What Is Floor Plan Interest Expense

163 j rules which covered so called earnings stripping and denied a corporation s interest deduction for disqualified interest to the extent it had excess interest expense in a year that its debt to equity ratio was greater than 1 5 to 1.

What is floor plan interest expense.

A business can deduct its business interest only to the extent of its business interest income plus 30 of business adjusted taxable income plus the business s floor plan financing income. Floor plan financing interest expense. Dealerships that take the floor plan financing interest exclusion in computing their limit can t claim 100 bonus depreciation for their fixed asset additions. 35 while the limitation applies to all business entity.

Floor plan financing interest expense is interest on debt used to finance the acquisition of motor vehicles held for sale or lease where the debt is secured by the acquired inventory. The loans are also inspected periodically by lenders by checking the inventory of all collateralized vehicles. Whether other debt applies to floorplan interest on inventory acquired on or after 2 15 20. Floor plan financing interest expense sec.

But because inventories are so immense the car business is very sensitive to both floor plan interest rates and the tax treatment of interest expenses. Interest but only interest on any other debt obligations that were incurred before 2 15 20. Taxpayers are also permitted to elect to apply the more restrictive 30 of ati limit. Floor planning is a form of financing for large ticket items displayed on showroom floors.

To figure this out a dealer would subtract their monthly selling expenses from their total expenses for the month. This floor plan finance formula will require a dealer to have a good handle on total dealership expenses and inventory for the entire month. First a dealer would need to figure out their monthly holding cost. 34 business interest expense exceeding the limitation amount can be carried forward indefinitely.

For example automobile dealerships utilize floor plan financing to run their businesses. Floor plan financing interest expense remained fully deductible under tax reform. Floor plan loans are among the safest of all financial instruments. Based on a literal reading of the tax law some dealerships had been concerned.

The taxpayer s floor plan financing interest expense. But it came at a cost. Floor plan financing interest expense is not subject to the section 163 j limitation. In a change made by the cares act taxpayers can elect to use their 2019 ati in computing the 2020 limit helping taxpayers whose income declines in 2020.