Section 163(j) Business Interest Expense Limitation
The 2017 Tax Cuts and Jobs Act instituted many changes to the existing tax code. One change that directly affected dealerships was the §163(j) business interest expense limitation.
The §163(j) limitation applies to all business interest payments for taxpayers with gross receipts exceeding $25 million. For years after 2020, deductions for business interest cannot exceed the sum of 1) business interest income, 2) floor financing interest, and 3) 30 percent of adjusted taxable income (ATI). Any disallowed interest is carried forward indefinitely to the next succeeding taxable year.
The ATI calculation is defined as taxable income computed without regard to 1) business interest, 2) net operating loss deductions, 3) §199A deductions, 4) depreciation and amortization deductions for years before 2022, and 5) any item of income, gain, deduction, or loss that is not allocable to a trade or business.
For partnerships, excess business interest is not carried forward at the partnership level but is allocated to the partners and carried forward to succeeding years by each individual partner. For S corporations, excess business interest remains as an S corporation attribute and is carried forward to succeeding years.
Application to Dealerships
As mentioned above, the deduction for business interest cannot exceed the sum of 1) business interest income, 2) floor financing interest, and 3) 30 percent of ATI. However, there is an exception for dealerships in the calculation as it relates to the floor plan financing. That exception allows the dealership to subject only non-floor plan interest to the limitation calculation. However, there is some give and take with this exception. To use this exception, bonus depreciation cannot be used. If the floor plan exception provides no benefit, the taxpayer can make the limitation calculation without including the floor plan exception and take bonus depreciation. However, once the floor plan exception has been used, the option to use bonus depreciation is eliminated for that year.
Related Sunsetting Provisions
After 2021, the depreciation and amortization addback to the ATI calculation will be eliminated. The elimination of the addback will negatively affect dealerships with large depreciation expense deductions by further limiting the dealerships’ non-floor plan interest deduction.
In addition, the immediate expensing of qualified property via bonus depreciation also is scheduled to sunset:
- 100 percent through 2022
- 80 percent through 2023
- 69 percent through 2024
- 40 percent through 2025
- 20 percent through 2026
- None for 2027 and beyond
Considerations for 2021
Dealerships contemplating large qualified improvement property, rental fleet, and/or service equipment additions after 2021 could be negatively affected with the sunsetting of the depreciation and amortization ATI calculation addback. Dealerships should evaluate their planned capital expenditures over the next several years and consider accelerating capital expenditures to the 2021 tax year to mitigate the limitation of business interest expense in the future.
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