rates but
with a deduction of up to 20% of qualifying income.
Determining what “qualifying income” is will be tricky enough,
but Congress added several limitations on the deduction as well.
They include a limitation of the greater of (1) 50% of the W-2
wages paid by the business, or (2) the sum of 25% of the W-2
wages paid plus 2.5% of the unadjusted basis of all depreciable
property used in the qualified business. In the end, we think the
blended federal tax rate for many dealerships with pass through
income will end up at about 29.6% for the typical taxpayer.
What about state income tax?
As you may have heard, state income tax and real estate tax paid
by individuals will be limited to $10,000 in 2018 and forward.
Thus, state income tax paid by dealers on pass-thru dealership
income will generally not be deductible. For example, for a S
Corp dealer making $2 million a year in a state that has a 6% tax
rate, a $120,000 deduction is lost (about a $45,000 tax increase).
A dealer can estimate that the loss of the state tax adds about
30% of his tax rate back to his effective tax rate; thus, a dealer
in a state with an 8% state tax rate has about 2.4% added to his
federal tax rate when comparing to tax rates in prior law.
State income tax paid by C corporations will continue to be
deductible. In high tax states, the benefit of C corporations
deducting state income tax will bring the tax rates between C
and S corporations closer. In a state with a 10% state income
tax rate, this would narrow the tax rate gap between C and S
corporations to by about 2.1%.
Is my home mortgage interest still deductible?
Yes, however interest is only deductible on up to $750,000
instead of $1,000,000 of mortgage debt. Mortgages taken before
1/1/18 are still capped at $1,000,000. Home equity indebtedness
is no longer deductible in 2018.
Does the Estate Tax still exist?
The estate tax remains in the tax law at the current rates, but
the lifetime estate exemption is doubled. The current $5.49
million exemption per spouse is now $10.98 million per spouse.
As of now, a married couple could pass on an estate of nearly
$22 million before estate tax would kick in.
If my dealership losses money, can I still cl aim refunds
of prior year tax?
Starting in 2018, net operating losses for C corporations, or
individuals with dealership pass through losses, can no longer be
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