cost

TECHNICAL
UPDATE


SEC. 163 AUTO DEALERSHIP BONUS
DEPRECIATION DECISION TREE

February 08, 2018 by Charles Duncan

There has been confusion regarding the implications of the Tax Cuts and Jobs Act of 2017 (TCJA) Section 13301(a) on I.R.C. Section 163 Interest Expensing. Taxpayers’ interest deduction is generally limited to 30% of the adjusted taxable income plus floor plan financing interest (for dealerships). One result is that many auto dealerships will no longer be eligible for bonus depreciation. This is particularly true of many dealership operating entities. The following decision tree is Source Advisors’ attempt to provide clarification. For further information, please follow this link to the: Tax Cuts & Jobs Act.

In General

  • Effective for tax years beginning after 12.31.2017

Definitions

  • Electing real property trade or business – any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business that makes an election under section 163(j)(7)(B) to avoid the limit on deducting interest.1
  • Floor plan financing interest – interest paid or accrued, (under the taxpayer’s method of accounting), on floor plan financing indebtedness.2
  • Floor plan financing indebtedness – debt that is:3
    • used to finance the acquisition of motor vehicles held for sale or lease, and
    • secured by the financed inventory.
  • Motor vehicles include:4
    • Any self-propelled vehicle designed for transporting persons or property on a public street, highway, or road. This includes trucks, cars, SUVs, recreational vehicles, and motorcycles;
    • a boat; and
    • farm machinery or equipment.
  • Operating entity – A separate entity that is regarded for Federal income tax purposes and that holds the operating assets of the dealership business (other than the underlying real estate).
  • Real estate holding entity – A separate entity that is regarded for Federal income tax purposes and holds only the dealership’s underlying real estate.

Decision Tree

Is the taxpayer an Operating Entity, go to 1; or a Real Estate Holding Entity, go to 2?

1. Operating Entity

  • Over the three years prior to the tax year at issue, were the taxpayer’s average, annual gross receipts $25 million or less at the single employer level?5
    • If so, the taxpayer may claim the full interest deduction without limitations and may be eligible for bonus depreciation.6
    • If not, please move on to (1)(b).
  • Under the taxpayer’s method of accounting, did the taxpayer pay or accrue floor plan financing interest during the taxable year?7
    • If so, did the taxpayer deduct interest subject to the limitations of under the provisions of section 163(j)(1)?
      1. If so, the taxpayer’s assets are ineligible for bonus depreciation. 8
      2. If not, the taxpayer’s assets may be eligible for bonus depreciation.
    • If not, the taxpayer’s assets may be eligible for bonus depreciation.

2. Real Estate Holding Entity

  • Over the three years prior to the tax year at issue, were the taxpayer’s average, annual gross receipts $25 million or less at the single employer level?
    • If so, the taxpayer may claim the full interest deduction without limitations and may be eligible for bonus depreciation.9
    • If not, please move on to (2)(b).
  • Does the taxpayer’s business activity consist of, “real property development,redevelopment, construction, reconstruction, acquisition, conversion, rental, operation,management, leasing, or brokerage trade or business”?10
    • If so, will the taxpayer make, (or did the taxpayer, in a prior year, previously make), the election under section 163(j)(7)(B) to be “an electing real property trade or business”?
      1. If so, the taxpayer must use the Alternative Depreciation System for all its assets and is ineligible for bonus depreciation 11
      2. If not, the taxpayer may use the General Depreciation System for its assets and may be eligible for bonus depreciation.
    • . If not, the taxpayer may be eligible to use the General Depreciation System for its assets and may be eligible for bonus depreciation.

 § 163 Interest Expensing & Bonus Depreciation for Auto Dealerships

Entity Type Fact Pattern Full Interest Deduction GDS /ADS > Bonus
Operating Entity Small Taxpayer w/ < $25M Avg.
Annual Gross Receipts 12
Yes GDS Yes13
Accrued14 & deducted floor plan
interest under 163(j)(1)
No GDS Yes15
Real Estate Holding Entity Small Taxpayer w/ < $25M Avg.
Annual Gross Receipts
N/A GDS Yes16
Made qualifying real property trade or business election17 N/A ADS18 No19

  1. I.R.C. § 163(j)(7)(B) (cross-referencing I.R.C. § 469(c)(7)(C)).
  2. I.R.C. § 163(j)(9).
  3. I.R.C. § 163(j)(9)(B).
  4. I.R.C. § 163(j)(9)(C).
  5. I.R.C. §448(c).
  6. I.R.C. § 163(j)(a)(3).
  7. I.R.C. § 163(j)(9)(A).
  8. I.R.C. § 168(k)(9)(B).
  9. I.R.C. § 163(j)(a)(3).
  10. I.R.C. § 163(j)(7)(B).
  11. I.R.C. § 168(g)(8).
  12. I.R.C. § 448(c).
  13. I.R.C. § 163(j)(a)(3).
  14. I.R.C. § 163(j)(9)(A).
  15. I.R.C. § 168(k)(9)(B).
  16. I.R.C. § 163(j)(a)(3).
  17. I.R.C. § 163(j)(7)(B).
  18. Only applies to residential rental, non-residential real, and QIP. 1245 and 1250 land improvements still receive bonus and GDS
  19. I.R.C. § 168(g)(8).