IRS Guidance on Business Interest Expense Limits

On April 2nd, the IRS issued Notice 2018-28, providing guidance on the business interest expense limitation amended in the Tax Cuts and Jobs Act. The limitation applies to all taxpayers, except for those averaging $25 million or less in gross annual receipts, and to all trades or businesses, except certain trades or businesses listed in Code Sec. 163(j).

Code Sec. 163(j) now limits taxpayer’s annual deduction for business interest expense to the sum of:

  • The taxpayer’s business interest income for the tax year;
  • 30% of the taxpayer’s adjusted taxable income for the tax year; and
  • The taxpayer’s interest paid or accrued on indebtedness to finance the acquisition of motor vehicles held for sale or lease, or to secure the inventory so acquired for the tax year.

Under Code Sec. 163(j), the amount of any business interest not allowed as a deduction for any tax year as a result of the limitation is treated as business interest paid or accrued in the next tax year and may be carried forward.

Additionally, rules were issued stating:

  • The business interest deduction limitation will be determined for a consolidated group (group of corporations filing consolidated federal income tax returns) as a whole.
  • To prevent the potential for ‘double counting’ of the business income for a partnership or S corporation, on both its tax return and the tax returns of its owners, a partner can only include its share of the partnership’s business interest income (the excess of the partnership’s business interest income over the partnership’s business interest expense).
  • When applying interest carried forward, the new base erosion and anti-abuse tax, under Section 59A, must be utilized to account for the interest in the year it is deductible.
  • A C corporation’s annual earnings and profits will not be affected by Section 163(j).

It is important to remember that this Notice was released as initial guidance for computing business interest expense. This guidance should be followed until further guidance is released later this year.

For more information on this matter or how it could affect your business, please connect with us.