Trailer Dealerships and the New Tax Reform Act Written by : David J . Wiggins , CPA | CliftonLarsonAllen
The recent tax legislation enacted is the largest tax overhaul since 1986 . While there are some elements of simplification ( increasing the standard deduction , removing Alternative Minimum Tax for businesses , etc .), the law as passed is quite complex . It will take years for the IRS to issue rulings and interpretations of the law , and then more years for tax court rulings to settle disputes and offer clarity .
Of great importance to trailer dealers is the treatment of pass through entity income ( typically income flowing to an owner ’ s personal return through an S Corporation or LLC ). Such income did receive tax relief , although the amazingly complex methods contained in the law to determine the level of tax will cause the dealer ’ s effective tax rate to constantly change from year to year .
Thanks to lobbying efforts , some late amendments and changes saved some items very important to dealerships , including preserving LIFO and deductions for floor plan interest . Unfortunately , the floor plan interest exclusion may have been overlooked regarding trailer dealerships . We are talking with the IRS to see if such dealers can be added in future regulation . The following is a summary of many of the questions dealers are asking as well as some detail on other noteworthy provisions :
Is interest still deductible ? For businesses with less than $ 25 million in sales , interest will continue to be deductible in full . For businesses with over $ 25 million in sales non-floor plan interest is limited to 30 % of net income before interest , taxes and depreciation . Floor plan interest is deductible in full for many dealerships . Unfortunately , trailer dealerships were not included in the floor plan exclusion . At this time , we do not know if this exclusion may be broadened to include “ trailer ” dealers .
Interest ( other than floor plan ) exceeding the limitation amount can be carried forward to future years . If elected by the taxpayer , the limitation would not apply to interest incurred in real property development or rental real estate operations . Loss of the floor plan expense carve out for “ trailer dealers ” could be expensive . Keep in mind , floor plan interest for tax purposes might not be netted with floor plan assistance received from the factory ( depending on each manufacturer ’ s reimbursement program ). If floor plan interest is limited , it is possible a dealership could break even or lose money for the year yet still owe significant tax .
As the analysis of the law unfolds , it is likely your existing debt situations will need to be reviewed to ensure the structure still makes sense .
Was LIFO affected ? Although discussed at various times in the process , LIFO remains with no changes from the current law . As such , it is a viable tax savings strategy . Since tax rates will likely be reduced for both C corporations and S corporations , dealerships on LIFO prior to 2018 will likely not only get deferral benefits from LIFO but permanent tax savings due the rate changes ( based on the expected tax rates ). Since the Alternative Minimum Tax has been eliminated for C corporations , this will also ensure that dealers on LIFO realize the full benefits of the related deductions .
Is the Cash Method now allowed for dealerships ? The new law allows for businesses with less than $ 25 million in gross receipts to adopt the Cash Method . For many trailer dealerships , this may be helpful . The gross receipt test will be applied on a combined basis for similarly owned businesses . A dealership meeting the gross receipt test then will be eligible to adopt the cash method . A dealership ’ s specific situation will need to be reviewed to determine if the cash method would be of benefit . It should be noted that for dealerships with significant inventories that the cash method does not mean that inventories will be expensed when purchased .
Is full expensing allowed for all fixed asset purchases ? Yes , 100 % bonus depreciation has been reinstated for all purchases made after 9 / 27 / 17 . Thus , new and used equipment purchases can be completely written off in the year of purchase .
24 NATDA Magazine www . natda . org