Pub. 18 2019-2020 Issue 3

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 . 1 , 2 0 2 0 18 new jersey auto retailer Many of the federal tax reform laws that were enacted over the past few years have directly impacted automobile dealer- ship owners. Additionally, State-level changes to Sales and Use Tax laws have also affected the bottom line for dealerships across New Jersey. The following are some details for dealerships to keep in mind when thinking about tax strategy and tax planning. Qualified Business Income Deduction ( 199A ) Generally, for tax years beginning after December 31, 2017 and before January 1, 2026, a non-corporate taxpayer ( including a trust or estate ) who has Qualified Business Income ( QBI ) from a partnership, S corporation, or sole proprietorship is allowed a 20% deduction from QBI, based on various limitations. This de- duction could be a substantial savings to owners of dealerships. • If applicable, the deduction related to the pass-through income can reduce the effective tax rate paid for dealership taxable income, from 37% to 29.6%. Reduction of Corporate Tax rates Since the new tax law was enacted, C corporations are taxed at a flat rate of 21%. • Some have said that cutting the corporate tax rate to a point that is lower than the individual tax rate is a signal to convert partnerships and S corporations to C corporations. While there may be circumstances where this is advisable, in general, the lower tax rate ( 21% ) is offset by the fact that, when the remaining earnings of the C corporation are distributed and taxed as a dividend, the double taxation will create an almost 40% federal tax rate — a rate higher than the maximum individual rate of 37% and certainly higher than the 29.6% effective rate on a qualified f low- through business. Section 179 expenses If eligible, automotive dealerships can take advantage of the IRS Section 179 deduction that allows for the immediate write-off of up to $1,020,000 of qualified assets, placed into service by year- end. However, this is limited to $25,000 for New Jersey auto dealerships. For property placed in service in tax years begin- ning after December 31, 2017, the phase-out threshold amount is increased to $2.5 million. • The IRS has a de minimis safe harbor rule that allows purchases of $2,500 or less to be expensed. If you have an audited financial statement, you are allowed to expense purchases of $5,000 or less. • Review listings of demos, company vehicles, and service units. Demos and company vehicles ( ex: loaners ) should be written down, monthly. Review the valuation for demos and company vehicles at year-end and adjust the book value accordingly. Temporary 100% bonus depreciation on qualified business assets • A 100% first-year deduction for the adjusted basis is al- lowed for qualified property acquired and placed in service Get on Track with How Tax Laws Impact Automotive Dealers BY WILFREDO FERNANDEZ, CPA