Consider These Tax-Related Moves Before Year End
This time of the year presents an opportunity to implement tax-saving strategies. But act fast, because the window for making many savvy moves for 2019 closes on December 31.
Bonus depreciation and floor plan interest deductions
A lesser-known provision of the Tax Cuts and Jobs Act is a limitation on the ability of dealerships to deduct 100% bonus depreciation, if they deduct the interest paid on floor plan financing. Section 163(j) limits a dealership’s annual interest expense deductions to business interest income, plus 30% of adjusted taxable income, plus floor plan interest.
In effect, this means that, if your dealership deducts floor plan interest, you can no longer also take a deduction for 100% bonus depreciation. But you can do one of the following if your dealership’s annual interest expense deduction exceeds the limit:
• Waive the 100% bonus depreciation deduction and instead deduct floor plan interest in full, while deducting other business interest up to the sum of business interest income, plus 30% of adjusted taxable income; or
• Claim the 100% bonus depreciation deduction while limiting your deduction for all business interest (including floor plan interest) to the sum of business interest income, plus 30% of adjusted taxable income.
Note: If you elect not to claim 100% bonus depreciation, the election is permanent based on proposed regulations. Final regulations aren’t anticipated until late 2019. Speak with your tax advisor about the best strategy for your dealership. Claiming Section 179 depreciation might be advisable.
As year end approaches, look for opportunities to defer business income from this year into 2020, while accelerating into this year business expenses that you’ll pay in 2020. This will defer the payment of income tax for 12 months, thus potentially reducing your 2019 tax bill and improving your cash flow.
Expenses that could be deducted without being paid would be items such as interest, commissions, salaries, property taxes, insurance and advertising. If you deduct these expenses, they need to be paid within 2½ months after the end of the dealership’s tax year to qualify as a deduction. Also, you might be able to take a deduction for prepaid expenses (such as insurance) if the expense is recurring and will be incurred within the next year.
Depreciated used vehicles may also represent a tax-saving opportunity. If such vehicles are worth less now than when you paid for them, write them down now to their current market value — and deduct the difference on your 2019 return. Use a reputable industry guide, such as a NADA guide or Kelley Blue Book, to gauge current market value. Be aware that you can’t implement this strategy if your dealership uses last-in, first-out (LIFO) accounting for used vehicles.
You also can write off any discrepancies between a physical parts inventory and your book inventory if you perform a physical inventory count at year end. In addition, you can write off accounts receivable balances (from both retail and wholesale customers) as bad debt expenses if you deem these uncollectible at year end.
A cost segregation study
If you haven’t had a cost segregation study performed on your dealership facility, this might be a good time to do so. By separating your facility’s individual components into different depreciation categories, you may benefit from the shorter depreciable lives of some of these components.
For example, dealership facilities are classified as nonresidential income property that’s depreciated over 39 years on a straight-line basis. But some components can be classified as land improvements or tangible personal property — depreciable over 15, 5 or 7 years, respectively. Or they may qualify for Section 179 or bonus depreciation.
Reallocating some costs related to the construction, acquisition or remodeling of your facility from 39-year nonresidential income property to land improvements or tangible personal property will allow you to depreciate these components faster. The result: a bigger tax deduction and lower 2019 tax bill. Carpeting, parking lot repaving, signage, and plumbing and electrical work are some of the components that can often be reallocated and depreciated faster.
Consider your dealership’s entity structure
Since passage of the Tax Cuts and Jobs Act in 2017, some dealerships have examined the potential benefits of switching from S to C corporation status. The main reason is that the new 21% flat corporate tax rate paid by C corporations is lower than the top individual tax rate of 37% paid by the owners of many S corporations. But if the dealership is eligible to take the 20% deduction on the S corporation, the top effective tax rate would be 29.6%.
There are many factors other than tax rates to consider when weighing this decision. For example, C corporations are still subject to double taxation when the dealership’s assets are sold, which can neutralize the benefit of the lower flat corporate rate. Speak with your tax advisor for more guidance on switching your corporation’s status.
Now might be a good time to meet with your tax advisor to discuss these and other year-end tax moves. Don’t delay — implementing strategies can’t usually be done overnight.