– The CARES Act provides financial relief to individuals and businesses in response to the COVID-19 pandemic.
– One provision of the CARES Act temporarily relaxes the TCJA limitation on deductions for business interest expense.
– Adjusted taxable income (ATI) refers to taxable income calculated by making specific adjustments, including items of income, business interest income or business interest expense, and other tax-related adjustments as listed by the IRS. 1. Business interest expense is defined as interest on debt that’s properly allocable to a trade or business.
2. The term trade or business doesn’t include performing services as an employee, electing real property businesses, electing farming businesses, or selling certain utilities with rates established by a specified governing body.
3. Interest expense that’s disallowed under the limitation rules is carried forward to future tax years indefinitely and treated as business interest expense incurred in the carry-forward year.
4. Businesses with average annual gross receipts of $25 million or less for the three-tax-year period ending with the preceding tax year are exempt from the interest expense limitation rules under the small business exception.
5. The small business exception can fluctuate for businesses with varying annual gross receipts, depending on the average annual receipts amount for the preceding three-tax-year period.
6. Special rules apply for partnerships, limited liability companies treated as partnerships for tax purposes, and S corporations regarding the calculation of the interest expense deduction limitation at both the entity level and at the owner level. 1. The IRS has proposed regulations for applying the business interest expense limitation to partnerships and S corporations and their owners, which present significant compliance challenges.
2. The CARES Act allows businesses to increase the interest expense deduction limitation to 50% of adjusted taxable income (ATI) for tax years beginning in 2019 and 2020, with the option to use 2019 ATI to calculate the 2020 limitation.
3. For partnerships, the 30% of ATI limitation remains in place for tax years beginning in 2019 but increases to 50% for 2020. Disallowed partnership business interest expense from a partnership’s 2019 tax year is allocated to partners and carried over to their 2020 tax years, with the option to elect to deduct 50% of carried-over partnership business interest expense from 2019 in 2020 without limitation.
4. Tax professionals can help businesses understand and navigate the complex business interest expense limitation rules and take advantage of the temporarily relaxed limitations and other tax relief measures provided by the CARES Act. – Real property businesses can elect out of the business interest expense limitation if they use the slower Alternative Depreciation System (ADS) method for depreciation.
– However, using the ADS method results in lower annual depreciation deductions compared to the regular MACRS method.
– Real property businesses should evaluate the tax benefit of bigger interest expense deductions against the tax detriment of lower depreciation deductions before making the election.
– Farming businesses, including nurseries and agricultural cooperatives, can also elect out of the business interest expense limitation rules if they use the ADS method to depreciate assets with MACRS depreciation periods of 10 years or more. – Operating as a Qualified Small Business Corporation (QSBC) can provide tax benefits for small businesses.
– Engaging in M&A requires thorough due diligence to ensure a successful and beneficial outcome.
– Avoiding probate in estate planning is generally recommended to simplify the process and save time and money.
– Employers with tipped employees may qualify for a tax credit related to providing food and beverages.
COVID-19: CARES Act relaxes the limit on Business Interest Deductions
Leave a Reply