TCJA Hot Topics: Business Interest Deduction Limitation
Tax Partner Darla Hemmann has more than 25 years of public accounting experience. She works with privately owned businesses, executives and family groups and is responsible for supervising and reviewing tax engagements. Here are a few of the questions Darla has been answering about the new business interest deduction limitation under the TCJA:
Q: How has the deduction for business interest changed since the passage of the TCJA?
A: Prior to the new tax legislation, business interest was generally allowed as a deduction. For tax years beginning after Dec. 31, 2017, every business is generally subject to a disallowance of a deduction for net interest expense in excess of 30 percent of the business’s adjusted taxable income. Post TCJA, the business interest expense is limited to the sum of:
- Interest income for the year, plus
- 30 percent of adjusted taxable income, plus
- Floor plan interest
Interest income means the amount of interest allocable to the trade or business. It does not include any investment income, which pass-through entities could have. Adjusted taxable income is taxable income before: any item of income gain, loss or deduction that is not allocable to the business; any interest income or expense; any net operating loss; any Section 199A deduction (20 percent qualified business income deduction); any depreciation, amortization or depletion.
Q: Are there any exceptions or taxpayers that are excluded from this limitation?
A: The business interest expense limitation does not apply to taxpayers with average annual gross receipts of $25 million or less (average of three-tax-year period ending with the prior tax year). Other excluded taxpayers include businesses using floor plan financing loans to fund inventory and motor vehicles and certain regulated public utilities and electric cooperatives. You can also elect out of the limitation if you are in a real property trade or business. This includes any real property developments, redevelopments, construction, reconstruction, acquisition, conversion, rental, operations, management, leasing, or brokerage trade or business. However, if you elect out, you are required to use the alternative depreciation system (ADS) to depreciate real property (includes non-residential, residential and qualified improvement property). Taxpayers should note that once this election is made, it is irrevocable.