In recent years, technological advancements and a series of legislative acts reshaping the federal tax code has significantly transformed the U.S. taxation landscape.
The Tax Cuts and Jobs Act of 2017 (TCJA) was landmark legislation. The TCJA, along with the pandemic, started a domino effect of subsequent tax acts including the CARES Act and the Inflation Reduction Act. Collectively, these laws represent the most substantial revisions to tax laws in over four decades.
Although many are familiar with these changes’ tax implications over the past few years, a lesser-known aspect is poised to influence tax situations in 2023 and beyond. Several tax-reducing provisions from previous legislation are scheduled to expire, a consequence of Senate budget rules mandating revenue neutrality over a 10-year period.
The Senate rules necessitated tax increases to offset the past reductions, meaning provisions that previously lowered taxes will gradually disappear.
In this evolving tax environment, two provisions stand out as particularly impactful for RV dealerships’ taxable income: changes in interest expense deductions and bonus depreciation.
Interest Expense Deductions
The tax code modification concerning interest deductions and bonus depreciation is especially critical for RV dealerships with significant interest expenses and large rental fleets.
Over the past few years, interest expense’s deductible amount was restricted for income tax purposes. Dealerships benefited from a special provision that enabled them to deduct floorplan financing interest, but the TCJA created a trade-off to meet the Senate budget rules. Although floorplan financing interest was exempt from the deduction limitation, companies with excess floorplan financing interest were prohibited from claiming bonus depreciation on assets placed in service that year.
Most dealerships were unaffected by the limitation calculation the first several years the TCJA was in effect. When the code changed in 2022, interest expense deduction limitations were substantially reduced. This adjustment may prevent dealerships from using bonus depreciation, potentially resulting in a significant swing in taxable income. The change could amount to millions of dollars for some dealers.
Companies with considerable fixed asset purchases, such as equipment and rental fleets, that previously benefited from tax losses because of bonus depreciation may now face sizeable taxable income.
Continuing the tax change trend in recent years, 2024 promises further evolution. In January, the House of Representatives approved a new tax bill. As of this article’s deadline, the bill awaited Senate action. If enacted into law, the legislation could roll back the interest expense deduction limitation calculation to pre-2022 standards.
Such a reversal could have major implications for dealerships, potentially bolstering their cash flow by enabling them to revise their 2022 tax returns. Doing so could reduce their tax burden and potentially secure refunds for taxes already paid. Based on the House legislation passed, these adjustments would affect tax years spanning from 2022 through 2025, delaying the limitation reduction until 2026.
Bonus Depreciation Deductions
Another provision phasing out bonus depreciation adds complexity.
Bonus depreciation has been a fixture in the Internal Revenue Code since 2001, incentivizing companies’ fixed assets and operation equipment purchases. Under the TCJA, 100% bonus depreciation was allowed until it began phasing out in 2023, gradually decreasing each year until reaching 0% in 2027, as illustrated here:
- 2022: 100%
- 2023: 80%
- 2024: 60%
- 2025: 40%
- 2026: 20%
- 2027: 0%
The bonus depreciation reduction could greatly impact new fixed asset purchase deductions, including deductions involving equipment and rental units. The diminishing percentages over the years pose a challenge to dealerships seeking to leverage the deduction for tax benefits.
The legislation currently advancing through Congress also postpones adjustments to bonus depreciation. According to the version of the bill approved by the House, bonus depreciation rates would remain at 100% until 2025. If this legislation is enacted, the bonus depreciation percentages would be as follows:
- 2022: 100%
- 2023: 100%
- 2024: 100%
- 2025: 100%
- 2026: 20%
- 2027: 0%
Under the existing tax code, RV dealerships may face a notable rise in tax obligations compared with previous years, potentially affecting cash flow. However, if the legislation passes, the law could reduce tax liabilities and have a positive cash flow effect.
Given the tax environment’s intricacies, including potential additional tax legislation, collaborating with tax compliance experts for multiyear forecasts becomes imperative. Despite consistent operations, tax obligations may vary, underscoring the value of meticulous planning to mitigate tax impact and ensure adequate cash flow.
As the tax landscape evolves and continues to become increasingly complicated, dealerships must proactively engage with tax compliance professionals to stay informed and strategically navigate shifting tax policies to prevent unforeseen cash flow implications from surprise tax bills.
Steve Blake is the Tax Managing Director of the CBIZ Somerset Dealership Team, where he focuses his time on mergers and acquisitions, tax strategic planning and tax compliance.
