Pub. 18 2019-2020 Issue 1

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 2019, and 1.5 percent for tax years beginning on or after January 1, 2020, through December 31, 2021 ). Individual Taxes. Some owners of business entities orga- nized as sole proprietorships, S corporations or partnerships will be affected by New Jersey’s “millionaire’s tax.” A new top personal income tax bracket has been established: New Jersey taxable income exceeding $5 million is taxed at 10.75 percent, effective January 1, 2018. For the 2018 tax year and thereafter, a gross income tax rate of 10.75 percent will apply on taxable income in excess of $5 million, regardless of the filing status of the taxpayer. Previously, the highest tax rate was 8.97 percent and it applied to taxable income of $500,000 and over. On the plus side, the maximum prop- erty tax deduction was raised from $10,000 to $15,000 for Gross Income Tax purposes. Business Tax Deductions • Qualified business income ( QBI ) deduction. TCJA adds a new deduction for noncorporate taxpayers that is generally 20 percent of a taxpayer’s qualified business income from partnerships, S corporations, and sole proprietorships, and rental activities. For auto dealers, the QBI deduction may be available for multiple activities connected with an auto dealership including the dealership business, management company and the rental of dealership real estate to the deal- ership ( self-rental activity ). The QBI deduction is the lesser of (1) 20 percent of the taxpayer’s QBI or (2) the greater of (i) 50 percent of the W-2 wages from the qualified trade or busi- ness; or (ii) the sum of 25 percent of the W-2 wages and 2.5 percent of the unadjusted basis immediately after acquisition ( UBIA ) of qualified fixed assets. An auto dealer that owns several related businesses may elect to aggregate commonly owned businesses in order to maximize the benefit available. New Jersey impact. No QBI deduction is allowed for either Corporate Business Tax or Gross Income Tax purposes. • Business interest expense deduction limitation. Every trade or business ( other than exempt and excepted trades or businesses, defined below ) is subject to disallowance for the deduction for net interest expense. Under the business in- terest limitation, the deduction allowed for business interest in any tax year cannot exceed the sum of: (1) the taxpayer’s business interest income; plus (2) 30 percent of the busi- ness’s adjusted taxable income ( may not be less than zero ); plus (3) the taxpayer’s floor plan financing interest for the tax year. Note that floor plan interest remains fully deductible under the new rules. Business interest deductions disallowed under the limita- tion may be carried forward indefinitely. Exempt and excepted trades or businesses are not subject to the business interest limitation. Exempt businesses include those with average gross receipts of $25 million or less in the prior three years. Exempted businesses include real prop- erty trades or businesses that elect out of the limitation by switching to the Alternative Depreciation System. Note that the election out is not available to a rental activity that leases at least 80 percent of its property to a commonly controlled trade or business. This rule will prevent many self-rental activities from electing out of the business interest limitation. • Cost Recovery (depreciation). The tax bill provides acceler- ated deductions for business property acquisitions: Section 179 expensing. The maximum amount a taxpayer may expense is increased to $1 million and the phase-out threshold is increased to $2.5 million. Section 179 expens- ing is available for qualified real property. Qualified real property means qualified improvement property ( QIP- see below description ) and the following improvements to nonresidential real property: roofs, heating, ventilation and air-conditioning property, fire protection and alarm systems, and security systems. New Jersey impact. New Jersey maintains its maxi- mum $25,000 deduction for Section 179 expense for up to $500,000 of qualifying assets put in service. 100 percent cost recovery of qualifying business assets is al- lowed for new and used property. Section 168(k), common- ly known as “bonus depreciation,” was enhanced to allow for 100 percent expensing of qualifying assets acquired and placed in service after September 27, 2017. Dealerships that have floorplan indebtedness are not eligible to deduct “bonus depreciation” for assets placed in service after December 31, 2017. There is some question as to whether a dealership with floorplan interest has the option to NOT deduct the interest and thus be able to take bonus depreci- ation on current and subsequent qualified property placed in service. We expect final regulations ( not yet issued ) to address this open question. New Jersey impact. New Jersey does not allow bonus depreciation deductions. • Excess Business Loss Deduction Limitation. Under the tax bill, a noncorporate taxpayer’s “excess business loss” is disal- lowed for the tax year but is treated as part of the taxpayer’s net operating loss carryforward in subsequent tax years. An excess business loss is the excess of all trade or business de- ductions 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 pro- vision applies at the partner or shareholder level. Each part- ner’s or S corporation shareholder’s share of items of income, gain, deduction, or loss of the partnership or S corporation is taken into account when applying the limitation for the tax year of the partner or S corporation shareholder. • Business meals & entertainment. Under TCJA, enter- tainment expenses are generally not deductible. Another change that affects many auto dealers is that employee meals on company premises are now 50 percent deductible ( previously 100 percent ) unless included in employees’ com- pensation. However, company holiday parties and picnic events remain 100 percent deductible. New Jersey auto dealers will want to discuss the above tax law changes with their advisors to ensure their business activities are situated to optimize the positive and negative aspects to their particular tax issues. Rochelle Kimmins, CPA, CFP is Tax Director at WithumSmith+Brown, PC in Edison, New Jersey. She can be reached at 732.379.5200 or rkimmins@withum.com .