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Tax Reform Series: Business Interest Deduction Limitation – Changes for 2018

The December 22 Tax Cuts and Jobs Act contained major tax changes and reform affecting both businesses and individuals.

The following is a summary of the new business interest deduction limitation. For Berntson Porter’s White Paper on the full impact of the new tax legislation, click here.

The Tax Cuts and Jobs Act contains a significant change that limits the deduction for business interest expense in certain situations, effective for tax years starting after December 31, 2017.

The new law limits businesses’ interest deduction to the sum of business interest income plus 30% of adjusted taxable income (ATI). ATI is the taxable income of a business computed without regard to:

  1. any item of interest, gain, deduction, or loss that is not properly allocable to a trade or business;
  2. business interest or business interest income;
  3. the amount of any net operating loss deduction;
  4. the 20% deduction for certain pass-through income, and
  5. any deduction allowable for depreciation, amortization, or depletion (sunsets 1/1/2022).
For pass-through entities (S-corporations and Partnerships) the limitation is applied twice. It is first calculated and applied at the entity level, and then separately calculated and applied at the individual level.
Any disallowed interest expense is carried forward indefinitely and deducted in future years, subject to the limitation above. Special carry forward rules apply to partnerships.

Not all taxpayers are subject to the new interest limitation rule. It only applies to taxpayers with average gross receipts of $25,000,000 or more for the preceding three tax years. Certain real estate and farming businesses also have the ability to elect out of these new rules.

Your team at Berntson Porter looks forward to working with you on this historic change to our tax system. If you have any questions, please contact your tax professional at Berntson Porter & Company, PLLC at 425-454-7990.


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