A trade organization for auto dealerships has asked the IRS to allow certain franchises to receive the benefit of tax reform’s expanded bonus depreciation deduction.
The Tax Cuts and Jobs Act (TCJA) increased the percentage of the additional first year depreciation deduction from 50% to 100% for property acquired after September 27, 2017, amended Code Sec. 168(k). Also, the TCJA expanded the types of property eligible for additional first year depreciation.
Auto dealers are asking for 100% bonus depreciation because the TCJA eliminated the like-kind exchange tax benefit for all but real property. Moreover, certain dealerships that deduct floor plan interest under Code Sec. 163(j)(1)(c) are not eligible for the bonus depreciation deduction.
These changes result in a “tax penalty” for businesses trading and upgrading vehicles, according to Joseph Magyar, CPA and partner with Crowe, LLP. Magyar testified on behalf of the National Automobile Dealers Association (NADA) at IRS Headquarters in Washington, D.C. last week at a public hearing. The hearing was held on bonus depreciation proposed regulations, REG-104397-18.
The elimination of deferral from the like-kind exchange will be offset by the allowance for bonus depreciation for most taxpayers, according to Magyar. “However, taxpayers that deduct floor plan interest under Section 163(j)(1)(c) are denied the bonus depreciation deduction while the gain and disposable of the relinquished property is taxed,” he said.
Carve-Out Exception for Dealerships
Magyar urged the IRS to include in the proposed regulations a provision that allows dealerships to take the bonus depreciation deduction on purchases of replacement property for their fleets of rental or leased vehicles. Maryar suggested a “carve-out” exception that would let dealerships qualify for bonus depreciation if they replace at least 10 vehicles in rental fleets in transactions that would have been like-kind exchanges.
“Dealerships that have fleet vehicle leasing activities, and also deduct floor plan interest under Section 163(j)(1)(c) and are denied the bonus depreciation related to their leasing activities, now face a significant tax increase, especially in tax years 2018 through 2020 as they trade in their vehicles and update their leasing fleets,” Magyar told the IRS. Treating the sales and leasing of vehicles as separate taxable events could minimize the tax consequence of losing like-kind exchanges, according to Magyar.
10 Vehicle Carve-Out Not a Magic Number
Kathleen Reed, branch chief, Branch 7 Office of the Associate Chief Counsel (Income Tax & Accounting) inquired as to why Magyar suggested precisely 10 vehicles. “About your comment on the Like-Kind Exchange. Why, at least 10? What’s the significance of 10 vehicles?” Reed asked.
Magyar responded to Reed that 10 is “not a magic number.” Rather, it is a “threshold to represent that this isn’t just one or two, but it’s really significant enough that it represents a separate activity [trade or business] or more than just an ancillary to the business otherwise.”
By Jessica Jeane, J.D.