Business Interest Expense—Deductible or Not?

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Another provision of the Tax Cuts and Jobs Act (TCJA) is a new limitation on the business interest deduction.   It appears simple, but it is one of the most complicated calculations you will have to make if you don’t meet an exception. 

Your deduction cannot exceed the sum of:

  • Business interest income,
  • 30% of the adjusted taxable income (ATI), and
  • Any floor plan financing interest.

In my next blog, I will go through the steps of calculating the limitation, but first, let’s find out if your business meets an exception.

Here are the 3 exceptions to being subject to the business interest limitation.

  1. Small businesses defined as those with average gross receipts of $25 million or less annually, averaged over a 3-year period ending with the prior tax year.
  2. Eligible real property businesses which includes businesses that develop, construct, acquire, convert, rent, operate, manage, lease and/or broker real property can elect out of the limitation rules. However, if elected, the business will have to use Alternative Depreciation System (ADS) to depreciate their real property and qualified improvement property. The ADS method has a slower recovery life which, of course, decreases the depreciation deduction each year.
  3. Eligible farming businesses can also elect out of the business interest limitation. But they are subject to the same rule that requires the business to use ADS to depreciate their farming assets.

If you meet exception 1, then you have no worries and can continue to deduct business interest as in the past. You will want to keep an eye on your gross receipts and if you are close to the $25 million average over 3 years, be aware of what could happen and if there is a way to prevent it.

If you do not meet exception 1, but you are in the real property or farming business, you will want to analyze what it means to your business to elect out of the interest limitation rule. You will want to compare the tax benefit of deducting the interest to the tax detriment of having to use ADS for depreciation.

We recommend that you consult with your tax advisor to determine what it the best move for you and your business especially with all the changes that the TCJA is making this coming year.

 

kathi

Kathi Koenig, CPA
Partner – McGowen, Hurst, Clark & Smith, P.C.
p. 515.288.3279
e. kkoenig@mhcscpa.com

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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.

For more information about our firm, please visit our website or check us out on Facebook.

 

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