We all know the easiest way to stem inflation is to increase interest rates. Well, the Fed just did that, and it will probably happen again soon.
And while rising interest rates impact more than you think (monthly vehicle loan payments just got more expensive, for instance, unless a customer increases their down payment), my first thought was this might not be so bad, since most of the dealers we work with aren’t charging over MSRP. So, does this just decrease demand to where supply is? Peeling back the onion always brings about more things to think about. For instance:
- Does a higher monthly payment make a customer decline the F&I products?
- Does a customer lengthen the term of the loan, and how does this impact a dealer’s GAP insurance?
- How are we going to pay for the facility upgrades coming our way?
Let’s dive a little deeper into that last point. Did you know that the Tax Cuts and Jobs Act changed the interest expense deduction for 2022? Under current law, interest expense deduction is based on a taxpayer’s adjusted taxable income (ATI), which is basically earnings before interest and taxes (with some other adjustments). A taxpayer can only deduct, in the current year, up to 30% of ATI. The floorplan interest expense is still deductible, but you might lose out on bonus depreciation I mentioned back in February. Click here for more information on potentially ending bonus depreciation expense early.
Loans for facility upgrades, meanwhile, just got more expensive based on the increased interest rate and the potential delay in the deductibility of the expense. Any interest expense that exceeds 30% is nondeductible in the current year but is carried forward indefinitely until the expense is below this threshold. I encourage you to think about solutions like evaluating your rent, etc. Click here for the rent consideration that could potentially be a solution like we discussed back in February to help alleviate this trap of nondeductible interest expense.
The time to act is now. Be proactive to see how this interest expense impacts you. Reach out to Steve Barber or any of our Schneider Downs Auto Advisors for assistance.
