21 Apr 2020 CARES Act: Business Interest Expense Deductions
The CARES Act amendments to section 163(j) will allow many taxpayers increased interest deductions in tax years beginning in 2019 and 2020.
Section 163(j) in general
Section 163(j) limits business interest expense deductions. Section 163(j) generally may apply to any taxpayer. It generally limits a taxpayer’s business interest deductions for a taxable year to the sum of: (1) 30% of the taxpayer’s adjusted taxable income (ATI) for that year, (2) its business interest income and (3) floor plan financing interest.
CARES Act amendments to section 163(j)
There are three ways that the CARES Act amends section 163(j): (1) increasing the limitation to 50% of ATI, (2) providing a special rule for a partnership’s 2019 section 163(j)-disallowed interest expense and (3) allowing an election to apply 2019 ATI to the 2020 section 163(j) computation.
1) Increasing the limitation to 50% of ATI
The CARES Act increases the section 163(j) limitation by including 50% of ATI in the limitation amount instead of only 30% of ATI. However, this increase to the limitation only applies to certain taxable years.
For partnerships, the increase to 50% of ATI applies to all taxable years beginning in 2020 only, and the special partnership rule discussed below applies to years beginning in 2019. For other taxpayers, such as corporations (including S corporations) and individuals, the increase to 50% of ATI applies to all taxable years beginning in 2019 or 2020.
2) Special rule for a partnership’s 2019 section 163(j) disallowed interest expense
While partnerships do not benefit from the 50% of ATI rule for taxable years beginning in 2019, the CARES Act provides partners a different benefit instead. Each partner’s allocable share of the partnership’s excess business interest (i.e., interest of the partnership disallowed under section 163(j) and carried forward by the partner) for a taxable year beginning in 2019 (the Partner’s 2019 Share) will be treated as follows:
First, the CARES Act provides a new beneficial rule under which 50% of the Partner’s 2019 Share will be treated as business interest that is not subject to any section 163(j) limitation paid or accrued by the partner in the partner’s first taxable year beginning in 2020. Second, the remaining 50% of the Partner’s 2019 Share will be subject to the same section 163(j) rules that previously were in place.
3) Election to apply 2019 ATI to the 2020 section 163(j) computation
To provide a benefit to taxpayers whose 2020 income will decrease from its 2019 level, the CARES Act allows an election to apply their 2019 ATI, rather than their 2020 ATI, to their 2020 section 163(j) computation. Taxpayers making this election will compute their section 163(j) limitation for a taxable year beginning in 2020 based on their ATI for their last taxable year beginning in 2019. For partnerships, this election is available at the partnership level, not the partner level.
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