The Tax Reform Act and Its Potential Effect on Your Dealership

• By: Guest Blogger
• On: 12/07/2017 11:27:17
• In: Federal / National Posts
• Comments: 0

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Personal exemption	$4,050	Repealed	Repealed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.