CARES Act - Modification of Limitation on Business Interest Deductions

The Tax Cuts and Jobs Act (TCJA) placed limits on the deductibility of business interest under Section 163(j) of the Internal Revenue Code.  In general, and with a number of exceptions, the TCJA limited business interest to 30% of adjusted taxable income (ATI).  The Act amends the TCJA provisions in a couple of respects.

First, the Act generally increases the adjusted taxable income limitation from 30% to 50% for taxable years beginning in 2019 and 2020 (but see special rules below for partnerships). 

Second, in the case of tax years beginning in 2020, the Act provides that taxpayers may elect to substitute 2019 ATI in place of the ATI calculated for in 2020 only.  This election is made by the partnership (and not the partners).  Since this provision is elective, it should help taxpayers who had a successful year in 2019, but their business and taxable income has declined in 2020 because of the economic challenges wrought by COVID-19; and, taxpayers whose 2020 ATI is higher than it was in 2019, can continue to use the ATI calculated for 2020.