The 2017 Tax Cuts and Jobs Act (“TCJA”) created a business interest expense limitation under Internal Revenue Code Section 163(j). Under TCJA, the business interest expense deduction was generally limited to 30% of Adjusted Taxable Income (“ATI”) plus business interest income. For taxable years beginning in 2019 and 2020, the CARES Act increases the allowable interest deduction, after taking into account floor plan financing and business interest income, to 50% of ATI. However, the 2019 increase does not apply to partnerships. For partnership tax years beginning in 2019 only, partnerships continue to apply the 30% ATI limitation and pass out the excess business interest expense to their partners for utilization or carryforward. However, the CARES Act does allow partners to deduct 50% of the 2019 excess business interest expense carryforward on their 2020 returns without regard to the Section 163(j) limitation.
This can be more easily illustrated with an example of the limitation and excess business interest expense carryforward.
- Assume in 2019 a partnership has $100 of ATI and $100 of business interest expense.
- The partnership would report $30 of deductible interest and $70 of excess business interest expense.
- The $70 excess business interest expense carries forward at the partner level to 2020. On the 2020 return, the carried forward interest is only deductible if the partnership passes out excess taxable income or excess business interest income.
- Under the new law, there would be no change in 2019 to the interest deduction allowed for the partnership. The result would be a $30 interest deduction and a $70 excess business interest expense.
- In 2020, the partners would be able to deduct 50% of the 2019 excess business interest expense carryforward or $35 ($70 X 50%) without regard to the Section 163(j) limitation. The remaining 50% of business interest expense would be subject to the existing rules.
- If one of the partners in 2019 is no longer a partner in 2020, 50% of their excess business interest expense carryforward is treated as additional interest incurred by the partner, while the other 50% would be subject to the existing rules.
For additional information about the new Section 163(j) limitation on the deductibility of business interest expense for 2019 and 2020, please contact your HCVT tax professional or Glenn Dance at email@example.com. To learn more about the impact of COVID-19, see about-covid-19.html