The following identifies benefits and pitfalls that affect auto dealerships regarding the federal government’s Coronavirus Aid, Relief and Economic Security Act.
The act impacts dealerships in four primary areas: interest deductibility, Qualified Improvement Property (QIP), net operating losses and payroll taxes.
The Tax Cuts and Jobs Act passed at the end of 2017 limited the deductibility of business interest to 30% of an entity’s adjusted taxable income, except for floor plan financing interest, which remained 100% deductible.
Although there is one important exception, the CARES Act allows businesses to deduct up to 50% of their adjusted taxable income (taxable income adding back interest expense plus depreciation) for 2019 and 2020.
This provision is quite impactful since those dealerships that are able to pass this interest limitation test, without using the floorplan financing exemption, are able to fully use bonus depreciation. (Wards Industry Voices contributor Ed Blum, left)
Those that are not “profitable enough” to pass this test will need to compute depreciation using the normal depreciation methods, including Section 179 expensing.
The important exception is for those dealerships that operate as partnerships. Although the expanded 50% factor is available for 2020, it is not available for 2019; the prior 30% factor applies. This may restrict the ability for those that file partnership returns, to qualify for bonus depreciation for 2019, since they will need to meet the lower 30% threshold.
As far as the aforementioned “QIP fix,” the TCJA intended for businesses to take bonus-depreciation for improvements made to the interior portion of nonresidential property. But due to a drafting error, the depreciation lifespan was set at 39 years instead of the intended 15 years.
The CARES Act fixes this error retroactive to 2018 and changes the QIP depreciable life to 15 years. This change now allows those QIP outlays to qualify for bonus deprecation for 2018. Businesses with significant outlays of QIP, such as those which incurred image upgrades, should consider amending their 2018 returns to claim the newly available bonus-depreciation.
As an alternative, one can also “catch-up” the increased bonus-depreciation by filing a Form 3115 “Application for Change in Accounting Method,” for 2019 and report such additional deductions from 2018 in 2019.
Note: You will still need to pass the interest expense limitation mentioned previously, in order to be able to use bonus depreciation so there is a strong interplay between these provisions.
Net Operating Losses (NOL) and Payroll Implications
The TCJA generally limited the amount of losses that non-corporate taxpayers could claim to $500,000. The CARES Act suspends this limitation retroactively to 2018, thus allowing individuals affected by this provision to amend their 2018 tax return.
The Net Operating Loss carryback provisions were previously eliminated by the TCJA in 2017. The new provision would allow carrybacks for up to five years for net operating losses (NOLs) recorded by C Corporations and individuals in tax years 2018, 2019 and 2020.
This provision may provide corporations and individuals that incurred losses in any of these three years with the potential for substantial refunds. If carried back to 2017 and before, the related refund would be based on the higher pre-TCJA tax rates – providing an additional tax-rate benefit. Being able to report these excess business losses along with the new NOL carryback provisions will provide for much-needed cash flow.
The CARES Act has also provided for a delay of the employer’s share of payroll taxes, however, there has been a great deal of misconception regarding this provision and its interplay with the Paycheck Protection Program (PPP) Small Business Admin. loans.(Wards Industry Voices contributor Mark A. Fenaughty, left)
The CARES Act provided that “the payment for applicable employment taxes (i.e., 6.2% Employer Social Security match) for the payroll tax deferral period shall be deferred.” The payroll tax deferral period is the period beginning Mar. 27 and ending Dec. 31.
According to FAQ issued by the IRS, item No.4 indicates that employers who have received a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer's portion of the social security tax that otherwise would be required to be made beginning on March 27 through the date the lender issues a decision to forgive the loan, without incurring failure to deposit or failure to pay penalties.
The repayment of the employer portion of the Social Security tax deferred would be due 50% on Dec. 31, 2021 and 50% on Dec. 31 2022. Accordingly, this deferral is the equivalent of an interest-free loan and should be recorded and accounted for as a liability.
The Bottom Line
As you can see, several provisions of the CARES Act provide certain opportunities to decrease tax liabilities for dealerships, however, it also makes taking advantage of them somewhat complex. Dealers should check with their accounting professional to determine their particular best course of action.
Certified public accountants Ed Blum and Mark A. Fenaughty are principals in the MBAF’s tax and accounting department