Bonus Depreciation and Your Eligibility

Mathew Feuerbach Supervisor, CPA

17 December 2019

With the first year after the major tax overhaul from the Tax Cuts and Jobs Act (TCJA) now complete, there are still changes being made as more regulations and guidance are released. One of the biggest clarifications in 2019, and a victory for dealerships, is the availability to take bonus depreciation under certain conditions.  A big issue of contention among taxpayers and tax professionals in 2018 was what the IRS intended when they said “floor plan financing is taken into account” in reference to the disallowance of bonus depreciation.

In September, the IRS issued final regulations concurrently with additional proposed regulations on bonus depreciation. Under this guidance, the IRS clarified that if a taxpayer’s interest expense, including floor plan interest, does not exceed 30% of adjusted taxable income plus business interest income, then the entity would be eligible to take 100% bonus depreciation in that year.

See the below examples:

Example 1: A dealership has adjusted taxable income of $50,000, which includes $12,000 of interest expense ($10,000 of floor plan interest and $2,000 of business interest).  Since the dealer’s interest
expense of $12,000 is less than its ATI of $15,000 ($50,000 x 30%), the dealership would be eligible for bonus depreciation on qualifying

Example 2: A dealership has adjusted taxable income of $50,000,
which includes $16,000 of interest expense ($14,000 of floor plan interest and $2,000 of business interest). Since the dealer’s interest
expense of $16,000 is more than its ATI of $15,000 ($50,000 x 30%), the dealership would not be eligible for bonus depreciation in the current year. 

This testing would be done each year, so being ineligible for bonus depreciation in one year would not prevent the entity from taking bonus depreciation in a later year. Because this determination is based on adjusted taxable income, many entities may not know whether they will be eligible for bonus depreciation until well after year end. This makes year end planning more important than ever. 

Additionally, the IRS has confirmed that leasing property to a trade or business with floor plan financing would not prohibit the lessor from taking bonus depreciation on eligible property. 

Entities that cannot take bonus depreciation should continue to look to Section 179 expensing. For 2019, the Section 179 expense limit has been increased to $1,020,000. The phaseout for assets placed in service has also been increased with a new starting threshold of $2,550,000, and a complete phaseout at $3,570,000. Listed vehicles with a gross vehicle weight over 6,000 lbs. and under 14,000 lbs. can take up to $25,500 of section 179 in 2019. This is the first time in many years that this amount has been increased from $25,000, as this amount will now receive inflation adjustments due to changes from the TCJA.  It is a year later, and we still have not received a technical correction to give Qualified Improvement Property a 15-year class life. This means that any improvements made to a leased building must still use a 39-year life.  While Congress originally intended
to give these improvements a 15-year life, and thus be eligible for bonus depreciation, it was not included when updating the tax code. Several bills that included the technical corrections have entered the house, but did not receive enough votes to pass. The IRS has explicitly stated that only a technical correction of the code made by
Congress can fix this error. Fortunately, this property remains eligible for section 179, even as a 39-year asset.

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