The Tax Cuts and Jobs Act (TCJA) of 2017 famously adjusted the income tax brackets and lowered the corporate tax rate to 21 percent, but the sweeping legislation contained a host of tax-related changes. The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 made further tweaks—like adjusting the then-new limitation on deducting business interest expenses—that forced the Internal Revenue Service to work on a new set of final regulation.
This week saw the IRS announce the publication of the final regulations for business interest expense deductions. Obviously, the regulations outline how the limitation is applied by the IRS and which types of businesses may not be subject to it.
How is the business interest expense deduction limitation applied?
The final regulations limit business interest expense deductions to an inflation-adjusted gross receipts threshold. The limitation applies to tax years after December 31, 2017, and the threshold for tax year 2020 is $26 million.
The IRS says the gross-receipts threshold is calculated as a sum of the following:
- "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."
Not all businesses are subject to the limitation. “A real property trade or business or a farming business may elect to be excepted from the business interest expense limitation,” the IRS explains. “However, taxpayers cannot claim the additional first-year depreciation deduction for certain types of property held by the electing trade or business.”
Further, the IRS says it published three documents that flesh out guidance for the business interest expense deduction limitation:
- Proposed regulations “[addressing] more complex issues related to the amendments made by the CARES Act”
- A safe harbor for “qualified residential living facilities to treat such trade or business as a real property trade or business solely for the purposes of qualified as an electing real property trade or business”
- An FAQ detailing aggregation rules for the gross receipts test and “[determining] whether a taxpayer is a small business that is exempt”
Visit IRS.gov to learn more about the business interest expense deduction limitation.