Interest on a dealer’s floor plan financing is fully deductible on the federal return, and it is one of the few kinds of business interest that Congress carved out of the Section 163(j) limitation. The floor plan financing interest expense deduction sits outside the 30% adjusted taxable income cap that constrains most other business interest, which means a qualifying dealer can deduct every dollar of floor plan interest paid in the year, no matter how large that number is relative to income. The catch is real and often overlooked: claiming this carve-out disqualifies the business from bonus depreciation on its other assets.
What Counts as Floor Plan Financing Interest
The deduction only applies to interest on debt that meets a specific statutory definition. The borrowing must be used to finance the acquisition of motor vehicles held for sale or lease, and the debt must be secured by that inventory. “Motor vehicle” is defined broadly. It covers self-propelled vehicles designed for use on public roads, boats, and farm machinery or equipment. For tax years beginning after 2024, Public Law 119-21 expanded the definition to include trailers and campers designed for recreational or seasonal use that are towed by or affixed to a motor vehicle.1Internal Revenue Service. Instructions for Form 8990
Interest on borrowings that fall outside that definition does not get the carve-out treatment. A mortgage on the dealership building, a term loan for shop equipment, or a working capital line are all business interest, but none of them are floor plan financing interest. They stay subject to the standard 30% adjusted taxable income limit.
Non-interest fees on the floor plan line are also separate from interest for tax purposes. Per-unit transaction fees, monthly administrative fees, audit fees, and late curtailment penalties are not floor plan interest and should not be lumped in on Form 8990.
How the Section 163(j) Deduction Works
Section 163(j) caps most businesses’ deduction for business interest at a formula: the sum of the taxpayer’s business interest income, plus 30% of adjusted taxable income (ATI), plus floor plan financing interest.2Office of the Law Revision Counsel. 26 USC 163 – Interest The third component is the piece that matters for dealers. Floor plan financing interest is added on top of the 30% ATI figure rather than being subject to it, so the entire amount clears the limitation regardless of size.3Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense
Any non-floor-plan business interest that exceeds the 30% ATI limit does not vanish. It carries forward to the next tax year and is treated as if paid in that later year, rolling forward indefinitely until the taxpayer has enough capacity to absorb it.2Office of the Law Revision Counsel. 26 USC 163 – Interest
Partnerships get special treatment. Disallowed interest at the partnership level is allocated to partners as excess business interest, and a partner can only deduct that allocation when the same partnership later passes out excess taxable income. That timing mismatch can strand deductions at the partner level for years.
How ATI Is Calculated After 2024
The ATI calculation has shifted more than once, and the current rule affects how much room there is for the non-floor-plan piece. From 2018 through 2021, depreciation, amortization, and depletion were added back to taxable income when computing ATI, which made the 30% cap more generous. From 2022 through 2024, those add-backs went away and ATI shrank, tightening the cap. For tax years beginning after December 31, 2024, Public Law 119-21 restored the add-back, so ATI once again includes depreciation, amortization, and depletion.3Internal Revenue Service. Questions and Answers About the Limitation on the Deduction for Business Interest Expense For a dealer carrying significant depreciation on facilities and service equipment, the restored add-back meaningfully increases the room to deduct interest that doesn’t qualify for the floor plan carve-out.
Small Business Exemption
Dealers with average annual gross receipts at or below the Section 448(c) threshold are exempt from Section 163(j) altogether. The base threshold is $25 million, adjusted for inflation and rounded to the nearest $1 million, and the test uses average gross receipts over the three preceding tax years. A dealership that clears this exemption can deduct all business interest without applying the 30% cap or worrying about the floor plan carve-out at all. Smaller single-point dealers should confirm this threshold before doing any of the segregation work described below, because the entire exercise may be unnecessary.
The Bonus Depreciation Trade-Off
This is the trap. IRC Section 168(k)(9) excludes from bonus depreciation any property used in a trade or business that has floor plan financing indebtedness, if that floor plan interest was taken into account under Section 163(j)(1)(C).4Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System Translated: if you claim the floor plan interest carve-out, the business loses bonus depreciation on its assets.
With Public Law 119-21 restoring 100% bonus depreciation on qualifying property, that lost deduction has real dollar consequences. A dealer investing in a major facility renovation, new service lifts, or technology infrastructure could give up a substantial first-year depreciation write-off in exchange for the floor plan interest carve-out.
The choice isn’t automatic. A high-volume dealer with millions in floor plan interest and modest capital spending will almost always prefer the carve-out. A dealer in the middle of a large building project may find the opposite. The election is effectively all-or-nothing at the entity level. You cannot claim the floor plan carve-out and take bonus depreciation on the same business’s assets in the same year.
The alternative is to forgo the carve-out and subject all business interest, including the floor plan portion, to the 30% ATI limit. If the dealer’s ATI is high enough to absorb the interest under the cap, this path preserves bonus depreciation eligibility. Modeling both scenarios each year, using the dealer’s actual interest expense, capital spending plan, and taxable income profile, is the only way to know which produces the better result.
Reporting on Form 8990
Any taxpayer subject to Section 163(j) files Form 8990, Limitation on Business Interest Expense Under Section 163(j). Floor plan financing interest expense goes on Line 4 of Section I, reported separately from all other business interest.1Internal Revenue Service. Instructions for Form 8990 The form then feeds that figure into the limitation calculation, adding it to business interest income and 30% of ATI to produce the total allowable interest deduction.
Accurate reporting depends on isolating floor plan interest from other interest throughout the year, not reconstructing the split at tax time. Interest on the dealership mortgage, equipment loans, working capital lines, and any other borrowing needs to be tracked separately from interest on the floor plan facility. For dealers organized as partnerships or S corporations, the entity-level Form 8990 drives the allocation to owners, and any error at the entity level flows to every partner or shareholder return.
Documentation should link each interest charge back to a specific unit of inventory and the corresponding floor plan advance. If the IRS challenges whether a given amount qualifies as floor plan financing interest, the dealer needs to show that the underlying debt financed the acquisition of qualifying inventory (motor vehicles, boats, farm equipment, or, for post-2024 years, qualifying trailers and campers) and that the debt is secured by that inventory.2Office of the Law Revision Counsel. 26 USC 163 – Interest
Bookkeeping Practices That Protect the Deduction
The tax treatment only works if the underlying records support it. A few habits keep the deduction clean:
- Accrue floor plan interest daily on every open unit, rather than waiting for the lender’s statement. Monthly true-ups against that statement catch errors before they compound.
- Set up separate general ledger accounts for floor plan interest, other business interest, and non-interest floor plan fees. That segregation flows straight into Line 4 of Form 8990 and prevents the misclassification that IRS examiners look for.
- Net manufacturer floor plan credits against floor plan interest expense rather than booking them as miscellaneous income. The financial statements then reflect the true carrying cost, and the tax return reports the correct net interest figure.
- Reconcile the lender’s floor plan statement to the inventory system monthly. Every unit on the lender’s statement should match a unit in inventory, and any mismatch should be resolved before it grows.
- Rerun the bonus depreciation trade-off analysis every year. Capital spending, inventory levels, and taxable income shift, and last year’s answer isn’t necessarily this year’s.