The business interest expense deduction and the new tax law

The new tax law has left taxpayers with many questions. One issue: how will the new tax law impact the business interest expense deduction?

The Treasury Department and the Internal Revenue Service (IRS) recently provided some guidance.

What is the business interest expense deduction? The business interest expense deduction essentially allowed businesses to deduct interest payments. A simple example provides clarity: a business that took out a loan could generally deduct the interest payments made on that loan using this deduction.

How did the new tax law change this deduction? The full impact of the change to the business interest expense deduction is difficult to predict and, as noted in a recent piece by Forbes, “represents the largest source of complexity and confusion on the domestic side of the” new tax law.

Essentially, full deduction of interest payments (like that noted in the above example) are no longer a given. In most cases, businesses with an average gross receipt for the three years prior to the tax filing year under $25 million can still deduct this interest. Those who have an average gross receipt that exceeds $25 million must follow the limitation rules set out in Section 163(j).

As with any tax law, there are ways to legally take advantage of the rules to reduce one’s tax obligations. It appears the IRS is reviewing the changes to close such loopholes. For example, the IRS specifically notes that “partners in partnerships and S corporation shareholders cannot interpret the newly amended section 163(j) to inappropriately double count the business interest income of a partnership or S corporation.”

Questions surrounding the use of this deduction are not yet fully answered. As such, the IRS has promised to issue additional guidance in the future. In the meantime, this quagmire could result in an increased risk of becoming the subject of an audit. There are ways to handle an audit notice that can reduce the risk of additional penalties, fees and charges. Any business that is the subject of an audit is wise to seek legal counsel to help better ensure their interests are protected.