Permanent Tax Relief for Auto Dealer Interest Deductions
How the Permanent DDA Add-Back Restores EBITDA for Auto Dealers' Section 163(j) Interest Deductions
Effective in 2026, multiple-location auto dealers will benefit from a major tax relief: the permanent extension of the Depreciation, Depletion, and Amortization (DDA) add-back provision when figuring Adjusted Taxable Income (ATI), which specifically affects their interest expense calculations. This change effectively restores the more favorable EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) standard, allowing capital-intensive dealerships to deduct significantly more non-floorplan business interest. This relaxation of the Section 163(j) interest limitation is a permanent feature in tax law, providing long-term predictability and a crucial competitive advantage for budgeting and growth.
Key Takeaways
What is the most significant tax benefit for auto dealers regarding business interest starting in 2026?
The most significant tax benefit is the permanent DDA add-back provision which effectively restores the EBITDA standard for calculating deductible non-floorplan business interest.
How does the permanent Section 163(j) change affect a dealership’s decision on taking bonus depreciation?
The permanently relaxed interest limitation frees most dealerships from having to choose between maximizing interest deductions and taking full bonus depreciation.
What calculation standard is being restored to help capital-intensive auto dealerships deduct more interest?
The favorable calculation effectively restores the EBITDA standard for Adjusted Taxable Income, allowing capital-intensive dealers to deduct significantly more non-floorplan interest.
Understanding the Favorable Section 163(j) Calculation
Prior to this permanent change, the tax code was set to tighten interest expense deductibility significantly. The calculation of ATI, the figure upon which the 30% limitation is based, was scheduled to remove the favorable DDA add-back. This meant that beginning in 2026, ATI would be calculated using an EBIT (Earnings Before Interest and Taxes) standard. For a business that relies heavily on asset investment, like an auto dealership, this would have severely reduced their ability to deduct non-floorplan business interest, potentially forcing them to choose between maximizing interest deductions and utilizing full bonus depreciation on new facility and equipment investments.
The good news is that congressional action has permanently baked the DDA add-back into the interest limitation calculation. This means that, for a dealership, interest expense is now tested against a larger, more favorable ATI figure. This effectively restores the pre-2022 Section 163(j) interest calculation, which is highly beneficial for dealerships that carry substantial non-floorplan debt, such as mortgages for new facilities, capital expenditure loans, or financing for major expansions.
“The permanent extension of the DDA add-back provision effectively restores the more favorable EBITDA standard, allowing capital-intensive dealerships to deduct significantly more non-floorplan business interest.”
Maximizing Deductions and Growth for 2026 and Beyond
This permanent provision offers a clear and enduring benefit for multiple-location dealers, especially those focused on aggressive expansion. Dealerships relying on expansion loans or other large business debt can now confidently budget for maximal interest deductibility in 2026 and beyond. This is critical because how Section 163(j) applies to auto dealerships is often complex due to the interplay of floorplan financing.
It is important to remember that non-floorplan business interest is not exempt from the Section 163(j) limitation, only the floorplan interest is. Therefore, this permanent relaxation of the limitation frees most dealerships from the prior restriction that often forced a difficult choice between taking full advantage of interest deductions and accelerating asset write-offs through bonus depreciation. With the EBITDA standard restored, it is far less likely that the dealership’s total non-floorplan interest expense will bump up against the 30% ATI limit.
Planning Your Financial Strategy
To understand what this may mean for their dealership, dealers should immediately engage their tax professionals for forward-looking tax modeling. This modeling should confirm that the dealership’s total interest expense falls comfortably below the new, more generous 30% ATI limit. Understanding the interest limitation will help dealers review and forecast non-floorplan business interest expense for 2026 deductibility based on planned facility upgrades or acquisitions.
This proactive modeling will not only validate the expected tax savings but will also allow dealers to structure new debt with the assurance of full interest deductibility. This favorable tax environment provides a solid foundation for capital expenditure, ensuring that financing a new building or a major equipment purchase does not inadvertently create interest expense that is not immediately deductible. Dealers can now confidently plan for financing long-term growth knowing that this provision of the tax law has been simplified and maximized their financial flexibility.
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 business 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.