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New Business Limits on Interest Expense Deductions

Tax Reform limits the net interest expense deduction for every business to 30% of adjusted taxable income.

What exactly is an interest deduction?

The IRS released proposed regulations (Prop REG-106089-18) this week that expand the definition of interest. A substitute interest payment made on a debt instrument under the terms of a securities lending or a sale-repurchase transaction, commitment fees, and certain debt issuance costs and guaranteed payments for partnership capital are examples of amounts that would be treated as interest under these proposed regulations

Businesses can carry forward interest amounts disallowed under the provision to succeeding tax years indefinitely. Note, for 2018 to 2021 tax years, adjusted taxable income is computed without regard to deductions allowable for depreciation, amortization, or depletion

Taxpayers with average annual gross receipts of $25 million or less for the three-tax-year period ending with the prior tax year are exempt from the 30% limit.

A special election may be made by real estate businesses to ignore the 30% limit in exchange for reducing their depreciation deductions.

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Richard Pon CPA, CFP