IRS Proposes Guidance on Bonus Depreciation and Floor Plan Financing

Proposed regulations released September 13, 2019 allow dealers to take bonus depreciation if they do not utilize the floor plan carve out to deduct its business interest expense.

As a way of background, the Tax Cuts and Jobs Act of 2017 (“TCJA”) limits the amount of business interest that can be deducted to the sum of (1) the taxpayer’s business interest income for the year, (2) 30% of the taxpayer’s adjusted gross income for the year, and (3) the amount of floor plan financing interest for the year (floor plan carve out). Floor plan interest remains fully deductible, but interest expense on debt other than floor plan financing debt may be limited due to (1) and (2).

The TCJA also made changes to the bonus depreciation rules including increasing the percentage from 50% to 100% and excluding certain properties from bonus depreciation eligibility. One such property was any property used in a trade or business that has floor plan financing interest, if the floor plan interest was taken into account to determine the interest expense deduction.

The proposed regulations clarify that floor plan interest is not taken into account by a business that had floor plan indebtedness if the sum of (1) the taxpayer’s business interest income for the year and (2) 30% of the taxpayer’s adjusted gross income for the year exceeds business interest expense, including floor plan interest. If the floor plan carve out was not needed to deduct all the interest expense, including floor plan interest, bonus depreciation can be taken.

The determination is made annually. The dealership may qualify to take bonus depreciation one year and not qualify to take bonus the next.

The proposed regulations also clarify that a lessor leasing property to a business with floor plan financing is eligible to take bonus depreciation.