Changes to the business interest expense deduction were implemented under the Tax Cuts and Jobs Act (TCJA). Beginning on January 1, 2018, this deduction is limited to 30% of adjusted taxable income (ATI) for qualifying taxpayers. Excess amounts will carryforward indefinitely.
The limitation does not apply to small businesses with average gross receipts of $25 million or less over a three-year period, unless the taxpayer is part of a consolidated or related-party group. Floor plan interest is excluded, and certain utility companies are also exempt.
Adjusted taxable income equals taxable income without the following:
- Non-business income, such as gains from the sale of assets held for investment
- Business interest expense
- Business interest income
- Depreciation (excludes depreciation treated as cost of goods sold), amortization, or depletion
- Section 199A deduction (if applicable)
An irrevocable election is available for real property and/or farming businesses if average gross receipts exceed $25 million. When electing out the business interest limitation will not apply, and an alternative depreciation system (ADS) is required for nonresidential real property, residential rental property, and qualified improvement property and farming assets with a useful life of more than 10 years.
For S-corporations and partnerships, the interest limitation is calculated at the entity level. Interest expense greater than 30% of ATI will carry over at the entity level until the corporation generates enough income (in the same trade or business). Furthermore, the entity level limitation for partnerships will carryover at the partner level.
Items to consider include, but are not limited to, the following:
- If making the election, review of depreciation cost comparison
- Consider the limitations on capital structures and the after-tax cost of debt financing
- Paying off or paying down loan if possible
We hope you find this information valuable. As always, we are here to help. Please contact Lori Givens with questions or to start a conversation.