“Hi – I’m Alex Bayrak from Bloomberg Tax here to discuss three things to know about the business interest deduction limitation under Section 163(j).
1. What is the business interest expense limitation?
Since the passage of the Tax Cuts and Jobs Act, §163(j) outlines that the amount of deductible business interest expense in a tax year cannot exceed the sum of:
- The taxpayer’s business interest income for the year
- 30% of the taxpayer’s adjusted taxable income, or ATI, for the year
- The taxpayer’s floor plan financing interest expense for the year
2. What is the definition of “interest” for purposes of the §163(j) limitation on deductibility of business interest expense?
Here, “interest” includes amounts paid or accrued as compensation for the use or forbearance of money, but also includes amounts associated with arrangements that create indebtednesses in substance but not in form.
This definition is broader than the definition of “interest” for other federal income tax purposes and includes a myriad of items such as:
- Substitute interest payments in certain situations involving a sale-repurchase agreement or a securities lending transaction
- Acquisition discount
- Deductible repurchase premium
- Amounts treated as interest under other provisions of the tax law
- And, subject to an exception, a portion of the payments on over-the-counter interest rate swaps
3. How does the CARES Act impact §163(j)?
The CARES Act temporarily increased the ATI portion of the limitation from 30% to 50% of ATI for tax years 2019 and 2020 (with the ability to elect out of the increased limitation) and allowed taxpayers to elect to substitute 2019 ATI for 2020 ATI. Even with this additional relief, the limitation is likely to impact more businesses than originally envisioned when the provision was enacted.”
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