Congress recently passed the Coronavirus Aid and Economic Security Act (CARES Act). The CARES Act provides for numerous changes to the Internal Revenue Code, but one of the major changes is to the treatment and limitation of business interest deductions.
Prior to the CARES Act, Congress had tightened limitations on business interest deductions through the Tax Cut and Jobs Act. Under the Tax Cut and Jobs Act, business interest deductions were limited to the sum of:
- the business interest income for such year;
- 30% of the adjusted taxable income of the taxpayer; and
- the floor plan financing interest of such taxpayer.
If the taxpayer was unable to take the business interest deduction, it could be carried forward.
Under the CARES Act, for tax years 2019 and 2020, the business interest deduction limitation has been raised to 50% of the adjusted taxable income of the taxpayer. The Act maintains the other two requirements. The CARES Act also provides that taxpayers may elect to apply these new rules by substituting the adjusted taxable income of the taxpayer for the last taxable year beginning in 2019 for the adjusted taxable income for the currently applicable taxable year. Thus, if a taxpayer had a higher adjustable gross income in 2019, this should theoretically raise the ceiling for the taxpayer’s business interest deduction in the current year if elected. This election also applies to partnerships and will be elected solely by the partnership.
For partnerships, the CARES Act provides that the 30-percent limitation continues to be applied at the partnership level to business interest expenses for 2019. But 50 percent of the excess business interest that is allocated to a partner, and that is carried over from 2019, is treated as business interest expense that was paid or accrued by the partner in 2020 and is not subject to the limitations for business interest income for 2020. The partner can elect out of this provision if preferred, but the partner may only revoke the election with the consent of the IRS. The IRS will likely provide further guidance on the election procedure.
Further, any taxpayers with a short taxable year will apply this election in the same ratio of the last taxable year’s, beginning 2019, taxable income.
Given the recent changes to the Internal Revenue Code, taxpayers who have already filed their 2019 return should seek the advice of a tax professional or tax attorney to determine if they should file an amended return to take advantage of the CARE Act’s tax savings and incentives.
Need assistance in managing the business planning processes? Freeman Law advises clients with corporate and other entity formations and reorganizations. Restructuring entities—through conversions, mergers, and liquidations—can involve particularly complex tax and regulatory considerations. Freeman Law provides experienced tax and business counsel, helping our clients achieve their organizational goals in a tax-efficient manner. Schedule a consultation or call (214) 984-3000 to discuss your corporate structuring or business and tax planning concerns.