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.

Unfortunately, there is a complicated exception applying to partnerships.  First, the 50% ATI limitation does not apply to partnerships for 2019 only; rather, the 30% ATI limit is still applicable for 2019.  Second, and unless a partner decides not to have the rules apply, 50% of the excess business interest disallowed at the partnership level for 2019 shall be treated as business interest paid or accrued by the partner in the partner’s first taxable year beginning in 2020 that is not subject to business interest limitations.  The remaining 50% of excess business interest continues to be deductible under the existing rules of the TCJA.

Special rules are applicable in the instance of short taxable years.

The above rules are effective for taxable years beginning after December 31, 2018.  

Please visit our Coronavirus resource page at schneiderdowns.com/our-thoughts-on/category/Coronavirus for related content.

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.

© 2021 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
Tax Reform 2021 - Build Back Better: Proposed Changes to Section 199A Qualified Business Income Deduction
Tax Reform 2021 - Build Back Better: Excess Business Losses Further Limited than Under 2017 Tax Cut and Jobs Act
Tax Reform 2021 – Build Back Better: Proposed Changes to Increase Net Investment (NII) Income Tax on S Corporation Shareholders and Limited Partners
Tax Reform 2021 – Build Back Better: Temporary Rule for S-Corporation Conversions to Partnerships
Tax Reform 2021 – Build Back Better: Surcharge on High Income Taxpayers and its Impact on Capital Gain Rate Taxes and Planning
Proposed Legislation Targets Estate and Gift Tax Planning
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

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.

×