IRS Releases Final Regulations on Limits to Business Interest Expense Deductions

Chris Gaetano
Published Date:
Jul 29, 2020
The IRS has released final rules governing the limits on deductions for business interest expenses, which underwent major changes in the Tax Cuts and Jobs Act (TCJA) before being further modified by the CARES Act.

Prior to the TCJA, interest could not be deducted if the debt-to-equity ratio was more than 1.5 to 1 or if the net interest expense exceeded 50 percent of adjusted taxable income, which still afforded a fair amount of room for people to get deductions. Once the TCJA became law, however, business interest expense deductions were limited to the sum of business interest income, 30 percent of adjusted taxable income, and floor plan financing interest (with certain elections and exceptions). The CARES Act implemented further changes to the rule, namely raising the 30 percent limit to 50 percent for the 2019 and 2020 tax years.

The 575-page document goes over many, many topics, including a number of definitions ranging from "adjusted taxable income" to "trade or business." It also outlines different treatments based on different business types, some general tests of gross receipts and aggregation, disallowed interest expense carry-forwards, allocation of interest expenses, general rules for ownership changes, and much more.

In addition to the final guidance, the IRS also released new proposed regulations that provide additional guidance on various business interest expense deduction limitation issues not addressed in the final regulations; Notice 2020-59, a proposed revenue procedure that provides a safe harbor allowing taxpayers engaged in a trade or business that manages or operates qualified residential living facilities; and FAQs regarding the aggregation rules under Section 448(c)(2) that apply to the Section 163(j) small business exemption.

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