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IRS Releases Proposed Bonus Depreciation Regulations – Favorable Outcome for Dealers

On September 13, the IRS released proposed regulations that address the bonus depreciation provisions within the Tax Cuts and Jobs Act. The proposed regulations provide the long-awaited guidance regarding the availability of bonus depreciation to dealers who incur and deduct floor plan interest on their tax returns.

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On September 13, the IRS released proposed regulations that address the bonus depreciation provisions within the Tax Cuts and Jobs Act. The proposed regulations provide the long-awaited guidance regarding the availability of bonus depreciation to dealers who incur and deduct floor plan interest on their tax returns.

On Friday, September 13, the Internal Revenue Service (IRS) released proposed regulations that address the bonus depreciation provisions within the Tax Cuts and Jobs Act (TCJA). The proposed regulations provide the long-awaited guidance regarding the availability of bonus depreciation to dealers who incur and deduct floor plan interest on their tax returns.

Under the TCJA, an entity’s deduction for business interest expense is limited to 30% of its adjusted taxable income. Due to the valiant efforts of the National Automobile Dealers Association (NADA) and state associations, floor plan interest is not subjected to the business interest limitation. However, the trade-off for floor plan interest being exempted from this provision of the TCJA is that bonus depreciation is generally unavailable to dealers. Bonus depreciation allows an entity to immediately deduct up to 100% of the purchase price of eligible assets in the year they are placed in service, rather than depreciate them over the useful lives of the assets, as specified by the Internal Revenue Code.

The TCJA and subsequent guidance regarding bonus depreciation and the interest limitation did not specifically address situations when a dealer’s total business interest expense, even when taking floor plan interest into account, was not in excess of 30% of its adjusted taxable income, and whether or not such a dealer would be able to utilize bonus depreciation. During 2018 and 2019, NADA, with support of accounting firms across the country, recommended to the IRS that dealers in these situations should be permitted to utilize the bonus depreciation provisions of the TCJA. These efforts were successful, and the proposed regulations issued on September 13 specifically state that a dealer with total business interest expense—including floor plan interest—that does not exceed 30% of adjusted taxable income is generally permitted to utilize bonus depreciation. Furthermore, the proposed regulations also specify that this calculation and the determination of whether or not a dealer is eligible to utilize bonus depreciation should be made on annual basis.

Dealers are encouraged to discuss this favorable guidance from the IRS with their tax preparers to determine if they are eligible to utilize bonus depreciation to maximize deductions. At blum, we understand the complexities of the TCJA and its impact on dealers, and are pleased to assist in any way we can.

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