Big Change to Business Interest Expense Limitation Coming in 2022
In 2017, the Tax Cuts and Jobs Act significantly changed IRC Section 163(j), greatly expanding its applicability. Modifications and clarifications to IRC Section 163(j) occurred through proposed and final regulations in the subsequent years. The Section 163(j) limitation applies to all business interest payments for taxpayers with gross receipts in excess of $26 million. Business interest deductions are limited to the sum of (i) business interest income; (ii) floor plan financing interest; and (iii) 30% of adjusted taxable income.
Prior to 2022, depreciation and amortization expense was allowed as an addback in the calculation of adjusted taxable income, thereby allowing taxpayers in capital-intense or highly-leveraged businesses to avoid the business interest expense limitation under IRC Section 163(j). But beginning in 2022, depreciation and amortization expense will no longer be allowed as an addback in the calculation of adjusted taxable income. As a result, the amount of business interest expense that businesses can deduct beginning in 2022 is expected to decrease significantly.
In the remaining days of 2021, it is recommended that owners and practitioners:
- Incorporate the effect of the change into year-end tax planning and modeling.
- Re-evaluate / analyze the potential benefits of the real property trade or business election.
- Accelerate large capital expenditures, where possible.
- Consider performing a cost segregation study in order to accelerate depreciation deductions.
- Evaluate whether to settle intercompany debts or restructure them in order to take advantage of self-charged interest exceptions.
- Potentially restructure lease agreements between related parties.
As a reminder, the IRC Section 163(j) limitation does not apply to a partnership or S-Corporation that qualifies as a small business. In order to qualify as a small business, a taxpayer must satisfy the “gross receipts test” under IRC Section 448(c) and not be a “tax shelter” as defined in IRC Section 448(d)(3). The small business exemption from IRC Section 163(j) is determined annually.
Source: Bloomberg Tax
- Carey M. Heyman, CPA
- Managing Principal of Industry - Real Estate
- CliftonLarsonAllen LLP
- Century City (Los Angeles)
Carey is the Managing Principal of the Real Estate Industry at CLA. He is a trusted advisor with close to 20 years of experience providing accounting, assurance, tax, and consulting services to real estate industry owners, operators, family offices, developers and syndicators. Carey has a strong track record of helping clients build and retain capital by leveraging tax- and cost-saving strategies and employing tax credits and incentives. He also consults with high net worth individuals, large family groups, and owners of closely-held businesses on all aspects of tax planning, estate planning, and retirement planning.
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