Limited Expansion of Business Interest Deduction to Offset Effects of COVID-19

COVID-19 Update

The COVID-19 pandemic threatens the viability of many of our country’s businesses by necessitating that they close their doors to normal operations, resulting in less income and likely reductions in workforce. Among the myriad of already enacted and proposed efforts by the federal government to combat COVID-19’s negative effects on our economy is a proposal to expand the ability of businesses to take additional tax deductions for interest paid or accrued on indebtedness of the business (or business interest). Generally, under the 2017 Tax Cuts and Jobs Act, business interest deductions were limited to no more than an amount that equaled the sum of the business’s interest income plus 30% of the business’s adjusted taxable income plus certain interest paid by vehicle dealers, each with respect to the relevant tax year. Excess interest deductions are carried forward indefinitely into future years. So, for example, a corporation with $100,000 of adjusted taxable income, $5,000 of interest income and $45,000 of business interest expense in 2019 would be able to take $35,000 in business interest deductions ($5,000 against the business interest income, and $30,000 (or 30% of $100,000)), leaving $10,000 to carry forward for use in future years. Exceptions to these limitations apply to certain small businesses, employee service providers, real property trades or businesses, farming businesses, and regulated public utilities. The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) expands the 30% limitation to 50% for tax years beginning in 2019 or 2020, allowing a business to take a greater interest expense deduction currently, which both is more valuable and allows for additional cash in the hands of the business to keep the business operating and workers employed. (Note that this may require filing amended 2019 returns.) A special rule applies to partnerships for taxable years beginning in 2019. For taxable years that begin in 2020, the CARES Act also would allow a business to elect to use its 2019 adjusted taxable income (or a pro rata amount of 2019 income for short taxable years beginning in 2020) for purposes of determining its threshold for deducting business interest, which again is intended to expand the deduction for businesses that see a decline in income in 2020, thereby limiting taxes owed and keeping funds in the business.

How Manatt Can Help: Our experienced and sophisticated tax team can provide guidance on understanding these rules and assist in determining whether exceptions apply, how to take advantage of them and how they may ease your business’s economic hardships in the face of the COVID-19 crisis.

For More Information: Contact Jeffrey Mannisto, partner and leader, Manatt Tax, at jmannisto@manatt.com or 310.312.4212; Megan Christensen, partner, Manatt Tax, at mchristensen@manatt.com or 202.585.6594; David Herbst, partner, Manatt Tax, at dherbst@manatt.com or 650.812.1320; or Robert Duran, partner, Manatt Tax, at rduran@manatt.com or 310.312.4274.

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