Q&A: Dealerships and OBBBA’s Key Changes to Expense Limitations
How the OBBBA’s Changes to 163(j) Expense Limitations Is Reshaping Tax Strategy for Car Dealers
For most dealerships, recent changes to Section 163(j) of the tax code are a welcome relief, as they allow for a more favorable calculation of the business interest expense deduction. The new rules revert the calculation back to an EBITDA-based formula, meaning that depreciation and amortization are added back to adjusted taxable income. This change generally increases a dealership’s deductible interest expense, which is crucial given the high costs of inventory and other capital investments. The changes also expand the definition of “floor plan financing interest” to include recreational vehicles like campers and trailers, providing an additional benefit for certain dealers.
Key Takeaways
How does the new law change business interest deductions?
The One Big Beautiful Bill Act (OBBBA) now calculates the interest expense limitation using EBITDA, allowing businesses to deduct more interest.
What is the new consumer tax deduction for car buyers?
Consumers can now deduct up to $10,000 in interest on a new car loan, even without itemizing.
What’s the biggest change to depreciation?
The new law permanently reinstates 100% bonus depreciation for qualifying business property.
Q: What is Section 163(j)?
Answer: Section 163(j) is a provision of the Internal Revenue Code that limits a business’s ability to deduct its business interest expense. The limit is calculated based on a percentage of the business’s adjusted taxable income (ATI), plus any business interest income and floor plan financing interest. This provision was originally created to prevent highly leveraged businesses from deducting excessive interest, but it can impact a wide range of businesses, including dealerships. Before the most recent changes, the calculation of ATI became more restrictive, which reduced the amount of interest that many businesses could deduct.
Q: How does the new law change the Section 163(j) calculation?
Answer: The new tax law, often referred to as the One Big Beautiful Bill Act (OBBBA), brings back a more favorable calculation for Section 163(j). Before 2022, ATI was calculated similarly to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which allowed businesses to add back depreciation and amortization to their taxable income. After 2022, the calculation changed to EBIT (Earnings Before Interest and Taxes), meaning these non-cash expenses were no longer added back. This significantly reduced a business’s ATI, thereby lowering the maximum amount of deductible interest.
The new law restores the EBITDA-based calculation for tax years beginning after 2024. By allowing the add-back of depreciation and amortization, dealerships can increase their ATI, which in turn raises the cap on their deductible business interest expense. This is a big win for capital-intensive businesses like dealerships that make frequent investments in property, equipment, and technology.
“The new rules revert the calculation back to an EBITDA-based formula, which generally increases a dealership’s deductible interest expense.”
Q: What is floor plan financing, and why is it important for dealerships?
Answer: Floor plan financing is a specialized type of debt used by dealerships to finance the purchase of their inventory—the cars, trucks, and other vehicles on their lot. This debt is secured by the inventory itself. The interest on this debt is considered floor plan financing interest.
For tax purposes, floor plan financing interest has a special status under Section 163(j). It is fully deductible and is not subject to the 30% ATI limitation. This is a critical exception for dealerships, as their business model relies on maintaining a large, costly inventory, and their interest expenses can be substantial. The new law further enhances this benefit by expanding the definition of “motor vehicles” to include recreational vehicles like campers and trailers, which means dealers of these products can now also fully deduct their floor plan financing interest.
Q: What’s the relationship between Section 163(j) and bonus depreciation?
Answer: This is a key point for dealerships. While floor plan financing interest is fully deductible, a business that takes the full deduction for this interest is generally prohibited from claiming bonus depreciation for assets placed in service during the same tax year. This creates a strategic choice for dealers.
Bonus depreciation allows businesses to immediately deduct a large percentage of the cost of new equipment and other qualifying property in the year it’s placed in service, rather than depreciating it over several years. The new law has also restored 100% bonus depreciation, which was previously phasing down.
The conflict between these two provisions—the full deductibility of floor plan interest and the ability to claim bonus depreciation—forces dealerships to make a strategic decision. A dealership with high floor plan interest might find the 163(j) floor plan financing exception to be the most valuable, even if it means forgoing bonus depreciation. However, a dealership making a large capital investment in a new facility or expensive shop equipment might opt for bonus depreciation instead. The new law’s restoration of the EBITDA-based calculation makes this decision a little more complex and favorable to dealers. With a higher ATI, a dealership may be able to deduct a larger portion of their regular business interest, allowing them to take advantage of bonus depreciation without being subject to the strict 163(j) limitation.
Q: What other tax changes affect dealerships?
Answer: While Section 163(j) is a significant change, the new law includes other provisions that impact dealerships. Here’s a brief look at some of them:
Consumer Auto Loan Interest Deduction
For a limited time, from 2025 to 2028, consumers can now deduct up to $10,000 of interest on new car loans. This is an above-the-line deduction, meaning it’s available even to those who don’t itemize. This could serve as a powerful sales tool to attract and close deals, particularly with middle-income buyers.
Electric Vehicle (EV) Credits
Several federal EV tax credits for consumers are being phased out or accelerated. This could impact customer demand for new and used EVs and requires dealerships to adjust their inventory and marketing strategies accordingly.
Overtime Pay Deductions
The law creates a new deduction for the premium portion of overtime pay for certain employees, which could offer some marginal tax relief for dealerships with large service departments.
Estate Tax Relief
For family-owned dealerships, the new law makes the increased estate and gift tax exemption permanent, providing greater certainty for succession planning.
Navigating the New Tax Landscape
The recent tax law changes present a mixed bag of opportunities and challenges for dealerships. While the restoration of the EBITDA-based calculation for Section 163(j) and the expanded definition of floor plan financing are clear positives, the strategic choice between deducting floor plan interest and claiming bonus depreciation remains a critical decision. Additionally, new consumer-focused provisions, such as the auto loan interest deduction and changes to EV credits, require a shift in sales and marketing strategies. Ultimately, staying on top of these complex rules and consulting with a qualified tax professional is essential for dealerships to maximize their tax benefits, maintain profitability, and successfully navigate this evolving tax landscape.
Disclaimer: This article provides general information and should not be considered professional financial or tax advice. Please consult with a qualified CPA or financial advisor for guidance specific to your individual dealership’s needs.
Dealership Experts
Kristin Krabacher is a financial strategist with Brady Ware Dealership Advisors, specializing in auto dealer profitability and tax optimization. With over 8 years of experience guiding dealership owners, Kristin excels at translating complex tax laws into clear, actionable insight. She’s helped countless clients enhance gross profit, improve compliance, and make smarter financial decisions through tailored benchmarking and audit-ready processes.