In an effort to help businesses cope with the impact of COVID-19, the CARES Act passed by Congress in March of this year eliminated some of the restrictions on the business interest deduction set in place in 2017 by the Tax Cuts and Jobs Act (TCJA). Now, the IRS has released much-needed guidance and final regulations for business interest expense deductions.
Limiting the business interest deduction was originally a way of helping pay for the TCJA and began with tax years starting after Dec. 31, 2017. The deduction was limited to the sum of:
- The taxpayer’s business interest income
- 30% (or 50% if applicable) of the taxpayer’s adjusted taxable income, and
- the taxpayer’s floor plan financing interest expense
The final regulations state that the deduction does not apply to:
- Certain small businesses with gross receipts of $26 million or less (applies to 2020 tax year, adjusted annually for inflation)
- Electing real property trades or businesses (cannot claim additional first-year depreciation deduction on certain types of property held)
- Electing farming businesses (cannot claim additional first-year depreciation deduction on certain types of property held)
- Certain regulated public utilities
Taxpayers must use Form 8990 to calculate and report their deduction and the carry-forward amount of disallowed business interest expense.
Additional regulations released by the IRS cleared up some of the remaining questions including issues related to the CARES Act. These additional regulations can be used with limitations until the final regulations are published in the Federal Register.
Additionally, a safe harbor was created in Notice 2020-59 that allows taxpayers engaged in a trade or a business managing or operating qualified residential living facilities to treat that as a real property trade or businesses in order to qualify as an electing real property trade or business.
Reach out for assistance with understanding and reporting your business interest expense.