Tax Laws Sunsetting in 2025: Key Impacts for Auto Dealers

Tax Laws Sunsetting in 2025: Key Impacts for Auto Dealers

January 13, 2025

As 2025 approaches, we at Larson & Company are closely monitoring the potential changes in tax laws that could significantly impact auto dealers’ operations, profitability, and tax planning strategies. Several key provisions of the tax code, set to expire or undergo changes by the end of 2025, may have direct implications for auto dealers, particularly those dealing with sales, financing, and vehicle leasing. Understanding these changes is crucial for dealerships to maintain compliance, optimize their tax positions, and plan for the future.

Bonus Depreciation Expiration

One of the most significant tax changes auto dealers will need to address in 2025 is the gradual reduction and eventual expiration of the bonus depreciation provision. Under the current tax law (Tax Cuts and Jobs Act of 2017), businesses, including auto dealerships, are allowed 40% bonus depreciation in 2025, 20% in 2026 and none in 2027 and beyond. An entity is allowed to take bonus depreciation on qualifying assets, even if it creates a loss.

Key Point:

• Impact on Auto Dealers: The reduction in bonus depreciation will mean that auto dealers can no longer fully expense the purchase of assets in the year they are acquired. This could lead to higher taxable income and an increased tax burden unless dealers adjust their capital expenditure strategies accordingly.

Section 179 Expensing Limits

While bonus depreciation grabs most of the attention, Section 179 expensing also provides an avenue for businesses to deduct the cost of certain property up to a limit. In 2025, changes to Section 179 are expected that may affect the cap on deductions.

Current Law:

• Section 179 allows businesses to expense up to $1.16 million of qualifying equipment, with a phase-out threshold of $2.89 million.
• Unlike bonus depreciation, Section 179 is only allowed if there is taxable profit.

Impact on Auto Dealers:

• If Section 179 limits change, dealerships may find their ability to deduct the full purchase price of certain assets restricted. This could result in a reduction in upfront tax savings.

Changes to the Research & Development (R&D) Credit

Auto dealerships that invest in technological upgrades, software systems, or other innovations may be impacted by changes to the R&D tax credit. Currently, businesses can expense qualified R&D costs, including the development of new tools or systems that improve dealership operations, customer service, or vehicle technology. However, the law as it stands suggests the expensing of R&D costs will be phased out after 2025, with companies required to amortize these costs over several years instead of expensing them immediately.

Impact on Auto Dealers:

• Dealerships that invest heavily in technology upgrades or product development (such as creating custom financing tools or new inventory management systems) may face a delayed return on investment if the R&D credit is no longer available or is amortized over a longer period.

Electric Vehicle (EV) Incentives and Tax Credit Expiry

In recent years, the government has offered a range of incentives to encourage the adoption of electric vehicles (EVs), including tax credits for both consumers and businesses. However, many of these credits are set to expire or undergo significant changes in 2025.

Key Considerations:

• The federal tax credit for purchasing new EVs, which has been instrumental in driving consumer demand for electric vehicles, will be subject to income limits and vehicle price caps as part of the Inflation Reduction Act (IRA) provisions.
• Additionally, tax incentives for the development of EV infrastructure (such as charging stations) are also set to expire in 2025.

Impact on Auto Dealers:

• As the availability of tax credits for consumers decreases, dealerships that sell EVs may face challenges in maintaining the same level of demand. Without these credits, the upfront cost of EVs could become a significant barrier for potential buyers.
• Auto dealers will also need to adjust their sales and marketing strategies for EVs, which may become less attractive to price-sensitive buyers if incentives expire or are reduced.

State-Specific Changes

While federal tax law changes have a broad impact, individual states may also enact changes that affect auto dealers. For example, some states offer tax credits or incentives for dealerships to upgrade to greener technologies, expand operations, or reduce their carbon footprints. However, some of these state-level incentives may be subject to change as local budgets and priorities shift.

Impact on Auto Dealers:

• Dealerships in certain states may need to track the status of state-level credits or incentives to ensure they are taking full advantage of available benefits before expiration.
• In states with a strong emphasis on EV adoption, dealers may need to stay on top of changing requirements related to electric vehicle sales, rebates, and infrastructure investments.

Tax Credits for Dealerships with Employee Benefits

Employers that offer employee benefits, including health insurance and retirement savings plans, may see changes to available tax credits or deductions. Tax laws related to these benefits are constantly evolving, and businesses that do not stay up to date on these regulations may miss out on valuable savings.

Impact on Auto Dealers:

• If tax credits related to employee benefits (such as the credit for small businesses offering health insurance) sunset or change, auto dealers may face higher operational costs if they cannot leverage these credits.
• Dealerships with large numbers of employees will need to reassess their benefit offerings to ensure they remain competitive in attracting and retaining talent while maximizing tax savings.
  
  
  

Conclusion

As auto dealers prepare for the sunsetting of key tax provisions in 2025, strategic planning and proactive engagement with tax professionals are essential. The reduction or expiration of bonus depreciation, changes to Section 179 limits, and the evolving landscape of EV incentives present significant challenges. However, with careful planning and knowledge of potential changes, dealerships can continue to thrive and remain competitive in an ever-evolving industry. By keeping an eye on both federal and state-level changes, dealers can make timely adjustments to their operations, financing options, and vehicle offerings, ensuring they are well-positioned for the future. As always, please consult your tax advisor on the information above.

Larson and Company has developed a suite of services specifically to serve the needs of companies of all sizes in a wide range of industries.