A provision of the CARES Act temporarily increases the amount of interest expense businesses are allowed to deduct on tax returns, increasing the 30 percent limitation to 50 percent of taxable income for 2019 and 2020.
Since 2018, RVIA, RVDA and congressional RV Caucus members have been lobbying to allow non-motorized RV inventory to be exempt from limitations placed in the 2017 tax legislation. The CARES Act change provides temporary relief for a more liberal deduction on business interest paid and allows time for RVIA to secure enactment of a permanent solution (tax years 2021 and beyond).
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, including motor vehicles. However, 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 50 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.