The Tax Cuts and Jobs Act (TCJA) has something for everyone. For example, corporate tax rates were cut from a top marginal rate of 35% to a flat rate of 21%. And owners of most pass-through entities, such as S Corporations and partnerships, will realize a tax rate decrease of up to 10% as a result of the new Section 199A deduction. However, it's not all good news.
The new law has certain pitfalls that can be treacherous, especially for capital intensive businesses. Let's take a quick look at how the new interest limitations may impact your business.
Certain Businesses Will See Substantial Increases In Taxable Income
Previous tax law generally allowed taxpayers to fully deduct business interest expense. But Code Section 163(j), a product of the TCJA, places a limitation on the deductibility of interest expense incurred in tax years starting after December 31, 2017, to 30% of adjusted taxable income (ATI). Your ATI is a specific measurement of net income that is related to earnings before interest, taxes, depreciation, and amortization or (EBITDA). Disallowed interest is not lost but treated as an indefinite carryforward item and deductible in future years. For many highly-leveraged businesses, such as real estate investment or trucking companies, this limitation can result in a substantial increase in taxable income. Furthermore, in years beginning after 2021, depreciation and amortization will be included in ATI and this will further limit interest deductions.
Some Businesses May Qualify For an Exclusion
As with most provisions of the tax code, there are a few exceptions to the limitation, most notably for businesses whose gross receipts do not exceed $25 million. Be careful, because business owners who own multiple related entities may still be subject to this limitation, even if those entities would not otherwise be subject to the limitation.
Work With An Accounting Firm to Navigate The New Provision
Proper tax planning and knowledge of the rules can help you avoid provisions of the TCJA that may negatively impact your business. As always, our team is ready to assist you in navigating this complex provision. Several of our team members specialize in helping the industries most likely to be impacted, such as real estate and transportation. For further information on this topic, or how other new tax law provisions may affect you, please contact us.
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