CARES Act Modifies Business Interest Deductions

No matter what business you’re in, the Cares Act just made the rules for business interest deductions a bit more flexible in order to give business that have experienced a drop in revenue due to the Coronavirus some financial relief.

If you have one or more business loans, other than a PPP Loan or EIDL, the interest you pay on those loans can be deducted on your taxes. Deductions reduce your business entity’s taxable income for the year. The less tax you have to pay, the better for your bottom line.

The TCJA limited a business entity’s annual net interest deduction to 30% of its adjusted taxable income (ATI), beginning in 2018. The CARES Act increases the ceiling for business interest deductions from 30% to 50% of adjusted taxable income for tax years 2019 and 2020. The CARES Act rules also allow you to use your 2019 ATI to calculate your 2020 limitation. That could help if you expect your ATI for 2020 to be lower than the previous year.

The new temporary rule excludes partnerships. Due to quirk in the CARES Act, the 50%-of-ATI limit applies to partnerships in 2020, but not in 2019. Any business interest expense that is disallowed is passed to the partners and is suspended at the partner level under the TCJA rules. However, 50% of the suspended business interest is fully deductible at the partner level on a 2020 return. This special tax treatment is automatic unless a partner elects on a 2020 tax return for it not to apply. The remainder from 2019 is suspended until the partnership generates enough taxable income or excess interest income is passed to a partner. This can be advantageous if the partnership elects to use its 2019 ATI to compute its 2020 business interest limit.

If your business opts to take advantage of the increased limit for deducting business interest, you can’t change it. In 2021, unfortunately, the limit will revert back to the 30% level. Additional tax changes are set to take effect in 2022 when the calculation for ATI changes and will be calculated as taxable income plus interest expense, with no adjustment for depreciation or amortization.

Additional Guidance released by the IRS:

• The business interest expense deduction limitation does not apply to certain small businesses whose gross receipts are $26 million or less, electing real property trades or businesses, electing farming businesses, and certain regulated public utilities. The $26 million gross receipts threshold applies for the 2020 tax year and will be adjusted annually for inflation.
• A real property trade or business or a farming business may elect to be excepted from the business interest expense limitation. However, taxpayers cannot claim the additional first-year depreciation deduction for certain types of property held by the electing trade or business.

Reach out to us - The business interest deduction rules created by the CARES Act may be more beneficial to some businesses than others. A business may amend its 2019 return. We can help make sure you are taking advantage of any other financial relief available for businesses that have experienced a drop in revenue due to the Coronavirus pandemic. Email us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .