On December 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA), which among other changes, changed the ability for businesses to deduct business interest expenses. The business interest expense limitation applies to all businesses with gross receipts exceeding an average of $25 million for the prior 3 years. For the years following 2020, the deduction for business interest cannot exceed the sum of 1) business interest income, 2) floor plan financing interest (explained in more detail below), and 3) 30 percent of Adjusted Taxable Income (ATI). Any disallowed interest expense is carried forward indefinitely to the next succeeding year.
For this purpose, Adjusted Taxable Income (ATI) is determined first by determining taxable income without regard to 1) any item of non-business income, gain, deduction, or loss, 2) business interest income, or business interest expenses, 3) Net Operating loss deductions, 4) Qualified Business Income Deductions, and 5) Depreciation, Amortization, or Depletion deductions.
Special Rules for Automotive Dealerships
For automotive dealerships, floor plan financing interest is an additional adjustment that benefits automotive dealerships. Floor plan financing interest is interest paid on debt used to finance the acquisition of motor vehicles held for sale or lease where the debt is secured by the acquired automotive inventory. Floor plan financing interest is not subject to the limitation that may reduce the interest expense deduction for automotive dealerships. While loan interest not related to floor plan financing is still subject to the limitation imposed by the TCJA, loan interest that results from floor plan financing is deductible without those limitations.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) retroactively increases the amount of business interest expense that may be deducted for tax years beginning in 2019 and 2020 by increasing the 30 percent limitation to 50 percent of ATI. This recent change has made it possible to deduct a greater amount of interest expenses, but it may require further analysis on a case-by-case basis to determine the best possible outcome.
Our team of professionals at ADKF have extensive experience working with automobile dealerships and work with you to navigate through the rules and complexities of the IRS regulations in order to determine the best possible outcome for your automobile dealership.