The tax and accounting experts at bgr CPAs explain the importance of bonus depreciation for auto dealership owners.
Automobile dealerships often face significant pressure from manufacturers to maintain and renovate facilities. Considering the pace at which inventory is turned over and the pressure to attract new customers within the industry, it may be difficult to imagine having to devote the time and resources necessary to undertaking a dealership renovation project. While such renovations can cause disruptions in sales and present substantial costs to an owner, dealers can take advantage of accelerated tax deductions using bonus depreciation.
Depreciation allows businesses to divide the cost of property into installments. Typically, businesses choose a method of depreciation that divides the cost evenly over the asset life. However, bonus depreciation methods may offer additional tax benefits for businesses who qualify.
Bonus depreciation is a method of depreciation that enables a business to make an additional deduction on the cost of qualifying property. Qualifying property has typically been defined as new equipment or tangible property that has been put into service in the same year that it was obtained. On December 18, 2015, the Protecting Americans from Tax Hikes (PATH) Act of 2015 was passed by congress, effectively modifying and extending several depreciation provisions including bonus depreciation rules.
The modifications to bonus depreciation rules can be beneficial for auto dealership owners. Specifically, a dealership may now deduct 50% of the cost of new property and equipment in the year of purchase, and the remaining cost over the course of the property’s life. Among the other changes detailed in the act are the following stipulations:
- Remodeling, Building Expansion and Construction: Qualified improvement property placed in service on or after January 1, 2016, may be eligible for bonus depreciation. Qualified improvement property is considered as any improvement to the interior of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service. This provision excludes enlargements, additions or repairs to escalators and internal structural framework. Thus, remodeling an auto dealership may be eligible for bonus depreciation if the construction meets certain rules.
- Furniture and Equipment Purchases: Businesses may deduct up to $500,000 for the acquisition of qualifying assets such as equipment and furniture. Equipment and furniture purchases costing less than or equal to $5,000 per unit can be immediately expensed if the business acting as the purchaser has an audited financial statement. If the business does not have an audited financial statement, the expense limit is $2,500 on purchases of equipment and furniture.
- Demolition Costs: Demolition costs incurred by an auto dealership, and associated with renovations, may be expensed on the basis that old improvements to the property be physically removed.
Auto dealers should act sooner than later with regards to remodeling, construction and equipment purchases, as the bonus depreciation is scheduled to phase-out with decreasing first year bonus percentages between now and 2019. As no bonus depreciation will be permitted after 2019, it is essential that owners undertake these purchases and renovations within the next three years in order to maximize their tax benefit.
The professionals at bgr CPAs have continuously helped clients within the automobile industry with various tax, accounting and business needs. We have extensive experience in assisting dealerships in financial and business matters, and in maximizing tax benefit while minimizing liability. To learn more, please contact Rick David, CPA, MBA, CFP at firstname.lastname@example.org or (410) 418-4400.