IRS Issues Final Regulations and Other Guidance on Business Interest Expense Deduction Limitation

David Gibbs, CPA, CCIFP, MBA
Focused on You. Dedicated to Your Success.
July 30, 2020

WASHINGTON — The IRS issued  final regulations (PDF) regarding the provision of the Tax Cuts and Jobs Act (TCJA) that limits the deduction for business interest expense, including basic statutory amendments made by the CARES Act.

For tax years beginning after December 31, 2017, business interest expense deductions are generally limited to the sum of:
  • the taxpayer's business interest income;
  • 30% (or 50%, as applicable) of the taxpayer's adjusted taxable income; and
  • the taxpayer's floor plan financing interest expense.

The business interest expense deduction limitation does not apply to certain small businesses whose gross receipts are $26 million or less, electing real property trades or businesses, electing farming businesses, and certain regulated public utilities. The $26 million gross receipts threshold applies for the 2020 tax year and will be adjusted annually for inflation.

A real property trade or business or a farming business may elect to be excepted from the business interest expense limitation. However, taxpayers cannot claim the additional first-year depreciation deduction for certain types of property held by the electing trade or business.

Taxpayers use Form 8990, Limitation on Business Interest Expense Under Section 163(j) , to calculate and report their deduction and the amount of disallowed business interest expense to carry forward to the next tax year.

Along with the final regulations, the IRS today issued the following 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. Subject to certain restrictions, taxpayers may rely on some of the rules in these proposed regulations until final regulations implementing the proposed regulations are published in the Federal Register.

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 Regarding the Aggregation Rules Under Section 448(c)(2) that Apply to the Section 163(j) Small Business Exemption  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.

For more information about this and other TCJA provisions, visit  IRS.gov/taxreform .

We will continue to update you on new developments. Please visit our  COVID-19 Resource Page  for more alerts.

Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. You can contact me at David.Gibbs@MCC-CPAs.com  and Marty at  Marty.McCarthy@MCC-CPAs.com . As always, we are happy to help.

Stay safe,

David Gibbs, CPA, CCIFP, MBA
Partner
McCarthy & Company

Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).