July 31st, 2020 Brad Hennebert
The IRS issued final regulations (PDF) from the Tax Cuts and Jobs Act limiting the deduction for business interest expense.
For tax years beginning after December 31, 2017, business interest expense deductions are limited to the sum of:
Thankfully, the deduction limitation does not apply to certain small businesses whose gross receipts are $26 million or less. The $26 million gross receipts threshold applies for the 2020 tax year and will adjust annually for inflation.
A real property business (which is many of our clients) or a farming business may elect out of the business interest expense limitation. However, the owner cannot claim the additional first-year depreciation deduction for certain types of property held by the electing trade or business.
Also, the IRS issued the additional items of guidance related to the business interest expense deduction limitation:
Proposed Regulations (PDF) 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.
Notice 2020-59 (PDF) contains 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.
FAQs provide a general 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.
Contact us today to set up an appointment to discuss this!