Last month we started the discussion about the new limitation on business interest deduction. I gave the three exceptions to the limitation.
- The Small Business with average annual gross receipts of $25 million
- Electing Real Property Business
- Electing Farm Business
For more information about these exceptions, please see last month’s blog.
This month I want to discuss how the limitation is calculated if you don’t meet one of these exceptions.
Tax Cuts and Jobs Act (TCJA) imposes a new limit to the amount a business can deduct for business interest. This limitation which starts with tax years beginning in 2017 is limited to the sum of:
- Business interest income, plus
- 30% of adjusted taxable income (ATI), plus
- Floor plan financing interest paid by certain vehicle dealers.
This may appear to be simple, but as they say the devil is in the details. Let’s assume that business interest which is defined as interest on debt that is incurred for a trade of business does not raise any questions for us.
The area that will raise the questions seems to be what is adjusted taxable income or ATI? ATI is taxable income that is adjusted for the following:
- Any item of income, gain, deduction, or loss that isn’t allocable to a business
- Any business interest income or expense
- Any net operating loss deduction,
- The new deduction called qualified business income (QBI) deduction for up to 20% of qualified income from a pass-through business entity
- Any deductions for depreciation, amortization or depletion for tax years beginning before 2022.
There could also be questions on what qualifies as floor plan financing so if your business has floor plans it will be necessary to research if this applies to you and any restrictions.
If you have interest expense that is disallowed, you can carry forward into future years and use the deduction as allowed.
If you have a substantial amount of business interest, it would be worth your time to discuss the exceptions and limitation to determine if it will affect you and if it does you will want to discuss what strategies could help minimize your limitation and maximize your deduction.
A little more about us:
Located in West Des Moines, Iowa with a branch office in Winterset, Iowa, McGowen, Hurst, Clark & Smith, P.C. celebrates 65 years of extending excellent service to our clients, providing them with accounting, auditing, consulting and investment expertise.
Established in 1946, our staff has grown from 3 to 60 employees, making us large enough to provide our clients with a broad base of experience and resources, yet small enough to offer very personalized service—which we feel makes us stand apart from other CPA firms. In addition to the traditional services of Accounting, Tax Preparation, Audit and Business Consulting, MHC&S offers our clients specialized services including Estate Planning, Business Valuations, Cost Segregation Studies, Retirement Planning, QuickBooks Training, Financial Advisory Services, Fraud Detection and Deterrence, Business Succession Planning, Litigation Support and more.
MHC&S is a member of CPAmerica International, Inc., a national association of accounting firms offering membership to only 90 firms throughout the United States. This association offers a wide pool of additional technical expertise to the members firms, as well as continuing professional education necessary to maintain the degree of excellence which MHC&S feels is vital in today’s business environment.