The Tax Cuts and Jobs Act of 2017 introduced numerous provisions that reduce income taxes for business including a corporate tax rate cut (now at 21%) and the 20 percent deduction on qualified business income for certain businesses. These cuts have a significant impact on the federal budget. As a result Congress offset part of the cost of the tax cuts by placing limits on the amount of interest that businesses can deduct.
Prior to the implementation of the Tax Cuts and Jobs Act, taxpayers could deduct substantially all business interest subject to a few exceptions. Effective for tax years beginning in 2018, a taxpayer deduction for net business interest is limited to 30 percent of adjusted taxable income. Adjusted taxable income does not include non-business income, business interest expense or business interest income, net operating loss deductions, depreciation and amortization and, if applicable, the new twenty percent deduction as noted above.
The limitation does not apply to small businesses, electing real property businesses, electing farming businesses, and certain utility companies. Small businesses for purposes of the of the business interest expense limitation is defined as one with average annual gross receipts over a trailing three-year period of $25 million or less. The Act provides for limitations with respect to related parties.
Electing real property business and farming businesses may make an election to not have this limitation apply. The issue here is too elaborate for this short article.
There are so many issues (including certain clarifications) to consider including how the limitation will apply to your business. With proper and early tax planning the limitation can be mitigated.