Changes to the Business Interest Limitation Could Affect Contractors in 2022

authored by John Werlhof : Professionals : CLA (CliftonLarsonAllen) (claconnect.com)

Following the tax reform bill passed in 2017, the deduction for business interest is generally limited to 30% of adjusted taxable income (see CLA article March 2018 Dissecting the Business Interest Expense Limitation : 2018 : Articles : Resources : CLA (CliftonLarsonAllen) (claconnect.com). Depreciation has historically been added back in computing adjusted taxable income, but that will change beginning in 2022. As a result, the amount of business interest that capital-intensive businesses can deduct beginning in 2022 may decrease significantly.

You may want to work with your tax advisor on the following action items to assess the effects of the change to the business interest limitation on your business:

1. Consider whether your business is subject to the limitation. Certain small contractors don’t have to worry about the limit.
2. Model the potential limitation for 2022.
3. Consider whether to elect to take slower depreciation on your real estate assets rather than apply the business interest limitation.
4. Consider performing a cost segregation analysis to be used with your 2021 to take advantage of the depreciation addback in the last year it’s available.
5. Assess whether to settle or restructure related party debts to reduce the amount of interest subject to the limit.

CLA Construction Tax Professionals can help you and your business assess the impacts of these changes to the Business Interest Expense Limitations (Section 163(j) Limitations) for 2022.