Carrying on our tradition of providing you with Solutions Beyond the Obvious, we are pleased to bring you our “Ask the Experts” series of articles. In these articles, our Tronconi Segarra & Associates tax experts identify and explain the significant tax changes that were passed as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act which can provide additional relief for businesses and individuals facing economic hardship as the result of the coronavirus pandemic. Contact your Tronconi Segarra & Associates tax advisor for more information about any of the topics discussed in these articles.
David J. Lever, CPA
Principal
dlever@tsacpa.com
The Tax Cuts and Jobs Act of 2017 modified IRC Section 163(j) to limit a company’s interest deduction to 30% of a taxpayer’s adjusted taxable income (“ATI”). ATI is currently computed by taking taxable income before interest expense, income tax expense, depreciation, amortization and depletion (effectively Tax basis EBITDA). Beginning in 2022, ATI will be computed as earnings before interest and income taxes.
The CARES Act temporarily enhances the potential for tax deductions by increasing the interest deduction limitation back to its pre-Tax Cuts and Jobs Act limit of 50% of a corporation’s (including sub-chapter “S” corporations) ATI for tax years 2019 and 2020. Partnerships continue to be limited to 30% of ATI for 2019, but the limitation increases to 50% of ATI for 2020. There are other special elections related to business interest expense available to partnerships and partners based on the CARES Act.
Furthermore, the CARES act provides businesses with the option of using their 2019 ATI in 2020 when computing their business interest deduction limitation. Given the current economic climate of 2020, this may be particularly advantageous for businesses aversely affected by the COVID-19 pandemic, allowing for a greater interest expense deduction.
The potential enhancement of this deduction coupled with other provisions of the CARES Act related to net operating losses provides for a tax planning opportunity. Please contact your Tronconi Segarra & Associates tax advisor to review your financing arrangements and discuss possible strategies to accelerate these deductions. If you do not have a Tronconi Segarra & Associates tax advisor, please call 716.633.1373 for more information on this or any other tax matter. You can also Contact Us through our website with your question.
This article has been prepared for general guidance on matters of interest only; it does not constitute professional advice. You should not act upon the information contained in this article without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy of completeness of the information contained in this article; and, to the extent permitted by law, Tronconi Segarra & Associates LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this article or for any decision based on it.
