The IRS has released final regulations and a new set of proposed regulations on the deduction for business interest, which was modified by the 2017 tax reform legislation. The new proposed IRS regulations on the business interest expense implement many of the new CARES Act provisions designed to help small business owners in 2020 and future years. While the final regulations largely mirror earlier proposed rules, one significant change relaxes the previous definition of “business interest”.
Under the proposed regulations, interest included commitment fees, debt issuance costs, guaranteed payments and other “substitute” interest costs. Under the final rules, commitment fees and debt issuance costs are excluded from the definition of interest.
Is business interest deductible when the business is a corporation?
Under prior law, business owners were typically permitted to deduct interest expenses incurred in carrying on a trade or business (subject to limitations).1 The 2017 Tax Act generally limits the interest expense deduction to the sum of (1) business interest income, (2) 30 percent of the business’ adjusted taxable income and (3) floor plan financing interest (see below).2 Businesses with average annual gross receipts of $25 million or less for the three-taxable year period that ends with the previous tax year are exempt from this new limitation (i.e., businesses that meet the gross receipts test of IRC Section 448(c)).3
Generally, the limit applies at the taxpayer level, but in the case of a group of affiliated corporations that file a consolidated return, it applies at the consolidated tax return filing level.
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