WASHINGTON -- The auto industry fared better, on balance, in the tax bill that narrowly passed the Senate on Saturday than in the House version. Now the industry will try to hold onto those gains, or improve on them, as both chambers convene to craft a unified bill.
Dealerships won a reprieve when last-minute language was inserted in the Senate legislation to preserve full deductibility of floorplan interest -- mirroring the House measure.
The Senate is seeking to limit business interest deductibility to 30 percent of adjustable taxable income, and the original proposal would have included the traditional write-off of interest expense on vehicle inventories.
Industry officials say retailers heavily rely on interest-only loans to buy products they can showcase to customers. The specialized financing and interest deduction enables dealerships, often small businesses, to keep down the cost of holding inventory.
Family-owned franchise dealerships also would benefit from how the House treats the estate tax, which is levied on property when it transfers to heirs after an owner's death. Both chambers would immediately double the current exclusion, but the House would repeal the estate tax after 2014.
For 2017, an individual can leave $5.49 million ($11 million for a married couple) to heirs and pay no federal estate tax, according to the IRS.
Aside from industry-specific provisions, the private sector stands to win big with corporate tax rates set to be reduced from 35 to 20 percent, with the change going into effect immediately under the House plan and in 2019 under the Senate version.
Republican Sens. Ron Johnson of Wisconsin and Steve Daines of Montana held out until they got better terms for small business owners compared to large companies. Single proprietorships and other S corporations don't have income taxed at the corporate level but pass it through to themselves and pay the tax on their individual returns.
Both proposals would lower the tax rate on individuals and then set thresholds on how much income would be treated as pass-through. The Senate bill allows a deduction for 23 percent of qualifying "pass-through" income, while the House bill caps the maximum rate at 25 percent and has special rules for income over that amount that effectively raises the tax rate.
Automakers received good news when the Senate bill maintained the existing tax credit for consumers who purchase electric vehicles.
Under current law, consumers who purchase plug-in EVs qualify for a federal tax credit of between $2,500 and $7,500, depending on the size of the vehicle battery. The credit phases out for each automaker when it reaches 200,000 vehicles sold, a level that never has been reached. Clean-energy proponents and automakers argue that the electric-drive sector still is getting on its feet and needs the credit to provide companies an incentive to invest.
Most companies also will benefit from a phaseout of capital expenditure deductions, but less than Republicans originally proposed. Early plans called for an immediate write-off for new equipment as opposed to taking annual depreciations. Now, the plans would allow for equipment to be expensed over five years at 100 percent, but after that, the rate will gradually phase out over the next four years. The advantage of accelerated expensing is that it front-loads the benefits, creating greater return on investment.
The limitations on business interest and capital expense deductions were necessary to help keep the tax bill within budget rules for not increasing the deficit more than $1.5 trillion over 10 years.
Eliminating certain tax breaks could diminish the overall desirability of corporate tax reform for many businesses. That was especially true for dealerships before the floorplan financing exemption made it through, said Shaun Petersen, senior vice president of legal and government affairs for the National Independent Automobile Dealers Association.
"One of the concerns that we have is that at the end of the day, [overall tax reform] may not be a net gain, and that's especially true if interest rates creep. You wouldn't be able to lower the rate enough if they take away that deduction, so you could end up paying more in taxes," he said.
Excise tax questions
Meanwhile, international automakers are worried about a 20 percent excise tax in the House bill aimed at imports between related parties, part of a broader effort to prevent companies from shifting income to low-tax jurisdictions.
The provision, for example, would impact shipments of tooling and other manufacturing components from a parent company to a U.S. subsidiary. Authors of the measure say a parent company could inflate the price sold to the subsidiary to reduce its taxable income in the U.S.
The Senate bill uses a calculation methodology that takes those kinds of situations into account to determine a company’s modified taxable income and then imposes a 10 percent tax on that amount, which international automakers say is fairer.
House and Senate leaders are expected this week to name their respective negotiating teams responsible for harmonizing the two tax bills.