What Is Floor Plan Interest Expense

Floor plan financing interest expense is not subject to the section 163 j limitation.

What is floor plan interest expense.

34 business interest expense exceeding the limitation amount can be carried forward indefinitely. The loans are also inspected periodically by lenders by checking the inventory of all collateralized vehicles. For example automobile dealerships utilize floor plan financing to run their businesses. Floor planning is a form of financing for large ticket items displayed on showroom floors.

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. But it came at a cost. Dealerships that take the floor plan financing interest exclusion in computing their limit can t claim 100 bonus depreciation for their fixed asset additions. Whether other debt applies to floorplan interest on inventory acquired on or after 2 15 20.

Interest but only interest on any other debt obligations that were incurred before 2 15 20. Other debt likely includes floorplan interest but not curtailment for inventory acquired before 2 15 20. 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. 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.

This floor plan finance formula will require a dealer to have a good handle on total dealership expenses and inventory for the entire month. Floor plan financing interest expense remained fully deductible under tax reform. 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. 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.

35 while the limitation applies to all business entity. Floor plan financing indebtedness is indebtedness that is used to finance the acquisition of motor vehicles held for sale or lease and that is secured by the acquired inventory. The taxpayer s floor plan financing interest expense. To figure this out a dealer would subtract their monthly selling expenses from their total expenses for the month.

Taxpayers are also permitted to elect to apply the more restrictive 30 of ati limit. Floor plan financing interest expense sec. Based on a literal reading of the tax law some dealerships had been concerned. Floor plan financing interest expense.