Automotive dealers have enjoyed the immediate expense of their capital expenditures over the years. The rules currently allow these expenditures with a useful life of 20 years or less to be expensed immediately instead of over a useful life.
We have grown to love this bonus depreciation for the past 20 years, since we can use it as a way to manage our tax liabilities and improve cash flow. Under the current law, bonus depreciation will start to be reduced from 100% expense in 2022 to 80% in 2023 to 60% in 2024 to 40% in 2025 to 20% in 2026.
However, we need to be aware. Interest expense limitations also exist under the current law. For 2021, interest expense that exceeds 30% of your adjusted taxable income (which is like EBITA, which is a term we know) is nondeductible for the current year and is carried forward indefinitely. There are special rules for floorplan interest. If a dealer’s floorplan interest exceeds this 30%, the interest is deductible, but the tax entity is ineligible for bonus depreciation.
Further, starting in 2022, the adjusted taxable income calculation does not allow the add-back of depreciation and amortization. Therefore, it will be more common for the floorplan interest to exceed the 30% adjusted taxable income calculation, starting in 2022. Here are some examples:
For tax years 2021 and prior:
| Taxable Income | $100,000 |
| Interest Expense (excludes floorplan) | $5,000 |
| Floorplan Interest Expense | $40,000 |
| Depreciation and Amortization | $50,000 |
| Adjusted Taxable Income | $155,000 |
| 30% Limitation | $46,500 |
Results: No limitation on interest expense based on $45,000 of total interest and eligible for bonus depreciation.
For tax years 2022 and beyond:
| Taxable Income | $100,000 |
| Interest Expense (excludes floorplan) | $5,000 |
| Floorplan Interest Expense | $40,000 |
| Depreciation and Amortization | $50,000 |
| Adjusted Taxable Income | $105,000 |
| 30% Limitation | $31,500 |
Results: No limitation on interest expense based on $5,000 of non-floorplan interest, but since floorplan interest exceeds the limitation, the dealer is ineligible for bonus depreciation.
As you can see, the limitation decreases significantly based on no depreciation addback in the adjusted taxable income calculation that starts in 2022. The good news is that recent profits have been high and floorplan interest expense has been low, which should help with the adjusted taxable income calculation. Also, the Section 179 deduction can still come into play to expense some capital expenditures.
We advise you to monitor this change starting in 2022 to manage your capital expenditures and a potential increase in tax liability. Please contact Steve Barber or any of your Schneider Downs Auto Advisors for any questions regarding the limitation.
