How Much Business Interest Can I Deduct?
As tax reform was being discussed, there was feedback that business interest would only be limited to business interest income. However, the final bill treats business interest as follows:
- If your average revenues are less than $25 million, then there are no changes to deducting business interest. This applies to loans for farm land, machinery, buildings, operating lines, etc.
- If your average revenues are greater than $25 million, then your limit is equal to 30% of adjusted net income. Until 2022 this limit is essentially EBIDTA (earnings plus interest, income taxes, depreciation and amortization). After that date it becomes EBIT (depreciation and amortization is deducted). This limit is generally at the entity level and any amounts disallowed are carried over to the succeeding year.
- Farmers are allowed an election to deduct 100% of their business interest even if revenues exceed $25 million. The offset is that they have to ADS depreciation (longer lives) on assets with a recovery life of 10 years or longer and they cannot take bonus depreciation on these assets. This provision was added to the tax bill to help feedlots that have high volumes of sales with low margins and borrowed money on their inventory.
The bottom line for most farm operations is that there is no change on deducting business interest. Only farm operations (primarily in the livestock segment) with larger revenues will need to make a decision to elect out of the restriction. The cost of electing out can be high if the farm operation invests a lot of money into infrastructure.