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Why Congress should be concerned about floorplan interest

December 1, 2017
By Peter Welch, NADA President
 
WASHINGTON — Congress is deep into the process of rewriting the tax code for a first time in a generation, and the stakes for our industry and the economy couldn’t be higher.
One issue still under debate is whether to change the tax code to reduce the deductibility of interest on floorplan financing. Such a change could put automobile and truck dealers at serious risk of paying higher taxes even when the dealership does not show a profit.
When this issue first arose in the House of Representatives, members of Congress recognized the important distinction between general business interest and specialized floorplan interest. They passed a bill that preserves full deductibility of floorplan interest for retailers who rely on floorplan financing to make inventory available on Main Streets across the country.
This is a very positive step because, as those of us in the automotive industry know, floorplan financing is the lifeblood of auto retail. It’s what allows big and small dealerships across the country to finance the purchase of expensive showroom inventory from the OEMs. 
With the average selling price of a new vehicle almost $35,000, even relatively small dealerships have inventory financing borrowings of more than several million dollars. As a result, interest expense historically has been one of the top three expenses at a typical dealership. 
What’s more, inventory in showrooms across the country stimulates retail demand for vehicles in thousands of markets nationwide. In this regard, floorplan financing is the foundation of the entire U.S. auto industry — both in terms of the sales it helps facilitate and the jobs it helps provide.
However, the Senate Finance Committee bill would limit the deductibility of business interest, which would create an entirely new tax burden on dealerships by limiting their ability to deduct as a necessary business expense the interest paid on floorplan loans. That would be bad for floorplan financing in good times — including at today’s low interest rates —and terrible in a downturn.
In addition to freezing working capital that dealers need to run their stores, hire additional workers and expand their operations, if franchised dealers cannot continue to fully deduct floorplan interest, there is a risk they could be forced to order and stock fewer cars and trucks, which could put a drag on factory orders. 
The ripple effects that fewer orders would have up the OEM supply chain, on the assembly line and across the economy could be severe.
While the NADA certainly supports the goals of tax reform, we will not support a bill that does not distinguish between floorplan interest and general business interest.
The Senate bill aims to limit interest deductibility for companies that choose debt over equity for tax purposes. But almost all auto, RV, farm-equipment and other dealers are closely held family businesses with no access to public equity markets. For these businesses, floorplan financing isn’t a tax-driven decision; it’s the only practical way they can acquire and maintain high-cost inventory.
The Senate should follow the House approach and ensure that interest on floorplan financing remains 100 percent deductible for small business automobile dealers. Not only is it good tax policy, it’s pro-growth economic policy because franchised new-car dealers are the source of 1.1 million American jobs and 18 percent of retail sales in America.
Every member of both the House and Senate needs to understand that the stakes for everyone aligned with the auto industry are simply too high for Congress to get this wrong, and we will continue working with leaders in Congress to make sure they get it right.
 
 

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