Wolters Kluwer Tax & Accounting looks at how businesses can take advantage of options with respect to the expanded business interest deduction.
Businesses have several options now with respect to the business interest deduction. Some special elections apply to certain types of businesses, such as partnerships, farming businesses and real estate businesses. Tax advisors can be of great assistance to these businesses in determining which elections are best in their specific circumstances.
In exchange for lower tax rates and more rapid business expensing, the TCJA (Tax Cuts and Jobs Act) put limits on the deduction of business interest, including a 30 percent of adjusted taxable income (ATI) limit. To help assist businesses during the Coronavirus pandemic, the CARES Act increased the limit on the business interest deduction to a 50 percent of ATI limit for 2019 and 2020. The CARES Act also permits taxpayers to utilize their 2019 ATI rather than 2020 ATI in determining the limit for 2020. The IRS has issued guidance to assist taxpayers in taking advantage of these changes, including several elections available to certain businesses.
- A taxpayer may elect out of the new 50 percent of ATI (adjusted taxable income) limit and instead apply the 30 percent limit
- A taxpayer may elect to use the ATI for the last tax year beginning in 2019 as the ATI for any tax year beginning in 2020
- Special rules apply to partnerships, permitting partners to claim the 50 percent of ATI limit only in 2020
- Partnerships may elect out of the 50 percent of ATI limit only for 2020
- Partnerships subject to the centralized audit rules and permitted to file amended returns for 2018 and 2019
- Farming and real property businesses, which could elect out of the 30 percent limit under the TCJA, now have until October 21, 2021 to make that election for the 2018, 2019, or 2020 tax year, but in no event later than the applicable period of limitations on assessment for that tax year
- Farming and real property businesses that made the election out of the 30 percent limit under TCJA can now revoke that election and make a new election
- Depending upon the situation, elections may be made by tax return, amended tax return, amended Form 1065, or administrative adjustment request (AAR)
Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help explain the various elections available with respect to the business interest deduction.