Boost Cash Flow for Your Dealership Using Tax Planning Strategies
This article was originally published in the RV Executive Today August 2024 issue.
RV dealerships face unique cash flow management and tax planning challenges that greatly influence their ability to enhance profitability, maintain operational and financial stability, and position themselves for long-term growth and success. A strong tax planning strategy is foundational to overcoming these hurdles.
Explore emerging tax planning strategies that can help boost your cash flow, reduce tax liabilities, and keep your dealership moving forward.
Depreciation Options
Accelerated depreciation methods for RVs and other qualifying assets is one way to reduce taxable income and defer tax payments. Since the implementation of the Tax Cuts & Jobs Act in 2017, many RV dealers have used bonus depreciation to reduce their tax liability year over year. With the current phase out and anticipated sunset of bonus depreciation beginning in 2027, Internal Revenue Code (IRC) Section 179 may be a depreciation option where applicable.
Section 179 allows dealerships to deduct the full purchase price of qualifying equipment purchased or financed during the tax year, within certain parameters. For 2024, the Section 179 deduction is available for all qualifying purchases up to a maximum deduction of $1,220,000 and includes both new and used assets.
The Section 179 deduction is limited by taxable business income and a fixed asset acquisition phaseout. The acquisition phaseout begins at $3,050,000 in total purchases for the 2024 tax year and is fully phased out when total purchases exceed $4,270,000
For owners with multiple pass-through businesses, plan Section 179 deductions to not exceed the maximum deduction in total from all businesses if possible. In addition, the dealership is prohibited from claiming Section 179 depreciation for any amounts above taxable business income in the tax year.
Inventory Valuation Methods
If you’re currently using a first-in-first-out (FIFO) method for valuing your inventory, consider the potential tax advantages of adopting the last-in-first-out (LIFO) method. When using the LIFO method of inventory valuation, the taxpayer generally receives a tax benefit year-over-year associated with the inflation on inventory.
As many RV dealers experienced during 2020 and 2021, if inventory levels decline substantially there may be tax consequences as LIFO inventory is liquidated. However, given the current economic conditions, high inflation rates, and return to more normalized inventory levels, it’s a great time to re-evaluate inventory valuation methodology and take advantage of potential tax savings.
Floorplan Interest Opportunities
The Tax Cuts & Jobs Act of 2017 implemented a cap on interest expense deductibility for businesses under Section 163(j). Dealerships have a unique opportunity to exclude their floorplan interest for purposes of the interest expense limitation calculation, which can have a significant impact on taxable income each year.
To be eligible to exclude your floorplan interest from potential limitation under Section 163(j), the dealership is excluded from using bonus depreciation; however, dealerships can take advantage of Section 179 depreciation while also excluding their floorplan interest from the interest expense limitation calculation.
State Pass-Through Entity Tax Elections
Most states have implemented programs for pass-through entities, like partnerships and S-corporations, that allow the pass-through entity to pay state taxes at the entity level on behalf of their owners. This is a workaround to the $10,000 state and local tax itemized deduction limitation at the individual level through the 2025 tax year.
By electing to pay the state tax at the entity level, the pass-through entity can deduct the state tax paid and reduce its taxable income, potentially providing substantial tax savings for business owners.
Some state’s pass-through tax elections are scheduled to sunset at the end of 2025 along with the federal sunset of the limitation on the state and local tax itemized deduction. Each state has its own program guidelines and requirements, so it’s important to work with your tax advisor to understand the nuances of your state’s pass-through election program.
We’re Here to Help
To learn more about tax planning strategies specific to RV dealerships and how they can benefit your business, contact your Moss Adams professional.