Floor Plan Financing Tax Reform

The tax reform created a new limitation which replaces the earnings stripping rules and applies to all businesses regardless of form on the deductibility of net business interest expense that exceeds 30 of a taxpayer s adjusted taxable income.

Floor plan financing tax reform.

The section 179 expense is not limited for taxpayers with floor plan financing so may provide a valuable benefit for these taxpayers subject to limitations on bonus depreciation. 1 business interest income 2 30 percent of adjusted taxable income and 3 floor plan financing interest. Preserving floor plan deductibility was one nada s top priorities for tax reform. Floor plan interest is deductible in full.

The senate s version of the tcja proposed limiting the deduction for floor plan financing interest to the same 30 percent amount that other types of interest are subject but this change was not adopted in the final bill. Floor plan financing interest is interest paid or accrued with respect to debt used to finance the acquisition of motor vehicles held for sale or lease and that is secured by the inventory acquired. The senate finance committee bill reported out of committee would have reduced the current 100 percent deduction of floor plan interest to 30 percent of adjusted taxable income and treated dealerships generally closely held small businesses the same as large corporations. The law allows real property and farming trades or businesses to make an irrevocable election out of the business interest deduction limitation.

Additionally certain types of real property that will not meet the definition of qualified improvement property for bonus depreciation purposes are eligible for deduction under section 179 under the qualified real property provisions. This rule limits annual interest expense deductions to an amount equal to the sum of. For those with over 25 million in gross receipts which includes most dealerships non floor plan interest is limited to 30 percent of net income before interest and depreciation. For this purpose floor plan financing interest means indebtedness used to finance motor vehicles held for sale or lease and secured by such inventory.

With this clarification the irs and treasury did not include bkd s recommended rule that debt incurred to purchase construction machinery or equipment for sale or lease to farmers. Auto dealers rejoice over preservation of 100 floor plan financing interest deduction by emily fiore and david blum on june 20 2018 posted in federal tax. In a response to requests made in bkd s comments on notice 2018 28 the proposed regulations clarify that the definition of motor vehicle for purposes of floor plan financing indebtedness is based on the equipment held for sale or lease not on the kind of business the purchaser or lessee is engaged in. This amendment offered by sen.

As a practical matter nearly all auto dealers incur such floor plan financing interest. In the original senate bill the interest deductibility was slashed to 30 percent of adjusted taxable income which would have been crippling to many dealers and created the risk of paying higher taxes even if a dealership does not show a profit.