Business Interest Deduction

The Tax Cuts and Jobs Act (“the Act”) provides for new limits on the business interest deduction that may impact the transportation industry. Effective for any tax year beginning after December 31, 2017, the Act places a limit on the deductibility of the business interest expense incurred. That limit is the sum of business interest income, 30% of the business’s “adjusted taxable income” and “floor plan financing interest.”

“Adjusted taxable income” has a similar definition to EBITDA and includes a taxpayer’s regular taxable income computed without regard to:

  1. any item of income, gain, deduction or loss that is not allocable to the trade or business;
  2. any business interest or business interest income;
  3. any net operating loss deduction;
  4. the newly provided 20% deduction for qualified business income of a pass-through entity; and
  5. allowable deductions for depreciation, amortization, and/or depletion (for years prior to 1/1/2022).  

“Floor plan financing interest” means interest paid or accrued on floor plan financing indebtedness. Floor plan financing indebtedness means indebtedness used to finance the acquisition of a motor vehicle held for sale or lease to retail customers and secured by the inventory so acquired. A motor vehicle includes an automobile, truck, recreational vehicle, motorcycle, boat, and farm machinery and equipment.

The business interest limitation does not apply to small businesses with average annual gross receipts (for the three prior years) less than $25 million. Further, any disallowed interest expense exceeding the limitation may be carried forward indefinitely. However, excess business interest of a partnership does not remain at the entity level. Instead, it is passed through to each partner. This treatment will complicate calculations of deductible interest in future years at the partner level by requiring separate excess taxable business income calculations. Interestingly, the excess interest disallowed in the current year remains at the corporate level for both C and S corporations and will be carried forward to subsequent years.

Transportation businesses that have traditionally relied on the business interest deduction—or that are contemplating taking on new debt—should consider the limitation. Careful tax planning in light of other provisions in the Act (e.g., new, more generous depreciation provisions) may help offset the limitation imposed on the business interest deduction. However, this determination is best made by a qualified tax professional.  

Contact a Schneider Downs tax advisor to determine if this deduction could benefit you.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2023 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
Automobile, Tax BY Brett Cubellis
Explaining the Transfer/Advance Payment of Clean Energy Credits and Energy Credits Online Registration
New Research and Development Capitalization Requirement Shuffles System
Contractors May Benefit From SALT Cap Workaround
2023 Legislative & Regulatory Update
Tax BY Kirk Mitchell
Can “Moore” Tax be Refunded from IRS? How to Protect Your Potential Claim for Refund of §965 Foreign Corporation Transition Tax
Fraud, Tax BY Charlotte Garraway
5 Red Flags of Fraudulent ERC Providers
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us
Pittsburgh

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.

×