"Tax Tips: Crunch time for calculating new benefits and limitations"
It's tax time for most business owners, so it's time to crunch the numbers on the new tax benefits and limitations introduced in the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA brought significant tax breaks for business owners, including the qualified business income deduction and bonus depreciation. It also brought new limitations, such as the limitation on the deduction of business interest.
If you haven't already done so, spend some extra time with your tax adviser this year to review the new rules. The analysis can be complicated and interrelated, but worthwhile. Here are two items that affect many businesses.
New business interest deduction limitation and election out
The TCJA limits the deduction for business interest to 30% of a business's adjusted taxable income, with an indefinite carryover of any business interest over this 30% limit. There are, however, important exceptions. Generally, if your company's average gross receipts for the three preceding tax years are less than $25 million, the new limit does not apply (watch for aggregation rules and tax shelter exceptions). Floor-plan financing interest remains fully deductible, and business interest is fully deductible up to the amount of any business interest income. The limitation does not apply to certain regulated public utilities.
Adjusted taxable income for this purpose is not reduced for net operating losses, the new pass-through income deduction or — before 2022 — depreciation, amortization or depletion. In effect, if you take advantage of bonus depreciation before 2022, this won't further limit your deduction of business interest.
In the case of partnerships and S corporations, the limitation is calculated at the entity level, but special rules apply to pass-through of certain items to the owners to prevent double-counting of income, and a special rule applies to carry-forwards by partnerships. Extensive Treasury regulations have been proposed describing these calculations.
An intriguing election is available to real property trades or businesses and farming businesses. These businesses can elect out of the business interest deduction limitation, but if they do, they're required to forgo bonus depreciation and use the alternative depreciation system. Fortunately, the proposed Treasury regulations don't require recapturing bonus depreciation taken in earlier years for property that is already in service at the time of the election.
The regulations are extensive and detailed. They provide guidance on what constitutes a "real property trade or business" and describe how the election is made. The election is made on the company's tax return and is irrevocable, so crunch those numbers and weigh the cost of the deduction limitation against the value of accelerated depreciation.