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Tax Reform Impact on Auto Retail Industry

Tax Reform Impact on Auto Retail Industry

The Tax Cuts and Jobs Act signed into law on December 22, 2017 will have significant impact on the auto retail industry – individuals (dealers) and businesses (dealerships). The enactment of comprehensive tax reform, the first major rewrite of the tax code since 1986, cut taxes of franchised dealers.

The following highlights certain auto retail industry provisions:

Preserving full deductibility of floor plan interest:

Floor plan interest remained 100 percent deductible in conjunction with not being able to claim the new temporary immediate expensing provisions of Section 168(k) (“Bonus depreciation); however, Section 179 expensing, with permanent increased limits to $1,000,000 (inflation adjusted), remains available.

Tax relief for pass-through dealerships:

A 20 percent deduction on pass-through income (including from trusts and estates), which results in a maximum effective tax rate of 29.6 percent for business income. The 20 percent deduction for pass-through income is limited to 50 percent of the W-2 wages paid by the business (generally will apply to the operating dealership) or the sum of 25 percent of the W-2 wages plus 2.5 percent of depreciable capital (generally will apply to entities engaged in a real estate trade or business).

Excess Business Losses:

For tax years through 2025, excess business losses will no longer be deductible in the current tax year. Instead, those losses must be carried forward and treated as part of the taxpayer’s net operating loss in the subsequent tax year. An excess business loss is the excess of the taxpayer’s total trade or business deductions and losses over the sum of (a) their total income and gains attributable to those trades or businesses and (b) $250,000 (single) and $500,000 (joint). With operating losses generated after 2017 only offsetting 80% of taxable income.

Section 1031 Like-Kind Exchanges:

Section 1031 exchanges will only be permitted for transactions involving real property, significantly diminishing the ability to defer gains on disposals of collectibles, vehicles and franchise rights.

C-Corporation taxation:

The much heralded flat rate of 21% exists. The corporate alternative minimum tax is repealed.

Individual income tax changes:

To “pay” for the projected decrease in tax revenues associated with the reduction in the C-Corporation tax rate, individual itemized deductions were essentially eliminated with the intent that more than 94% of individuals will claim the standard deduction. The specific changes to itemized deductions are:

  • The deduction for state and local income and property taxes, in total, will be limited to $10,000
  • Home equity loan interest is no longer deductible, and interest on the excess of new mortgages over $750,000 will not be deductible
  • Miscellaneous itemized deductions such as unreimbursed employee business expenses and investment advisor fees will no longer be deductible

Additional changes to individual taxes include:

  • Overall reduction in income tax rates, of note is the reduction in the highest tax rate from 39.6% to 37%
  • The Standard Deduction was essentially doubled, with joint filers claiming a deduction of $24,000, single or married filing separately $12,000 and head of household $18,000.
  • “Softening” the impact of Alternative Minimum Tax (“AMT”) – the exemption was increased as well as the income threshold at which the exemption is phased-out and with the limitations on deductions for state and local income taxes, it is anticipated that far fewer individuals will be subject to AMT
  • Enhanced child tax credit – credit increased to $2,000 per qualifying child.
  • Estate tax reform – the estate, gift and generation-skipping transfer tax exemptions doubled from $5.6 million to $11.2 million per individual—or $22.4 million per couple—effective January 1, 2018, until December 31, 2025.

LIFO (last in, first out) inventory accounting method:

It is worthy to note despite numerous threats to repeal LIFO, the widely used accounting method was not changed in the bill.

For more information on the tax reform impact on the auto retail industry, fill out the form below and a member of our Automotive Services team will respond.

Author: Elliot J. DeSanto, CPA | edesanto@withum.com

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