Treasury has released proposed regulations addressing the new 20 percent business deduction as well as bonus depreciation under the tax reform legislation signed into law December 2017. Treasury is currently requesting comments on the regulations before they become final. Accordingly, there is the potential that the provisions discussed below might change. These complex regulations overall are favorable for dealers and we encourage you to discuss the potential impact these regulations might have on your individual tax situation with your tax advisor.
Section 199A Proposed Regulations: New 20% business income deduction available for individuals, trusts, and estates:
- The new 20% deduction is available for individuals, trusts and estates on qualified business income. This deduction becomes subject to limitations once you reach certain income levels (taxable income greater than 157,500 for single taxpayers and 315,000 for married taxpayers). If your taxable income exceeds the threshold levels, then the potential 20% deduction is subject to limitation based on 50% of W-2 wages or a combination of 25% of W-2 wages plus 2.5% of the unadjusted basis (UBIA) in qualified assets of each trade or business.
- Rental real estate entities that have common ownership with the dealership generally will be considered as a qualified trade or business for purposes of the deduction.
- Taxpayers can aggregate multiple qualified trades or businesses with at least 50% common ownership into a single group if the trades or businesses meet certain criteria. Taxpayers can choose which trades or businesses to aggregate at the individual level. Aggregation is not mandatory, but once an election to aggregate is made, the grouping is binding.
- Wages paid through an employee leasing company, common paymaster or a professional employer organization (PEO) qualify as W-2 wages for purposes of the W-2 wage limitations under the new regulation.
- Specified service trades or businesses do not qualify for the 20% deduction after an individual’s taxable income exceeds the phase-out thresholds. Questions remain as to whether a management company related to a dealership might be eligible for the 20% deduction or if it would fall under the definition of a specified service trade or business.
- A netting rule requires an individual taxpayer to net qualified business losses against income from other qualified trades or businesses before applying the W-2 wage and UBIA limitations. After netting, any W-2 wages and UBIA amounts from the trade or business with negative income are lost and not taken into consideration when applying the limitations for the businesses with positive income.
- If netting results in an overall qualified business loss, there is no current year 20% deduction and the net loss carries forward to the following year. In the following year, the carried forward loss will be netted against qualified business income from other trades or businesses.
- Section 1231 income characterized as capital gain is ineligible for the 20% deduction.
- There are increased reporting requirements at both the individual taxpayer level and the business entity level. Individual taxpayers must annually disclose trades or businesses aggregated for purposes of computing the 20% deduction. Business entities are now required to provide each
partner/shareholder with the qualified business income, qualifying W-2 wages and UBIA for each separate trade or business carried on by the entity.
- Several anti-abuse rules were created to negate certain restructuring, employee reclassification, related party transactions, and other strategies aimed at creating a 20% deduction for businesses not otherwise eligible.
Bonus Depreciation Proposed Regulations:
- 100% bonus depreciation is available for assets acquired and placed in service after September 27, 2017. Starting in 2023, the bonus depreciation percentage decreases by 20% annually until 2027 when it is completed phased out. (2023 – 80%, 2024 – 60%, 2025 – 40%, 2026 – 20%, 2027 and on – 0%)
- Questions remain regarding the floorplan interest exemption for the new 30% interest limitation rules and the corresponding restriction on a dealership’s ability to claim bonus depreciation.
- Used property now qualifies for bonus depreciation, subject to some limitations with regards to prior use of property and related party transactions. The proposed regulations clarify what constitutes “prior use” that would make a used asset ineligible for bonus depreciation.
- Taxpayers with a basis step-up adjustment resulting from the purchase of a partnership interest from an unrelated party will be able to take bonus depreciation on their stepped-up basis attributable to partnership property that would otherwise qualify for bonus depreciation. It is unclear whether the floorplan financing limitations on bonus depreciation would prevent bonus depreciation on a taxpayer’s stepped up basis in a dealer partnership.
- The proposed regulations did not address a drafting error in the tax reform law with regards to qualified improvement property, which if not corrected, would not be eligible for bonus depreciation and would have a 39 year depreciation life. This error, if corrected, would shorten the depreciation period to 15 years, making qualified improvement property eligible for bonus depreciation.
- The luxury auto limitations still apply to automobiles used by the business, but with higher limits.
For more information, please contact:
The information is not – and is not intended to be – audit, tax, accounting, advisory, risk, performance, consulting, business, financial, investment, legal, or other professional advice. The information is general in nature, based on existing authorities, and is subject to change. The information is not a substitute for professional advice or services, and you should consult a qualified professional adviser before taking any action based on the information. Crowe is not responsible for any loss incurred by any person who relies on the information.
This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction.