The Coronavirus Aid, Relief, and Economic Security (CARES) Act became law on March 27, 2020, providing financial assistance to businesses and individuals impacted by the COVID-19 pandemic. The CARES Act does allow businesses to increase the existing Adjusted Taxable Income (ATI) limit from 30% to 50%, thus allowing a greater amount of business interest to be deducted in a year.
What are the changes relating to Business Interest Expense Deduction in the CARES Act?
The Tax Cuts and Jobs Act (TCJA) had imposed limits to the amount of business interest expense that may be deducted in a tax year to the sum of:
- Taxpayer’s business interest income;
- 30% of the taxpayer’s Adjusted Taxable Income (ATI); and
- Qualified floor plan financing interest.
Under the current rule, businesses with interest expense above the 30% limit were allowed to carry these expenses forward into future tax years.
The CARES Act increases the limitation from 30% to 50% of ATI for taxable years beginning in 2019 or 2020 while preserving taxpayers’ ability to carry forward disallowed interest deductions.
Is the change applicable to Corporations and Partnership firms?
For many types of businesses, including Corporations, the changes to the ATI limit from 30% to 50%, is applicable for tax years that begin in 2019 or 2020.
For partnership firms, the 50% limitation will apply to income earned in 2020 (but not 2019), and for 2019, 50% of the excess business interest allocated from the partnership to the partner will be treated as business interest paid in 2020 (and not subject to the business interest deduction limitation) and the remaining 50% will continue to be subject to the 30% limitation but can be carried forward.
How will my business be benefited?
The CARES Act allows businesses to calculate the limitation for the taxable year beginning in 2020 based on Adjusted Taxable Income (ATI) for the taxable year beginning in 2019. Given a possible economic downturn in 2020, many businesses could have greater ATI in 2019 than 2020; in that case, the election to use 2019 ATI in lieu of 2020 ATI generally allows more interest expense to be deducted in 2020 than otherwise would be permitted.
If your business was denied immediate interest deductions under the Tax Cuts and Jobs Act (TCJA), these changes should provide relief, since they will reduce cash taxes payable or generate or increase Net Operating Losses (NOLs) which under the CARES Act, may now be carried back to offset the taxable income of five prior tax years.
Where can I find more information on the Business Interest Deduction and other COVID-19 economic relief efforts?
More information on the Business Interest Deduction can be found on the IRS’s website at https://www.irs.gov/coronavirus.