What’s in it for dealers, individuals
The new tax structure signed into law late last year will benefit dealers. WEDA CEO John Schmeiser said the association responded to what members wanted. “Our members indicated to us that we needed to be at the table to represent their interests when it was announced that tax reform was under discussion,” said Schmeiser. “We are pleased that we received a receptive ear from our elected representatives and that led us to achieving positive changes for equipment dealers throughout the country.”
Curt Kleoppel, president, Equipment Dealer Consulting and WEDA chief financial officer, agrees. “Overall, dealers stand to benefit from the reforms to the individual and business income tax code,” said Kleoppel. “Despite the tax code being made simpler for many individual filers, there are very specific changes to business deductions that dealers should pay careful attention to.”
Following is a summary of the tax reform legislation, including the amendment WEDA worked to secure on behalf of dealers across the country. Changes in the tax bill will be effective for the 2018 tax year through 2025.
Personal Income Tax Rates and Provisions
While the primary changes in this tax reform relate to corporate tax rates, there are significant changes to individual rates, as well. The legislation retained the seven-bracket tax structure, but widened the bracket widths.
Key Provisions Affecting Final Individual Taxable Income
- Standard Deduction doubled to $12,000 for individuals or $24,000 for married couples.
- Itemizing –
SALT (State and Local Tax) Deduction limits the state and local tax deduction to a combined $10,000 for income, sales, and property taxes;
Home Mortgage Interest Deduction is maintained for one home up to $750,000;
Charitable Deduction is maintained.
- Capital Gains rates are largely left unchanged.
- Sec. 1031 Like-Kind Exchanges are maintained for real property transactions.
- Retirement Savings Provisions around 401(k)s and IRAs are maintained.
- Health Insurance –
Individual Mandate is repealed beginning January 1, 2019;
Medical Expense Deduction is maintained for expenses exceeding 7.5 percent of AGI in 2018, and 10 percent beginning in 2019;
Health Savings Accounts tax treatment is maintained.
- Child Tax Credit is expanded to $2,000 per child (phase-out begins at $400,000 income).
- Alternative Minimum Tax is retained on personal filings, but raises the exemption on the alternative minimum tax from $86,200 to $109,400 for married filers, and increases the phase-out threshold to $1 million.
- Estate Tax relief is granted by doubling the exemption amounts ($11 million for individuals; $22 million for couples) through 2025; reverting to current amounts thereafter.
- Stepped-up basis is maintained.
- Business Income Tax Rates and Provisions
- Corporate Rate permanently reduced to 21 percent beginning in 2018.
- Pass-Through Businesses Income establishes a 20 percent deduction of qualified business income from certain pass-through businesses. Specific service industries, such as health, law, and professional services, are excluded. However, joint filers with income below $315,000 and other filers with income below $157,500 can claim the deduction fully on income from service industries. This provision would expire December 31, 2025.
- Alternative Minimum Tax for corporations is eliminated.
- Interest Deductibility –
Small Business Exemption fully maintained for businesses with less than $25 million in revenue. Farming businesses with income greater than $25 million can retain interest deductibility if they use the Alternate Depreciation System for investments.
Limitation on Deductibility with Floor Plan Interest Amendment. Deduction limited to the sum of (1) business interest income; (2) 30 percent of the taxpayer’s adjusted taxable income for the tax year; and (3) the taxpayer’s floor plan financing interest for the tax year. Any disallowed business interest deduction carried forward indefinitely (with certain restrictions for partnerships).
Definition of Floor Plan Financing Interest. Interest paid or accrued on indebtedness used to finance the acquisition of farm equipment held for sale or lease to retail customers and secured by the inventory so acquired. Does not include construction machinery and equipment.
Trade-Off for Using Floor Plan Interest. Full expensing disallowed if floor plan interest factored into deduction. Sec. 179 expensing still maintained if floor plan interest used.
- Full Expensing allows full and immediate expensing of short-lived capital investments for five years.
- 179 Expensing limits are increased to $1 million per year with phase-out beginning at $2.5 million, indexed for inflation after 2018.
- Cost Recovery (Bonus Depreciation) is allowed for used property, and is permitted at the 100 percent rate through 2022, and phased down by 20 percent each year thereafter.
- Net Operating Loss eliminates net operating loss carrybacks and limits carryforwards to 80 percent of taxable income. Farming businesses are still allowed a two-year NOL carryback.
- Agricultural Cooperatives receive a 20 percent deduction on pass-through income that will be calculated on the gross income of the cooperative beginning in 2018 in lieu of the domestic production activities deduction (section 199), which is repealed.
- Cash Accounting is maintained for farming businesses.
- LIFO accounting method is maintained.
- Repatriation enacts deemed repatriation of currently deferred foreign profits at a rate of 15.5 percent for cash and cash-equivalent profits and 8 percent for reinvested foreign earnings.
- Territorial System eliminates worldwide system and moves to a territorial system with base erosion rules.
Floor Plan Interest Amendment
“The floor plan interest deduction amendment is great for our dealers,” noted Kleoppel. “It guarantees full deductible interest on inventory financing, which is a big part of interest expense. Plus, the new deduction for regular interest, limited to 30 percent of taxable income, will also benefit our dealers with operating/capital improvement type interest financing.”
Eric Wareham, vice president of government affairs, WEDA, said the business interest deduction limitations in the original tax bill were unduly burdensome for equipment dealers. Working with the House and Senate, he said WEDA successfully secured the floor plan interest language that accounts for the unique circumstances of farm equipment dealers. “The floor plan interest deduction amendment is a premier example of the association’s advocacy at work. The tax reform bill flew through Congress and was passed with relatively few amendments, catching most industries off-guard,” said Wareham. “Having the industry expertise and being a trusted resource for policy makers created the opportunity for WEDA to secure this amendment and safeguard dealers’ interests.”
“Special recognition is warranted for Reps. Vicky Hartzler and Jason Smith, both from Missouri, who were instrumental in obtaining this amendment,” added Wareham. “Also, a special thanks to Curt Kleoppel for his work on providing invaluable information and expertise to legislative members and staff during deliberation on this amendment.”
“This policy summary is provided to dealers as an overview of the tax reform legislation, not as tax advice,” offered Schmeiser. “We recommend dealers consult their tax advisors or the team at Equipment Dealer Consulting for specific tax advice questions.”
Editor’s note: For information about Equipment Dealer Consulting, LLC, call 816-561-5323. The Equipment Dealer Consulting team is licensed in Missouri, Kansas, Iowa, Oklahoma, and Texas.
What other organizations have to say…
“The tax reform package passed by Congress… will result in lower taxes for the vast majority of farmers and ranchers,” said Zippy Duvall, president, American Farm Bureau Federation. “This tax overhaul includes many changes to the tax code, most notably lower individual tax rates, that will benefit farmers and ranchers. Ninety-four percent of farmers and ranchers pay taxes as individuals, and those rates are coming down. The bill also maintains all of the important deductions and credits that farmers rely on.”
“Tax reform is a huge win for equipment manufacturers of virtually every type and their employees. From small, family-held manufacturers to large, publicly-traded companies, the Tax Cuts and Jobs Act will improve the bottom line for equipment manufacturers across the country” said Dennis Slater, president, Association of Equipment Manufacturers. “Our industry will continue to seek improvements and reforms to our nation’s tax code in order to make the United States the most competitive place for equipment manufacturers.”
“Every major piece of legislation will have some positives and some negatives. The Tax Cuts and Jobs Act is no different,” noted Brian P. McGuire, president and CEO, Associated Equipment Distributors. “While AED didn’t get everything it wanted, I have no doubt that had we not been at the table throughout the process the industry would be in a far worse position. The tax reform process isn’t over. The Tax Cuts and Jobs Act will need to be refined, and many important provisions are temporary. The administration will be issuing guidance on many aspects of the new law in the coming year. AED will remain engaged, but it’s important that construction equipment dealers also continue to be involved. As this process has shown, there’s too much at stake not to advocate for your company and your industry.”
Article written by WEDA Staff