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Final Business Interest Regs Relax Definition of “Business Interest”

Final Business Interest Regs Relax Definition of “Business Interest”

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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William H. Byrnes has achieved authoritative prominence with more than 20 books, treatise chapters and book supplements, 1,000 media articles, and the monthly subscriber Tax Facts Intelligence. Titles include: Lexis® Guide to FATCA Compliance, Foreign Tax and Trade Briefs, Practical Guide to U.S. Transfer Pricing, and Money Laundering, Asset Forfeiture; Recovery, and Compliance (a Global Guide). He is a principal author of the Tax Facts series. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, and practiced in Southern Africa, Western Europe, South East Asia, the Indian sub-continent, and the Caribbean. He has been commissioned by a number of governments on tax policy. Obtained the title of tenured law professor in 2005 at St. Thomas in Miami, and in 2008 the level of Associate Dean at Thomas Jefferson. William Byrnes pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school (International Taxation and Financial Services graduate program).

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