Pub. 17 2018-2019 Issue 2

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 I S S U E N O . 3 , 2 0 1 8 16 new jersey auto retailer Since last December, there have been sweeping changes to both Federal and New Jersey tax laws that have a direct impact on the automotive dealerships industry. On Decem- ber 22, 2017 the Federal Tax Cuts and Jobs Act was passed. Sub- sequently, on July 1, 2018, the New Jersey Legislature and Gov- ernor Phil Murphy agreed on a budget that included significant State tax law changes. In both cases the changes impacted both individuals and businesses. This article will focus on corporate tax rate changes, and how they impact automotive dealerships. TAX STRUCTURES How do the corporate tax rate changes, embedded within the Federal and New Jersey tax law, impact your auto dealership? Well, it depends. Dealerships can operate under several differ- ent tax structures, including as a corporation. Sounds simple enough, right? Well, not exactly. It depends on whether the cor- poration is being treated as a C corporation or an S corporation for tax purposes. All corporations start off as C corporations. The tax law allows corporations that meet certain requirements, to elect to be treated as an S corporation. C corporations pay tax at the corporate level, while S corporations are “pass-through” entities, with tax being paid at the personal income tax rate of the shareholder. CORPORATE TAX RATE Under the new Federal tax law, C corporations received a signif- icant tax cut. Beginning this year, the Federal corporate tax rate changed to a flat rate of 21% – compared to the existing graduat- ed tax rate that topped off at 35%. As mentioned earlier, S cor- poration shareholders bear the burden of paying the taxes on the pass-through corporate income. Under the new Federal tax law, the individual tax rate was also cut from a graduated rate, which topped off at 39.6% to a new maximum rate of 37%. At first, it appears that C corporations are the way to go – why pay 37% tax as an S corporation shareholder when your auto How New Corporate Tax Rate Changes Impact Auto Dealerships BY WILFREDO FERNANDEZ, CPA