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The Tax Reform Act and Its Potential Effect on Your Dealership

By Guest Blogger David Wiggins
CliftonLarsonAllen

Well, here we are at the end of another year. Republicans have waited for years to have the upper hand to make some long-awaited tax law changes. These tax law changes will be effective in 2018 and will hopefully keep the economy rolling and car sales growing.

House Republicans recently released their initial bill, and last week the Senate has released its version of tax reform. Now that both chambers have voted and approved their bills, the two will have to be
combined for a final bill that can be sent to President Trump for approval.
 

The key elements for dealers will be:
 
  1. The limitations with regard to business interest expense.
  2. Ability to use the cash method for businesses with gross receipts under certain amounts.
  3. The reduction in taxable income rates for active and passive investors in business S corporations.
  4. The 20 percent tax rate and its implications for C corporations.
  5. Loss of state income tax deductions for personal income tax, and
  6. The increases being made for taxable estates.
Below are summary comparisons between the House and Senate bills being discussed:
 
  Current Law House Proposal, As Amended Senate Proposal
Personal tax rates Seven tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, 39.6% Four tax brackets: 12%, 25%, 35%, and 39.6% with 6% bubble
 
Seven tax brackets: 10%, 12%, 22.5%, 25%, 32.5%, 35%, 38.5%
Personal LT capital gains and qualified dividend tax rates Up to 23.8% Up to 23.8% Up to 23.8%
Maximum pass-through tax rate 39.6% Passive business: 25% + NIIT; Active business: generally 30% of income subject to 25% and 70% of income subject to 39.6%; personal service business: maximum 39.6% Ordinary rates with deduction of 17.4% of qualifying domestic income; ltd. deduction for income from lower-income service businesses
Maximum corporate tax rate 35% 20%; 25% for personal service corporations 20%, eff. years beg. after 2018
Dividends received deduction 70% deduction for dividends received by corporations; 80% in the case of ≥20% owned corporation 50% dividends received deduction; 65% in the case of ≥20% owned corporation Same as House plan
Personal standard deduction Married filing jointly: $12,700

Head of household: $9,350

Single: $6,350
Married filing jointly: $24,400

Head of household: $18,300

Single: $12,200
 
Married filing jointly: $24,000

Head of household: $18,000

Single: $12,000
Child tax credit $1,000 per child $1,600 per child; $300 credit for taxpayer, spouse, and non-child dependents $1,650 per child; $500 for non-child dependents
Personal exemption $4,050 Repealed Repealed
Depreciation Fixed assets are generally capitalized and depreciated with section 179 immediate expensing up to $500k available in some cases Immediate expensing of most new and used property (excluding structures) through 2022; section 179 limit increased to $5 million Immediate expensing of most new property (excluding structures); section 179 limit increased to $1 million
Depreciable life of buildings 39 years for most non-residential buildings; 27-1/2 years for residential rentals 39 years for most non-residential buildings; 27-1/2 years for residential rentals 25 years
Mortgage interest Deductible on up to $1.1 million of debt; interest on second home deductible Deductible on up to $500k of debt except grandfather rule; no second home or home equity interest Deductible on up to $1.0 million of debt (incl. second home); no home equity interest
Personal state income and property tax Allowable as an itemized deduction Property tax capped at $10k; income tax deduction repealed; itemized for state income tax on business income(?) No state income or property tax deduction
Business interest Generally deductible Generally limited to extent interest > 30% of income; unlimited for small business Same as House plan except unlimited carryover
Cash method of accounting Generally limited to business with < $1, 5, or 10 million in revenue depending on facts Expanded to include businesses with <$25 million in revenue Expanded to include businesses with <$15 million in revenue
Self-employment tax Not imposed on limited partnership, rental, or S corporation income Not imposed on limited partnership, rental, or S corporation income Same as House plan
Alternative minimum tax (AMT) Potentially imposed on both corporations and individuals Repealed Repealed
Net operating losses (NOL) Generally carried back 2 years and forward 20 years Carryback repealed except farms (one year); carryover deduction limited to 90% of pre-NOL income Carryback repealed except farms (two years); carryover deduction limited to 90% of pre-NOL income
Gift and estate tax Tax of up to 40% imposed on gifts and estates, subject to a $5.45 million lifetime exemption per spouse Lifetime exemption doubled; estate tax repealed after 2023; gift tax remains in effect with 35% rate in 2023; step-up continues Lifetime exemption doubled; estate tax remains in effect

You should consult your tax advisor as soon as you have your October 2017 financial statements completed and discuss what tax planning you need to accomplish before December 31, 2017. Starting now should leave you enough time to make whatever changes you need before the end of the year and also be ready for the anticipated tax law changes.

Dave Wiggins, CPA is a principal with CliftonLarsonAllen's dealership team. He has extensive knowledge of the inner workings of retail dealership operations, including new developments regarding regulatory compliance issues. Dave specializes in federal and state taxation with the unique perspective of those specific strategies that apply to dealerships and their owners. He can be reached at david.wiggins@CLAconnect.com or 314-925-4300.
 

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