CARES Act Helps Businesses with Change in Interest Expense Deduction for 2019 and 2020
April 6, 2020
The Coronavirus Aid, Relief and Economic Security (CARES) Act, which was passed by Congress to help people and businesses facing financial hardship as a result of the COVID-19 pandemic, is temporarily changing some tax limits that were put in place by the Tax Cuts and Jobs Act (TCJA) of 2017.
Prior Interest Expense Deduction Rules
Section 163(j) of the Internal Revenue Code (IRC) created a limitation on the deduction of business interest expenses for tax years beginning after December 31, 2017. The law applied to interest on all business debt without a transition rule in place prior to the law. Deductions for business interest expense were limited to the sum of:
Interest expense that had been disallowed as a deduction in the current tax year could be carried forward indefinitely to future years and would be considered as business interest paid, subject to any limitations applicable that year.
Interest Expense Deduction Rules under CARES Act
With the CARES Act, amendments have been made to Section 163(j), but these modifications are applicable for only the 2019 and 2020 tax years:
Here is an example.
Assume that in 2019 a partner’s share of ATI is $300 and net interest expense of $190 before limitations.
Each partner may choose not to apply this modification. It is currently unclear as to how these rules apply to tiered partnerships (i.e. which tier actually deducts the 50% EBI from 2019 in 2020.)
To get more information about how your business can address this modification to Section 163(j) of the IRC, please contact the tax team at Smith & Howard by filling out the form below.
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