By Barbara Ashorn, Tax Shareholder

Q: With the TJCA and CARES Act both impacting the business interest expense limitation, will you please explain the rule for the 2022 filing year?

The business interest limitation reverts to the original Tax Cuts and Jobs Act (TJCA) rule for the 2022 filing year, which imposes a limitation on the deduction for business interest expense and removes the addback of depreciation, amortization and depletion in the adjusted taxable income (ATI) calculation. 

Under Section 163(j), the amount of deductible business interest expense in a taxable year cannot exceed the sum of:  

  • The taxpayer’s business interest income, 
  • 30% of the taxpayer’s adjusted taxable income (ATI) and  
  • The taxpayer’s floor plan financing interest.

This limitation applies to taxpayers with gross receipts of $27 million for 2022 ($26 million for 2019, 2020 and 2021). Any business interest expense not allowed as a deduction due to the Section 163(j) limitation is generally carried forward and treated as business interest paid or accrued in the next tax year.  

Keep in mind, the Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily changed the deduction, and taxpayers could elect to use 50% of the ATI limitation for the 2019 and 2020 filing years and use their 2019 ATI to compute their 2020 business interest limitation.  

With the original TJCA rules returning, this will significantly impact businesses that are more capital intensive and catch more taxpayers unaware. We strongly encourage you to work with your tax advisor to conduct proactive tax planning and ensure you’re making the proper tax elections related to your business activity. Contact Doeren Mayhew’s business tax accountants today for assistance.