News

The IRS issued a long-awaited package of guidance regarding the Sec. 163(j) limitation on business interest expense deductions. The guidance includes final and proposed regulations as well as a proposed revenue procedure with a safe harbor for operators of qualified residential living facilities and FAQs on the aggregation rules for determining a taxpayer’s gross receipts for purposes of the small business exception to the business interest expense limitation. The business interest expense limitation was enacted in the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and amended by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.

Under Sec. 163(j), for tax years beginning after Dec. 31, 2017, business interest expense deductions are limited to the sum of:

• The taxpayer’s business interest income;

• 30% (or 50% for 2019 and 2020, as amended by the CARES Act) of the taxpayer’s adjusted taxable income (ATI); and

• The taxpayer’s floor plan financing interest expense.

In a change made by the CARES Act, taxpayers can elect to use their 2019 ATI in computing the 2020 limit, helping taxpayers whose income declines in 2020. Taxpayers are also permitted to elect to apply the more restrictive 30%-of-ATI limit.

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