The Tax Cuts and Jobs Act (“the Act”) provides for new limits on the business interest deduction that may impact the transportation industry. Effective for any tax year beginning after December 31, 2017, the Act places a limit on the deductibility of the business interest expense incurred. That limit is the sum of business interest income, 30% of the business’s “adjusted taxable income” and “floor plan financing interest.”
“Adjusted taxable income” has a similar definition to EBITDA and includes a taxpayer’s regular taxable income computed without regard to:
- any item of income, gain, deduction or loss that is not allocable to the trade or business;
- any business interest or business interest income;
- any net operating loss deduction;
- the newly provided 20% deduction for qualified business income of a pass-through entity; and
- allowable deductions for depreciation, amortization, and/or depletion (for years prior to 1/1/2022).
“Floor plan financing interest” means interest paid or accrued on floor plan financing indebtedness. Floor plan financing indebtedness means indebtedness used to finance the acquisition of a motor vehicle held for sale or lease to retail customers and secured by the inventory so acquired. A motor vehicle includes an automobile, truck, recreational vehicle, motorcycle, boat, and farm machinery and equipment.
The business interest limitation does not apply to small businesses with average annual gross receipts (for the three prior years) less than $25 million. Further, any disallowed interest expense exceeding the limitation may be carried forward indefinitely. However, excess business interest of a partnership does not remain at the entity level. Instead, it is passed through to each partner. This treatment will complicate calculations of deductible interest in future years at the partner level by requiring separate excess taxable business income calculations. Interestingly, the excess interest disallowed in the current year remains at the corporate level for both C and S corporations and will be carried forward to subsequent years.
Transportation businesses that have traditionally relied on the business interest deduction—or that are contemplating taking on new debt—should consider the limitation. Careful tax planning in light of other provisions in the Act (e.g., new, more generous depreciation provisions) may help offset the limitation imposed on the business interest deduction. However, this determination is best made by a qualified tax professional.