The Tax Cuts and Jobs Act has passed. If you own or run a dealership, you’re probably wondering what this means for you. Most significantly, it means dealerships will pay less in taxes for the year 2018. However, we’re dealing with a very large piece of legislation, so there’s obviously more to it than that. Having gone through the new tax law, we have outlined the top five ways it could impact your dealership:
1. The maximum tax rate is lower.
A dealership in the highest tax bracket will be taxed at 37%, down from 39.6%. What tax percentage your dealership will actually pay comes down to whether you’re organized as a C corporation, an S corporation, or a limited liability company (LLC).
2. C corporations will pay 21%.
If your dealership is a C corporation, you’ll pay a tax rate of 21%. You will still have to pay an additional tax on the distribution of income retained by your dealership, and this tax will be up to 23.8%.
3. Pass-through entities can deduct 20%.
If your dealership is an S corporation or an LLC, it’s considered a pass-through entity. Under the new tax law, pass-through entities can deduct 20% of their taxable income. For example, if you’re in the highest tax bracket paying 37%, you can subtract 20% of your income, and the remaining 80% is the amount on which you’ll pay 37%.
However, the deduction is limited to 50% of the wages you pay your employees or 25% of employee wages plus 2.5% of depreciable assets.
4. The Section 179 deduction has been increased to $1 million.
The Section 179 deduction was set at $500,000 for 2017, but it has been doubled to $1 million beginning in 2018. Your dealership can use this deduction on new and used equipment and off-the-shelf software, so long as you don’t spend more than $2.5 million on equipment that gets put into service during 2018. You can also take bonus depreciation on equipment.
5. Two important things haven’t changed.
Originally, floor plan interest was under threat of being limited. It was retained in the new tax law because the proposed limitation inadvertently affected small businesses to a much greater degree than the large corporations it was actually targeting. Dealerships can still deduct floor plan interest.
The second thing that hasn’t changed is last-in, first-out (LIFO). LIFO can still be used as an accounting method to determine the cost of goods sold and demonstrate a lower net income.
Put Expertise on Your Side
Considering how extensive the tax bill is, there are more changes (such as those affecting property and estate taxes) that need more than one article to cover. If you’d like to discuss how your individual dealership will be affected by the tax law or the best actions you can take this year, please contact your Wipfli relationship executive or a member of the dealership practice.