T
ax reform legislation includes a 20 percent deduction
on qualified income for businesses structured as pass-
through entities, which include the majority of dealerships.
This provision, known as the Section 199A deduction, is one of
the Tax Cuts and Jobs Act’s most complicated — but possibly
most lucrative — benefits for dealership owners.
Recently released guidance from the IRS sheds some light on
how to apply and take advantage of this generous deduction.
The guidance also reveals that if you’ve been told that taking
this deduction is simple, you’ve been misled. Claiming the 199A
deduction will require extensive planning. There are wage and
depreciable asset limitations that curb its potential benefit,
and certain types of income will not qualify. There are also
aggregations of related businesses that may help owners get the
highest tax benefit in certain situations.
199A deduction hinges on qualified business
income (QBI)
Section 199A provides for a 20 percent deduction on all combined
qualified business income (QBI) from most trades or businesses.
Dealerships and related finance companies (RFCs) are eligible.
For the purposes of this deduction, QBI includes all items of net
income and loss from the dealership, excluding capital gains and
losses. This deduction can be taken by individuals, trusts, and
estates that have QBI from sole proprietorships, including single-
member LLCs, and pass-through entities, such as partnerships
and S corporations.
W-2 and depreciable property limitations
complicate QBI calculations
Although the 20 percent deduction sounds fairly straightforward,
as with most things income tax-related, implementation is not
that easy. It isn’t merely calculated based on the limitations
of just one entity. The relevant information flows through to
the partner’s or shareholder’s income tax return, where the
income, losses, and wage and depreciable asset limitations from
other entities owned by the taxpayer determine the final 199A
deduction.
The amount of QBI available for the 20 percent deduction is
limited to the greater of:
• 50 percent of the W-2 wages with respect to your
dealership, or
• 25 percent of W-2 wages plus 2.5 percent of the
unadjusted cost basis of tangible, depreciable property
used in the dealership
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