The Tax Cuts and Jobs Act (Act) made significant changes to the Internal Revenue Code. One such change significantly restricts business interest deductions, which were fairly broad under the old law. However, significant carve outs remain in place for the complete deduction of floor plan financing interest. Revised Code § 163(j) states that the deduction for business interest is limited to the sum of:
- business interest income for the taxable year;
- 30 percent of the taxpayer’s adjusted taxable income for the taxable year; and
- the taxpayer’s floor plan financing interest for the taxable year.
Additionally, any disallowed business interest deduction can be carried forward indefinitely, although this carry forward may be limited for partnerships.
Floor plan financing allows a business to receive a line of credit to purchase inventory and is frequently used by automotive dealers. The inclusion of floor plan interest financing in the deduction allows dealers to continue to deduct the interest paid on secured financing that many dealerships require to remain in business, even though the interest may exceed, or greatly exceed, 30 percent of the taxpayer’s annual taxable income. This carve-out was not in the original Senate version of the bill, however, was added as an amendment by Sen. Rand Paul (R-Ky.) and included in the Senate version passed on December 2, 2017.
There is a concession, however, for dealers wishing to utilize the full floor plan financing interest deduction. Code § 168(k) allows for 100 percent depreciation of qualified property that is placed into service through December 31, 2022, but limits “qualified property” and does not include “any property used in a trade or business that has had floor plan financing indebtedness (as defined in paragraph (9) of section 163(j))….” As such, dealers that deduct their floor plan financing interest under Code § 163(j) are subject to the old capitalization and depreciation rules. Given this trade-off, automotive dealers may choose to forgo the interest deduction in certain situations in order to utilize the 100% depreciation benefit. It should be noted that Code § 168(k) includes a depreciation benefit phase out, such that property placed in service after January 1, 2023 are subject to 80 percent deduction, which is further reduced to 60 percent, then 40 percent, then 20 percent each year following 2023.
The new rules under the Act are complex and subject to change or technical correction (possibly with retroactive effect). Accordingly, it is important that you consult with knowledgeable professionals who can advise on the proper application of these rules to your business.