Pub. 16 2017-2018 Issue 4

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S 15 new jersey auto retailer W W W . N J C A R . O R G or business is the reputation or skill of one or more of its employees. Although an auto dealership would certainly meet the requirements of a qualified trade or business, the treatment of management companies is unclear. If a management company earns income by providing management services to associated dealerships, it may be an excluded trade or business. Limitations on the QBI deduction. The de- ductible amount is the lesser of: • 20 percent of the taxpayer’s QBI or • the greater of (i) 50 percent of the W-2 wages from the qualified trade or business; or (ii) the sum of 25 percent of the W-2 wages and 2.5 percent of the unadjusted basis immediately after acquisition of qualified property. For auto dealers with multiple business entities, the QBI deduction is computed separately for each entity. Therefore, it TAX REFORM  continued on page 16 is important to review the wages currently paid by each entity to determine the ex- pected deduction for 2018. As the law is currently written, it may be unacceptable to simply allocate wage expense across related entities. Instead, the wages paid by each entity may be used for applying theW-2 lim- itation. Future clarification from the IRS will likely address treatment of controlled groups and grouping elections. Note that entities that don’t haveW-2 wages may still qualify for the QBI deduction to the extent of 2.5 percent of the unadjusted basis of qualified property owned by the business. This will apply to rental activities and sole proprietorships with no wages. Business Interest Limitation Every trade or business is subject to disal- lowance for the deduction for net interest expense. Under the business interest lim- itation, the deduction allowed for business interest in any tax year cannot exceed the sum of: • the taxpayer’s business interest in- come; plus • 30 percent of the business’s adjusted taxable income (may not be less than zero); plus • the taxpayer’s floor plan financing in- terest for the tax year. Note that floor plan interest remains fully deductible under the new rules. Adjusted taxable income, for purposes of the limitation, is computed without regard to any business interest expense or income, net operating loss deduction, QBI deduction or depreciation, amorti- zation or depletion deductions. Disallowed business interest expense under this limitation can be carried forward indefinitely. Exceptions: (1) The small business ex- ception doesn’t apply to a taxpayer with average gross receipts of $25 million or less. The test would aggregate entities under common control; (2) Real proper- ty trades or businesses can elect out of the business interest limitation if they use the Alternative Depreciation System to depreciate applicable real property; (3) floor plan interest is not subject to the limitation. However, a business that has floor plan indebtedness is not eligible for 100 percent expensing (aka bonus depreci- ation) of qualified property. Section 179 expensing is still available to businesses with floor plan indebtedness (cost recovery changes are discussed below). Excess Business Losses Under the tax bill a noncorporate taxpay- er’s “excess business loss” is disallowed for the tax year but is instead carried forward and treated as part of the taxpayer’s net operating loss in subsequent tax years. An excess business loss is the excess of all trade or business deductions of the taxpayer over the sum of all trade or business gross receipts of the taxpayer plus $250,000 ($500,000 for joint filers). In the case of a partnership or S corporation, the provi- sion applies at the partner or shareholder level. Each partner’s or S corporation