Tax Reform May Impact the Deduction of Business Interest for Some Customers
While the Republicans were crafting the tax reform proposals this fall, there was a lot of discussion and debate regarding the tax deduction for interest paid by businesses. Early plans called for the deduction to be severely limited, but the final tax bill signed by the President in December is much more lenient, which is good news for financial institutions.
Businesses with average annual gross receipts of less than $25 million will fall under a small business exception and will be able to fully deduct the interest they pay on their loans. This should cover the vast majority of loan customers served by community banks and similar financial institutions.
Larger businesses could be limited under the new tax reform plans if they are highly leveraged or have low taxable income in a given year. Businesses over $25 million are limited to deducting net interest expense in excess of 30% of the business’s adjusted taxable income. Adjusted taxable income is computed without regard to deductions for depreciation or amortization.
However, there are some ways around this limitation including an exception for interest on floor plan financing (i.e. loans to finance the acquisition of motor vehicles, boats, or farm machinery for sale or lease, and secured by such inventory). There are also special rules that would allow certain farming businesses and real estate businesses to elect out of the limitation on business interest in exchange for using slower depreciation deductions.
Banks and other financial institutions should also rest easy knowing that their interest expense deductions will not be limited as long as total interest income exceeds interest expense.
The CLA financial institution team is here to help you work through the nuances of the new tax reform law. Please contact a member of our team to discuss these matters further.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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