IRS Issues New Regulations on Bonus Depreciation

Access to Bonus Depreciation for More Dealerships

By: Brian Denlinger, CPA

Over the last year auto dealerships have struggled with one aspect of the Tax Cuts and Jobs Act (TCJA). Under the TCJA most businesses were given a huge incentive to increase capital expenditures. This incentive came in the form of 100% bonus depreciation. Bonus depreciation allows businesses to immediately deduct certain capital expenditures with a tax life of less than 20 years. For auto dealerships this could include parking lots, decorative fixtures, car lifts, as well as many other items. Unfortunately, there was a provision in the TCJA that stated that any company with Floor Plan financing indebtedness, was not eligible for this accelerated deduction. This interpretation that any floor plan indebtedness limited bonus depreciation was backed up in regulations issued by the IRS on August 8, 2018.

This obviously hurts auto dealerships.  Many of the expenditures made during construction, or renovation of a dealership would qualify for this accelerated deduction without this provision.  Additionally, this did not seem to be the original intent of the law. In a Congressional Blue Book on the TCJA the authors seemed to imply that the original intent was to have this be less restrictive.

Fortunately, the IRS seems to have acquiesced to this position. On September 13, 2019, the IRS issued new regulations. Under these new regulations the IRS stated that the bonus restrictions do not apply for if the sum of the amounts calculated under section 163(j)(1)(A) and (B) for the trade or business for the taxable year equals or exceeds the business interest, as defined in section 163(j)(5), for the taxable year. This is obviously very heavy in Tax Code Sections, but it means that more dealerships will have access to bonus depreciation. Your Brady Ware representative can walk you through this calculation.

Furthermore, the IRS also confirmed that companies that lease property to companies taking floor plan interest have no restrictions to bonus. This means that there are no restrictions to bonus depreciation for real estate entities holding the building.

While these areas of tax law can be confusing, this is definitely a win for auto dealerships. Please feel free to reach out to your Brady Ware advisor if you have any questions about how this change will affect your dealership.

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