Transcript Is Available of IRS Hearing on Bonus Depreciation Regs

UNITED STATES DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

PUBLIC HEARING ON PROPOSED REGULATIONS
"ADDITIONAL FIRST YEAR DEPRECIATION DEDUCTION" 

Washington, D.C.
Wednesday, November 13, 2019

PARTICIPANTS:

For IRS:
AMY J. PFALZGRAF
Special Counsel
Office of the Associate Chief Counsel
(Income Tax & Accounting)

KATHLEEN REED
Branch Chief
Branch 7
Office of the Associate Chief Counsel
(Income Tax & Accounting)

ELIZABETH R. BINDER
Attorney
Branch 7
Office of the Associate Chief Counsel
(Income Tax & Accounting)

For U.S. Department of Treasury:

ELLEN MARTIN
Tax Policy Advisor
Office of Tax Policy

Speaker:

JOSEPH MAGYAR
Crowe, LLP
(on behalf of the National Automobile Dealers Association)

* * * * *

PROCEEDINGS

(9:59 a.m.)

MS. REED: So, welcome the Public Hearing for the Section 168 Proposed Regulations that were published on September 24, 2019.

And we only have one speaker today, and so after that person speaks, I'm going to open it up to anyone else who wants to otherwise speak. And then the hearing will end.

So, let's see. The first person is from Crowe, and the only person.

MR. MAGYAR: Good morning. My name is Joseph Magyar. Thank you for allowing me on behalf of the National Automobile Dealers Association to provide comments regarding the 2019 proposed regulations under Internal Revenue Code section 168(K). NADA represents over 16,000 franchise dealers located in all 50 states. We sell, finance, and service both new and used vehicles.

The members of NADA collectively employ over 1.1 million people nationwide, and most NADA members are small businesses as defined by the Small Business Administration.

The floor plan and bonus depreciation interaction, NADA appreciates and generally supports the additional guidance contained within the proposed regulations which is consistent with the intent of the Tax Cuts and Jobs Act, the TCJA.

We applaud the consideration given to the taxpayer concerns regarding the original proposed regulations. The NADA continues to have concerns about some aspects of the interaction between sections 163(J) and 168(K). Section 168(K)(9)(B) excludes property used in the trade or business with floor plan financing indebtedness, from the definition of property qualified for bonus depreciation.

If the floor plan financing interest related to such indebtedness was taken into account under sections 163(J)(1)(C), section 163(J)(1)(C) allows trades or business with floor plan financing to deduct 100 percent of their floor plan financing interest in addition to the amounts allowed under section 163(J)(1)(A) and (B), or the 30 percent limitation.

NADA appreciates and agrees for the purposes of 168 (K)(9)(B) that floor plan financing interest does not take into account by trade or business that has floor plan financing indebtedness, if the sum of the amounts calculated under the 30 percent limitation exceeds the total business interest expense, including floor plan financing interest.

Thus, under the scenario trades or businesses with floor plan financing interests would be able to deduct bonus depreciation. The proposed regulations conclude that taxpayers of floor plan financing interest expense are not able to optionally limit their business interest expense including floor plan financing interest to the 30 percent limitation and carryover the excess business interests.

For example, a taxpayer that has floor plan financing interests expense and purchases $5 million of property additions, that otherwise qualify for bonus depreciation would be ineligible for bonus depreciation if their business interest expense, including the floor plan financing interest, exceeded the 30 percent limitation by just one dollar.

Thus, under the proposed regulations one dollar of excess business interest expense would make the taxpayer ineligible for bonus depreciation, and cost the taxpayer additional depreciation expense of approximately $4 million, assuming five-year makers property.

The taxpayers would be significantly penalized by the TCJA under the proposed regulations and not entitled to the same benefits available to other taxpayers without floor plan financing interests.

It is unfair to penalize taxpayers' business interests that includes floor plan financing by requiring them to claim the exclusion when doing so prevents them from claiming more beneficial bonus depreciation.

The Blue Book includes two examples of the interaction between sections 168(K)(9)(B), and 163(J)(1)(C). The proposed regulations are consistent with Blue Book Example 1, and inconsistent with Example 2. The conclusion reached in the preamble to the proposed regulations that taxpayers with floor plan financing interest expense are not able to optionally limit their business interest expense to the 30 percent limitation is not consistent with the intent of the TCJA or the Blue Book.

Taxpayers with floor plan financing interest that wish to deduct bonus depreciation and limit their business interest expense, including floor plan interest to the 30 percent limitation, should be able to share the same benefits that taxpayers without floor plan financing interest enjoy.

Section 163(J) should be read as providing dealers with a choice of including their floor plan interest as part of the 30 percent limitation. There is no statutory language that excludes floor plan financing interest from business interest, or a recommended treatment allowing the taxpayer a choice.

We believe the intent was to allow taxpayers with floor plan interest to be treated similarly to all other taxpayers in any case while providing them the opportunity to deduct 100 percent of their floor plan financing interest in exchange for a loss of bonus depreciation.

NADA urges that the full — the final regulations include a provision that dealers can choose each year to either (1) deduct business interest including floor plan interest subject to the same limitations as taxpayers with no floor plan interest and deduct bonus depreciation, or (2) deduct their full floor plan interest under section 163(J)(1)(C) with a 0 deduction for bonus depreciation.

For taxpayers who had relied on the Blue Book for 2018 transitional guidance is needed. For tax year 2018 some taxpayers relied on the second Blue Book example, and actually limited their business interest expense and claimed depreciation. If the final regulations do not allow the optional limitation such taxpayers need relief related to the carryover of 2018 business interest expense that included floor plan financing interest.

Relief should provide that the excess floor plan interest not deducted with the 2018 tax year be allowed as part of the general business interest limitation carried forward. Such provision would eliminate uncertainty for dealers that relied on the second Blue Book example.

Relief for election out of bonus depreciation for the 2018 tax year, for the tax year 2018 some taxpayers had total business interests, including floor plan financing interest, that did not exceed the 30 percent limitation, and did not rely on the first Blue Book example to claim bonus depreciation.

In addition, a further subset of these taxpayers attached an irrevocable election out of bonus depreciation to their 2018 income tax returns. Many taxpayers in this situation would like to rescind the election out of bonus depreciation, and rely on the proposed regulations and claim bonus depreciation without filing a costly private letter ruling.

Relief is needed for taxpayers in this situation to allow them to rescind this election in claimed bonus depreciation. It may be asserted that such election out of bonus depreciation was not valid because the taxpayer was interpreting is not being eligible to claim bonus depreciation, and thus the election was meaningless and does not need to be rescinded.

However, due to the uncertainty, we ask that the final regulations clarify that such circumstances do not constitute an election out of bonus, and that the taxpayer may amend the tax return to claim bonus depreciation as allowed by the proposed regulations, or allow other relief such as filing an accounting method change to claim the bonus depreciation.

Alternatively, we asked that final regulations provide general relief to rescind an election out of bonus depreciation. We recommend a six-month period after the regulations are finalized for administrative relief by amending the taxpayer's return or similar administrative process.

Thank you for the opportunity to comment on these matters. Do you have any questions?

MS. REED: On the third point I guess, it's with the dealers who follow the Example 2?

MR. MAGYAR: Yes.

MS. REED: In the Blue Book. Approximately how dealers do you think there were?

MR. MAGYAR: So, you're asking about the second example where the dealers chose to optionally limit their bonus depreciation —

MS. REED: Right.

MR. MAGYAR: And take the bonus depreciation?

MS. REED: Right, with the interest limitation, right.

MR. MAGYAR: I can't really point to any specific statistic. I know within our practice, I would say it was probably about 20 to 25 percent of our clients. And we have probably the largest practice in the country serving dealers. So that's hundreds of dealership tax returns. So, if you extrapolated that out to the, you know, 16,000 dealers across the country, it's probably a few thousand dealers.

MS. REED: Would you mind clarifying a little bit what you — you mentioned what you thought the relief should look like in that situation. Could you kind of go over that one more time?

MR. MAGYAR: Well, in the — you know, first off we would request that dealers be able to have the option to choose whether they limit the floor plan interests, or whether they take bonus depreciation, but if in the situation where that's not optional, that if you're one dollar over the interest limitation, the 30 percent limitation, you can't take bonus. The request there is, the dealers, who, for their 2018 returns, optionally file that second Blue Book example, they have floor plan interest included within their general business interest limitation carryover.

Under the proposed limitation — proposed regulations, that situation couldn't exist because it's not optional. So for those taxpayers who find themselves in that situation, or simply asking for relief that would say, if you have floor plan interest that is included in your generally business interest limitation carryover, that you're allowed to include that in your carryover, as a general business interest limitation carryover that you don't — the concern is that otherwise, you just lose that.

That you don't get to carry that over because you're not allowed to do that under the regulations, so if someone did file that second Blue Book example, we are just asking for the following tax year that you can include that as part of your carryover. That it's not lost forever. So that becomes a timing issue and not a permanent difference.

Does that clarify what you were asking about?

MS. REED: Yes, it did.

MR. MAGYAR: Okay. Any other questions? Okay. Thank you.

MS. REED: Thank you. Is there anyone else who would like to speak? All right, well, that's the end of this Public Hearing. Thank you so much.

(Whereupon, at 10:11 a.m., the HEARING was adjourned.)