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Limitation on Business Interest Expense Deduction under TCJA

10/05/2018  |  By: Brian Strahle, Sales Tax Practice Leader, State & Local Tax Services

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The Tax Cuts and Jobs Act (TCJA) created a new limitation that disallows a deduction for net interest expense that exceeds 30 percent of adjusted taxable income (ATI) for businesses with average annual gross receipts more than $25 million. (IR-2018-233)

ATI is defined as a tax-basis EBITDA (taxable income before interest, depreciation, and amortization). For tax years beginning after December 31, 2017, and before January 1, 2022, 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 2018 and 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.

Posted in: Tax