NATDA Magazine Nov/Dec Nov2018Mag_FINAL - Page 50

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 continued on page 52 50 NATDA Magazine