The Internal Revenue Service (IRS) issued final regulations regarding the provision of the Tax Cuts and Jobs Act (TCJA) that limits the deduction for business interest expense, including basic statutory amendments made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

In these final regulations, the IRS clarified that for tax years beginning after Dec. 31, 2017, business interest expense deductions are generally limited to the sum of:

  • The taxpayer’s business interest income
  • 30% (or 50%, as applicable) of the taxpayer’s adjusted taxable income
  • The taxpayer’s floor plan financing interest expense

The business interest expense deduction limitation does not apply to certain small businesses whose average gross receipts are $25 million or less (indexed to $26 million for 2019) for the previous three tax years, electing real property trades or businesses, electing farming businesses and certain regulated public utilities.

A real property trade or business, or a farming business may elect to be excepted from the business interest expense limitation. However, taxpayers cannot claim the additional first-year depreciation deduction for certain types of property held by the electing trade or business.

Along with these final regulations, the IRS issued additional guidance related to the business interest expense deduction limitation, including:

  • Proposed regulations that provide additional guidance on various business interest expense deduction limitation issues not addressed in the final regulations, including more complex issues related to the amendments made by the CARES Act. Subject to certain restrictions, taxpayers may rely on some of the rules in these proposed regulations until final regulations implementing the proposed regulations are published.
  • A proposed revenue procedure that provides a safe harbor allowing taxpayers engaged in a trade or business that manages or operates qualified residential living facilities to treat such trade or business as a real property trade or business solely for purposes of qualifying as an electing real property trade or business.
  • An overview of the aggregation rules that apply for purposes of the gross receipts test, and that apply to determine whether a taxpayer is a small business that is exempt from the business interest expense deduction limitation.

For more information about this and other TCJA provisions, contact Doeren Mayhew’s tax advisors today.