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While the The Tax Cuts and Jobs Act of 2017 is generally seen as being loaded with benefits for businesses, there is at least one exception. In an effort to discourage companies from becoming too indebted or taking on too much leverage, the new law caps the business deduction for net interest expenses. Regardless of whether your business is over-leveraged or under-leveraged you should be aware of some of the important points surrounding business interest deduction.
Beginning in 2018, the deduction for business interest is limited to:
business interest income for the tax year;
30 percent of adjusted taxable income for the year, including any increases in adjusted taxable income as a result of a distributive share in a partnership or S corporation (discussed below), but not below zero; and
floor plan financing interest of the taxpayer for the tax year.
In effect, the new law limits the deduction to 30 percent of adjusted taxable income. Adjusted taxable income is not the same as taxable income, but rather is determined by a special formula defined in the new law.
There are, however, exceptions to this limitation:
the limitation does not apply for small businesses with average gross receipts of $25 million or less;
floor plan financing used by automobile dealers is permitted to the full extent of business interest income and floor plan financing interest; and
certain real property or farming businesses may elect to be excluded from the limitation.
Even though the Tax Cuts and Jobs Act lowered corporate tax rates, the limitation on interest deductions may result in higher tax liability for certain businesses. Be sure to speak with your tax professional who can help determine whether you will be affected by this new law, and if so to work with you to reduce its impact on your business.