Business Interest Expense Deduction Limitation

Final regulations related to business interest
expense deduction limitation

Final regulations are out regarding the provision of the Tax Cuts and Jobs Act that limits the deduction for business interest expense, including basic statutory amendments made by the CARES Act.

For tax years beginning after December 31, 2017, business interest expense deductions are generally limited to the sum of:

the taxpayer’s business interest income
30 percent (or 50 percent, as applicable) of the taxpayer’s adjusted taxable income; and
the taxpayer’s floor plan financing interest expense

The business interest expense deduction limitation does not apply to certain small businesses whose gross receipts are $26 million or less, those electing real property trades or businesses, those electing farming businesses, and certain regulated public utilities. The $26 million gross receipts threshold applies for the 2020 tax year and will be adjusted annually for inflation.

A real property trade or business or a farming business may elect to be excepted from the business interest expense limitation. However, businesses cannot claim the additional first-year depreciation deduction for certain types of property held by the electing trade or business.

To calculate and report your deduction and the amount of disallowed business interest expense to carry forward to the next tax year, use Form 8990, Limitation on Business Interest Expense Under Section 163(j),

Along with the final regulations, the IRS issued the following additional items of guidance related to the business interest expense deduction limitation:

Proposed Regulations

The proposed regulations provide additional guidance on various business interest expense deduction limitation issues not addressed in the final regulations, including more complex issues related to the amendments made by the CARES Act. Subject to certain restrictions, you may rely on some of the rules in these proposed regulations until final regulations implementing the proposed regulations are published in the Federal Register. Written or electronic comments and requests for a public hearing on these proposed regulations must be received within 60 days of date of filing for public inspection with the Federal Register.

Proposed Revenue Procedure

A proposed revenue procedure provides a safe harbor allowing taxpayers engaged in a trade or business that manages or operates qualified residential living facilities to treat such trade or business as a real property trade or business solely for purposes of qualifying as an electing real property trade or business. Written or electronic comments on the proposed revenue procedure must be received no later than Monday, September 28, 2020.

For a general overview of the rules that apply to determine whether a taxpayer is a small business that is exempt from the business interest expense deduction limitation, see FAQs Regarding the Aggregation Rules Under Section 448(c)(2) that Apply to the Section 163(j) Small Business Exemption.

A Final Note

Contact your local tax professional if you have questions or need further assistance with the Business Interest Expense Deduction Limitation per the Tax Cuts and Jobs Act and the CARES Act.

Stay safe. Stay well. Stay home.