• Special Treatment for Motor Vehicle Inventory Interest Under New Federal Tax Law
  • February 19, 2018 | Authors: Thomas M. Byrne; Jason S. McCarter
  • Law Firm: Eversheds Sutherland (US) LLP - Atlanta Office
  • The new 2017 tax law restricts the amount of interest most corporations can deduct on their returns, but includes a significant exception for automobile dealers. Under the revised version of section 163(j) of the Internal Revenue Code, a taxpayer may only deduct business interest for a taxable year in an amount that does not exceed the sum of:

    1. The business interest income of such taxpayer for such taxable year, plus
    2. Thirty percent of the adjusted taxable income of such taxpayer for such taxable year, plus
    3. The floor plan financing interest of the taxpayer.

    By including the floor plan financing interest of the dealer in the calculation of the total deductible interest, these rules allow a significant exception from the restrictions on the deductibility of business interest for this type of financing. Furthermore, floor plan financing interest is defined fairly broadly. It includes any interest paid or accrued on floor plan financing, which is indebtedness used to finance the acquisition of motor vehicles held for sale to retail customers and secured by the acquired inventory. A motor vehicle is defined as an automobile, truck, RV, motorcycle, boat, farm machinery or equipment, or construction machinery or equipment.

    Congress apparently included floor plan financing interest to allow dealers to continue to deduct the interest they pay on the secured financing they rely upon for their businesses, even though that interest may greatly exceed 30% of the taxpayer’s annual taxable income (particularly if the taxpayer has a less profitable year).

    It should be noted, however, that Congress imposed a “tradeoff” for motor vehicle dealers that avail themselves of the exception for their floor plan financing interest. Section 168(k) of the new law generally allows 100% expensing for property placed in service through the end of 2022. If this rule applies, a business entity that places assets into service through the end of 2022 is not required to capitalize and depreciate the property over its useful life; rather it may immediately deduct the value of the property on that year’s return. The statute provides, however, that any dealer that has included floor plan financing interest in its section 163(j) calculation is not eligible for immediate expensing on the property it puts into service. Rather, the dealer is subject to the old capitalization and depreciation rules. Accordingly, motor vehicle dealers may elect to forgo the use of this exception in certain situations because the benefits of immediate expensing outweigh the potential loss of the deduction for floor plan financing interest.