The Tax Cuts and Jobs Act (TCJA) created a new limitation on business interest expense deduction. Interest paid or accrued by a business is deductible up to 30 percent of adjusted taxable income (ATI). Businesses with average annual gross receipts of $25 million or less for three previous tax years are exempt from the interest expense deduction limitation.

Some other taxpayers are also exempt, including real property businesses, but only if they elect to continue to fully deduct their interest. If they make the election, they are required to use the alternative depreciation system for real property used in the business.

ATI is defined as a tax-basis EBITDA (taxable income before interest, depreciation, and amortization). Through 2021, ATI is computed without regard to deductions allowable for interest, depreciation, and amortization (EBITDA). After December 31, 2021, depreciation and amortization will no longer be added back when computing the limitation.

Caution: The limitation applies to interest paid to related and unrelated parties.

Tennessee will follow the interest expense limitation under TCJA for 2019 but has decoupled from the limitation for tax years beginning on or after January 1, 2020.

Several strategies exist for taxpayers who may be subject to the limitation. Planning can take considerable time since it often involves participants outside the control of the taxpayer. The quicker taxpayers act, the more likely it is they will see savings.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.