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January 7, 2021

IRS Regulations and Other Guidance on Business Interest Expense Limitation

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A business interest expense is the cost of interest on a business loan used to maintain business operations or pay for business expense. Read Sec. 163(j) limitation on business interest expense deductions to learn more.

Business interest expense (BIE) deductions are limited to the sum of:

    •       Taxpayer’s business interest income (BII);

    •       30% of the taxpayer’s adjusted taxable income (ATI); and

    •       Taxpayer’s floor plan financing interest expense

Business interest expense deduction limitation does not apply to:

    •       Certain small businesses whose gross receipts are $26 million or less, 

    •       Electing real property trades or businesses, 

    •       Electing farming businesses, and

    •       Certain regulated public utilities.

For qualified residential living facilities, Notice 2020-59 is 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. They are treated as a real property trade or business solely for purposes of qualifying as an electing real property trade or business, which is permitted to elect out of the business interest expense limits under Sec. 163(j)(7)(B).

Sec. 448(c) is gross receipts test that applies to determine whether a taxpayer is a small business that is exempt from the business interest expense deduction limitation. A taxpayer meets this test if the taxpayer has average annual gross receipts for the past three tax years of not more than $25 million, adjusted for inflation.

IRS’s Final and proposed regulations (REG-107911-18) addressES:

         •        how to calculate the interest expense limitation,

         •        what constitutes interest for purposes of the limitation,

         •        which taxpayers and trades or businesses are subject to the limitation, and

         •        how the limitation applies to consolidated groups, partnerships, internationally

by MAEMURA STAFF

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