Generally Good News for Dealers in Bonus Depreciation Regulations
September 13, 2019
On September 13, the Treasury Department and the IRS issued proposed regulations to provide guidance for auto dealers on the interplay between the business interest limitation and bonus depreciation.
The Tax Cuts and Jobs Act (TCJA) provided a new limitation for deductible business interest expense equal to 30% of adjusted taxable income, plus business interest income, plus floorplan interest expense, with any excess interest carried to future years. This section of the law provides dealers with a full deduction for floorplan interest (the special exception) since it is an addition to the limitation computation. Additionally, Congress denied the use of bonus depreciation for dealers relying on this special exception provision. The TCJA also increased the bonus depreciation rate to 100% for eligible property placed into service after December 31, 2017.
The 2019 proposed regulations clarify that dealers can claim bonus depreciation if all business interest expense, including floorplan interest, does not exceed the general 30% business interest expense limitation. Furthermore, the 2019 proposed regulations provide that eligibility for bonus is determined annually. Therefore, a dealer that exceeds the 30% interest limitation and uses the special exception to deduct all of its floorplan interest is prohibited from claiming bonus depreciation only for that one year.
The 2019 proposed regulations specifically state that claiming floorplan interest is not optional. This means that, if all business interest expense — including floorplan — exceeds the 30% limitation, the dealer will not be eligible to claim bonus depreciation during that year. This is not consistent with the earlier example in the Joint Committee on Taxation Blue Book, which indicated that dealers would have a choice to limit their interest expense deduction, carry forward to a future year, and thereby claim bonus depreciation. Treasury and the IRS are aware of this issue and are considering it during this current period of commentary and hearings on the proposed regulations.
Finally, the 2019 proposed regulations provide that a lessor leasing property to a dealership with floorplan financing is not prohibited from claiming bonus depreciation. This alleviated concern that related real estate entities that lease dealership facilities might be prohibited from claiming bonus depreciation.