Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to boost the economy and provide needed cashflow to taxpayers struggling with the impact of COVID-19. The CARES Act provides tax relief and tax incentives for individuals and businesses alike. Included in the numerous tax provisions is an increase in the business interest deduction limit under Code Sec. 163(j) for the 2019 and 2020 tax years.
The Tax Cuts and Jobs Act placed limits on the deduction for business interest for any type of business starting in 2018. Any interest not deductible generally may be carried forward indefinitely to succeeding tax years. For tax years beginning after Dec. 31, 2017, the deduction for business interest expense is generally limited to the sum of a taxpayer’s business interest income, 30 percent of adjusted taxable income and floor plan financing interest.
Certain small businesses whose gross receipts are $25 million or less are not subject to the limits under this provision. Other exclusions from the limit are certain trades or businesses, including performing services as an employee, electing real property trades or businesses, electing farming businesses and certain regulated public utilities. Taxpayers must elect to exempt a real property trade or business or a farming business from this limit.
Under the CARES Act, the business interest deduction limit under Code Sec. 163(j) increases to 50 percent of the taxpayer’s adjusted taxable income (ATI) for the 2019 and 2020 tax years. In the case of a partnership the 50 percent limitation applies only for the 2020 tax year, but a special allocation rule may apply to excess business interest for the 2019 year. For the 2020 year only, a taxpayer may also elect to use its 2019 ATI in calculating the limitation.
Election Out of Increased Limitation. A taxpayer may elect not to have the increased limitation apply in 2019 or 2020. The time and manner for the election for the 2020 tax year will be determined by the IRS, but if the election is made it can only be revoked with the consent of the IRS. In the case of a partnership, the election not to the have the increased limitation apply is made by the partnership and not the partners.
Election to Use 2019 ATI in 2020 Calculation. In addition to the increased limitation, a taxpayer may elect for any tax year beginning in 2020 to use its ATI from the 2019 tax year to calculate the Code Sec. 163(j) limitation. In the case of a partnership, the election is made by the partnership and not the partners. The time and manner for the election for the 2020 tax year will be determined by the IRS. The 2019 ATI used for the calculation is pro-rated if the taxpayer’s 2020 tax year is a short tax year.
The option to use the 2019 ATI in calculating the limitation is meant to counteract the likelihood that incomes will not be higher in 2020 because of the economic environment during the Coronavirus (COVID-19) emergency, whereas 2019 may be a higher revenue year for most businesses.
Please contact our offices if you would like greater detail or information on how the rules may apply specifically to your situation and we can work with you to determine your best options.