The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that was passed in late March by Congress included a number of provisions to support businesses across the industry, including the very popularPaycheck Protection Program. The RV Industry Association notes that what you may have missed was a temporary increase in the amount of interest expense businesses can deduct on their tax returns – from 30 percent to 50 percent of taxable income for 2019 and 2020.
As states are reopening and RV dealers are reporting increased sales, the floorplan financing relief under the CARES Act will provide relief to dealers as they begin to order additional inventory.
“Since 2018, the RV Industry Association, our friends at the RV Dealers Association, and our RV Caucus members have been lobbying to allow non-motorized RV inventory to be exempt from limitations placed in the 2017 tax legislation (also referred to by their Internal Revenue Code section 163(j)). The CARES Act change provides temporary relief for a more liberal deduction on business interest paid and allows time for the RV Industry Association to secure enactment of a permanent solution (tax years 2021 and beyond).”
By way of background, the RVIA notes that restrictions on the net interest deduction were significantly tightened in the 2017 Tax Cut and Jobs Act, which reduced the limit on the deduction for net interest from 50 percent to 30 percent of adjusted taxable income (income before taxes, interest deductions, and depreciation, amortization, or depletion deductions).
Certain businesses were exempt from the 2017 changes. Smaller businesses with less than $25 million in gross receipts were excluded. Interest used to finance inventory for motor vehicles was also exempt, although due to a drafting error the exception did not apply to vehicles that are not self-propelled. Since approximately 85 percent of RVs sold are non-motorized travel trailers, almost an entire class of RVs was excluded from the exemption. As a result, larger dealers are forced to adopt different accounting rules for trailer and motorhome inventory.
This CARES provision increases the amount of interest expense RV dealers and other businesses can deduct on their tax returns by increasing the limit to 5 percent of taxable income (with adjustments) for 2019 and 2020. As businesses look to weather the storm of the current crisis, this provision will allow them to increase liquidity with a reduced cost of capital.