Dealerships were exempt from a limited interest deduction at the last minute when language to preserve full deductibility of floorplan interest was added to the tax bill.
Dealers depend on interest-only loans to floorplan their vehicles. The interest deduction lets dealerships curb the cost of holding inventory in the form of cars and trucks.
In the initial version of the tax bill, deductibility for business interest was limited to 30 percent of adjusted taxable income. That means dealers would have been limited in their ability to write off interest expense on vehicle inventories. The National Automobile Dealers Association and other industry groups lobbied hard for a dealer exclusion in the bill.
NADA worked with its dealer 20 group members, CFO 20 group members and a network of accounts that represent thousands of dealers to identify the items under the tax code that affect dealerships the most, said NADA spokesman Jared Allen.
From conversations with those groups, NADA concluded that preserving floorplan interest deductibility was dealers' top priority because it's typically one of the largest expenses a dealership has, he said.
The industry was concerned that during recessions, the limit on floorplan financing interest "would cause dealers some problems and they would end up with nondeductible interest," said DHG's Dearman. "Because manufacturers are going to continue to make lots of vehicles and dealers are going to carry a decent amount, that was a deduction worth fighting for."
But there was a de facto tradeoff. Because dealers preserved floorplan interest deductibility in the final law, they are precluded from using bonus depreciation on machinery, equipment, furniture and fixtures.
Under the former bonus depreciation standard, dealers could write off 50 percent of an expense, such as a $50,000 lift, in one year. Without bonus depreciation, dealers will still be able to write off such expenses, but over five to seven years, rather than one, Dearman said.
Deductions for state income and property taxes will be limited to $10,000 for dealership owners under the new tax law. For dealerships that are organized as pass-through organizations, the dealer was previously able to deduct all state income and property taxes. So a dealer who previously had to pay $100,000 in state income tax on dealership income, and deducted all of that from federal taxes, now can deduct only $10,000 of that from federal taxes.