Breaks, credits and a lower rate are among the pluses
The legislation commonly known as the Tax Cuts and Jobs Act of 2017 (TCJA) creates a new playing field on which dealerships can execute future tax strategies. Significantly, a flat corporate rate of 21% replaces the graduated corporate tax of 15% to 35%, beginning with the 2018 tax year. Further, the new law repeals the 20% corporate alternative minimum tax which affected high-income corporate taxpayers. And there’s more to smile about.
Attention: Pass-through dealerships
The TCJA creates a 20% qualified business income deduction for owners of pass-through entities, such as S corporations, partnerships and sole proprietors, through 2025.
Under previous law, net taxable income from pass-through entities simply flowed through to owners. It was then taxed at the owners’ standard rates. In other words, no special treatment applied to pass-through income recognized by business owners.
But, for tax years beginning in 2018, the TCJA establishes a new deduction based on a noncorporate owner’s qualified business income (QBI). This new tax break is available to individuals, estates and trusts that own interests in pass-through business entities. The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels.
Hefty changes for bonus depreciation
Under the new tax law, depreciation-related tax breaks for auto dealerships are now more attractive. Under pre-TCJA law, for qualified new assets that your dealership placed in service in 2017, you could claim a 50% first-year bonus depreciation deduction. This tax break was available for the cost of new assets: computer systems, purchased software, vehicles, machinery, equipment, office furniture and so forth. Also, bonus depreciation could be claimed for qualified improvement property under certain parameters.
Now enter the TCJA and see how bonus depreciation significantly improves. For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage is increased to 100%. In addition, the 100% deduction is allowed for eligible new and used property.
Bonus depreciation is scheduled to be reduced in later years, eventually down to 20% in 2026. Ask your tax advisor for details.
Section 179: A trusted standby
When 100% first-year bonus depreciation isn’t available, the Section 179 tax break can provide similar benefits. It allows eligible taxpayers to deduct the entire cost of qualifying new or used depreciable property and most software in Year 1, subject to various limitations.
Under pre-TCJA law, for tax year 2017, the maximum Sec. 179 depreciation deduction was $510,000. This maximum was phased out dollar for dollar to the extent the cost of eligible property placed in service during the tax year exceeded the phaseout threshold of $2.03 million.
Qualified real property improvement costs also were eligible for the Sec. 179 deduction. Among others, this real estate break applied to certain improvements to interiors of retail and leased nonresidential buildings (such as dealerships, in both cases).
The TCJA permanently enhances the Sec. 179 deduction. Under the new law, for qualifying property placed in service in tax years beginning in 2018, the maximum Sec. 179 deduction is increased to $1 million. And the phaseout threshold amount is bumped up to $2.5 million.
For later tax years, these amounts will be indexed for inflation. To determine eligibility for these higher limits, property is treated as acquired on the date on which a written, binding contract for the acquisition is signed.
The definition of qualified real property eligible for the Sec. 179 deduction is also expanded to include the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.
Charting a new course
Formulating new tax strategies is serious business that depends on the particulars of your situation. Plan to sit down with your tax advisor to chart your dealership’s course for the years ahead.
More TCJA highlights for business owners
Here are some other significant changes resulting from the Tax Cuts and Jobs Act of 2017:
Limits and disallowances. There are new limits on net operating loss deductions. There also is a new disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income. (Exceptions apply.) And the law created a new rule that limits like-kind exchanges to real property that’s not held primarily for sale.
Employee benefits. The law created a new tax credit for employer-paid family and medical leave — through 2019. There also are new limits on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation. Additionally, look for new caps on excessive employee compensation.
Your tax advisor can help explain how these and other changes may affect your dealership.