Recent changes in tax law may benefit many BHPH dealerships, especially smaller ones, so if you have not reaped the benefits yet, this is the time to start. Although the Tax Cuts and Jobs Act (TCJA) was signed in December 2017, it has taken some time for many BHPH dealerships to really experience the impact of the new tax law. Now that the effects can be felt, it’s vital for BHPH dealers to begin contemplating how they can prepare for their next filing. Understanding the latest tax reform can help many dealers avoid paying more than necessary and BHPH Marketplace shares what you need to know.
Where Flow-Through Entities are concerned, there have been some changes that can benefit BHPH dealerships. Flow-Through Entities, also called Pass-Through Entities, are business entities such as a sole proprietorship, partnership, or S corporation whose income is taxed at the individual rate as the owner’s personal income.” Independent and BHPH dealerships generally fall into this category. The new tax law allows owners to deduct 20 percent of their QBI, or qualified business income, from Flow-Through Entities, and only pay taxes on the remaining 80 percent. It’s important to note that in this legislation QBI does not include income from investments.
Many BHPH dealerships will benefit from the new tax law in another way as well. Under the TCJA, only businesses with average annual gross receipts of less than $25 million can still fully deduct interest. Businesses with over $25 million in annual receipts can only deduct up to 30 percent. For some larger BHPH auto groups, this may pose an issue. However, for small dealerships, the change is unlikely to have any effect, and they can continue deducting all of their interest as before.
BHPH dealerships with gross earnings of $25 million or less may also receive a significant one-time deduction for their inventory under the new tax law. Doing so requires the use of an election. Dealers will have to fill out forms for a Cash-Basis Accounting Method Change as well as Change in Method of Accounting for Inventory Items. Both can be done using Form 3115, but cannot be done on the same form, so BHPH dealerships will need to fill out two copies. This will allow small dealers to essentially reduce their taxable income for one year by writing off existing inventory balances.
One more benefit for BHPH dealerships with total annual receipts equaling $25 million or less will be the exemption from new business interest rules. Those who earn more than $25 million before expenses will not be so lucky. Under the new tax law, business interest deductions for those dealerships will be subject to new limitations.
While some new deductions are included in the new tax law, other deductions are no longer available. Until the TCJA took effect, 50 percent entertainment costs– such as those involved in events to more attract BHPH customers– were tax deductible. That is no longer the case. In fact, only food costs still carry a 50 percent tax deduction. This means that under the new tax law BHPH dealerships will need to separate food costs from other entertainment costs in their accounting.
By understanding the new tax law, BHPH dealerships can take steps now to benefit later. Preparing now with changes to accounting practices and methods will help many independent and BHPH dealers pay less. If your dealership earns less than $25 million before expenses are subtracted, you have several opportunities to enjoy significant deductions that will allow you and your business to retain a larger portion of your hard-earned profits.