Chicago Automobile Trade Association

2 tax bills in Congress treat dealers differently on floor plan interest

November 17, 2017
As the legislative sausage-making continues in the nation’s capital, attempts to enact the first comprehensive reform of the tax code since 1986 are taking different paths in the Senate and the House of Representatives.
Full deductibility of business interest, which includes floor plan interest, is preserved under the tax plan passed by the House on Nov. 16, a reversal from when the bill was introduced. But in the Senate Finance Committee, the deductibility would be limited to 30 percent of adjustable taxable income.
Some tax analysts said that imposing a rigid formula in the tax code is risky, especially when market rates are increasing from historic lows. They also said that reducing the floor plan deductibility would unfairly put at serious risk dealerships with high-cost inventories. 
Advocates for dealerships contend that floor plan interest should remain fully deductible for the following reasons: 
• Automobile dealers contribute 18 percent of total retail sales nationally, so limiting the deductibility of floor plan interest could reduce growth and threaten jobs on Main Street. Also, interest rates are increasing, and floor plan loan rates are not fixed. Reducing interest deductibility of interest would exacerbate the negative economic consequences of any future downturn in the auto industry.
• Almost 90 percent of the nation’s franchised dealerships are closely held companies. For these businesses, floor plan financing is a necessity, not a choice. Without affordable floor plan loans, dealerships would not be able to finance sufficient inventory, because the average sales price of a new vehicle is more than $34,000.
• The limitation on interest deductibility is apparently designed for companies that choose debt over equity for tax purposes, which is not the case for franchised automobile dealerships. Most franchised automobile dealerships are family-owned small businesses and do not have access to public equity markets.
The House tax reform bill (House Resolution 1) includes a provision to preserve full floor plan deductibility for businesses — including car and truck dealers, RV dealers, motorcycle dealers, boat dealers and retailers or farm and manufacturing vehicles and equipment — that rely on floor plan financing to purchase expensive inventory for their showrooms.  
Senators are being urged to include such a provision in its tax legislation, which could be voted on soon.
 
Senate Republicans took a big gamble Nov. 14 with their tax bill, adding a partial Affordable Care Act repeal provision to free up more money for tax cuts. But that move also injected significant new political hurdles.
 
Repealing the mandate that all Americans have health coverage would save the government an estimated $338 billion over 10 years, but only because millions of people would stop buying insurance and therefore would no longer receive government subsidies.
 
Other major provisions affecting dealers in H.R. 1, as approved by the House:
 
Corporate rate: Reduced from 35 percent to 20 percent
 
Expensing: Section 179 small business expensing limits increased from $500,000 to $5 million per year and the phase-out from $2 million to $20 million
 
Advertising deductibility: No change
 
LIFO: No change
 
Alternative Minimum Tax: Repealed
 
Estate Tax: Raises the exemption for estates worth more than $5.49 million for individuals and $10.98 million for married couples to $11 million and $22 million, respectively. The tax is repealed after 2023.
 
Standard deduction: Raises the standard deduction from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples
 
Individual tax rates: 12 percent up to $90,000, 25 percent up to $260,000, 35 percent up to $1 million, 39.6 percent above $1 million
 
Pass-throughs: The bill would reduce the top pass-through rate to 25 percent, with important limits. Business owners could choose one of two options: (1) The "70/30 proposal," where 70 percent of income is considered wage income — which would be taxed at the individual tax rate — and 30 percent as business income, which would be taxable at the 25 percent rate; or (2) the business owner will set the ratio of wage income to business income based on the level of their capital investment. To provide further relief, the Brady amendment establishes a 9 percent tax rate for the first $75,000 in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income through a pass-through business. The 9 percent rate is phased out at $225,000.
 
Business interest deductibility: As a general rule, interest deductibility is disallowed for expenses in excess of 30 percent of the business’s taxable income. However, floor plan interest remains 100 percent deductible. (Note: Entities that floor plan will not be able to claim increased expensing; however, Section 179, with the increased limits, will remain available.) Businesses with average gross receipts of $25 million or less will retain 100 percent of all interest expense.
Like-kind exchange: Limited only to real property
 
State and local taxes: Repeals the state and local tax deduction except for property taxes (up to $10,000
 
Electric vehicle tax credit: Repeals the $7,500 electric vehicle tax credit beginning Jan. 1, 2018.
 
 

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