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New Year, New Legislation, New President: What Does It Mean for Buy Here – Pay Here Dealers?

January 25, 2021

This article originally appeared in The Showroom.

Within the span of a month, the Consolidated Appropriations Act, 2021, was signed into law, and a new presidential administration took office. Both events stand to have a profound impact on existing tax law as well as the COVID-19 economic relief available to businesses and individuals. Here’s what these changes mean for buy here – pay here (BHPH) dealers.

Consolidated Appropriations Act, 2021

After the Paycheck Protection Program (PPP) was introduced, the IRS stated that the deductions supporting PPP forgiveness were not deductible. Fortunately, the latest round of COVID-19 relief legislation, the Consolidated Appropriations Act, 2021, reinstates the tax deductions, which was clearly intended at the onset of the program. Furthermore, it confirms that PPP forgiveness warrants a basis increase (as tax-exempt income). These provisions should serve to bolster cash positions of many BHPH dealers still largely affected by the coronavirus pandemic as we enter 2021.

Dealers typically have a strong first quarter due to existing and prospective customers receiving tax refunds. However, it’s important for dealers to be wary that the first quarter of 2021 could be different – tax refunds may decrease as a result of unemployment income being taxable.

While the legislation contains several provisions related to the original PPP, it introduces a second round of funding to qualifying borrowers. The requirements are more rigid this time around as borrowers will have to show a significant decline in gross revenue and cannot have more than 300 employees (amongst other criteria) to qualify. The maximum loan amount is as follows: (Average monthly payroll for one-year period prior to loan date or average monthly payroll for calendar year 2019) * 2.5 with a maximum loan size of $2 million. Borrowers elect whether to use calendar year 2019 or the applicable one-year period. The covered period to utilize PPP loan proceeds is between eight and 24 weeks, and borrowers can choose any time within this window. BHPH dealers will want to check with their professional advisors to see if they qualify for a second round of PPP funding.

Potential Tax Implications of the Biden Presidency

It’s important to note that none of President Biden’s proposed tax policies have been introduced to Congress yet, nor have any currently applicable laws changed. Ultimately, the final tax plan that the president unveils as a prospective law may be much different from his initial campaign proposal. However, awareness of these ideas gives BHPH dealers a good indication of what the new administration finds important and relevant. The following potential tax implications will have the most direct impact on BHPH dealers.

The Biden tax plan reverts the top income tax rate to 39.6% (currently at 37%) for taxpayers with more than $400,000 in taxable income. As the 35% rate currently applies to those with income over $400,000 for married filing joint or over $200,000 for single, head of household, and married filing separate status filers, the income levels associated with the remaining tax brackets would need to shift in order to keep Biden’s promise to only increase taxes on top earners. The increase in the top income tax bracket will have an obvious impact on many BHPH dealers due to the increased tax burden.

The Tax Cuts and Jobs Act of 2017 created the qualified business income deduction (QBI), which allows taxpayers other than C corporations to deduct 20% of qualified business income. The Biden tax plan would only allow a deduction for taxpayers with taxable income of $400,000 or less. Many dealers benefited from QBI by lowering their taxable income, which could be eliminated for some dealers under the proposed plans.

When analyzing the impact of presidential elections and potential tax changes, dealers need to look at both their short- and long-term financial plans. For individuals, thinking about succession and estate planning becomes critically important. For businesses, considering the changing tax rates as well as the availability for new or increased tax credits and deductions becomes increasingly important as they consider their long-term financial success and viability.

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