The Tax Cuts and Jobs Act of 2017 (TCJA) created legislation limiting the deductibility of business interest expense on businesses with average annual gross receipts of $25 million or more (amount is indexed annually for inflation) in the previous three years and businesses considered tax shelters as defined under the Internal Revenue Code. The limitation generally reduces the deductibility of business interest expense to 30% of the taxpayer’s adjusted taxable income. The recent passing of the CARES Act generally increased the deductibility of business interest expenses from 30% to 50% of adjusted taxable income for tax years beginning in 2019 and 2020.
As each state has their own respective tax structure, there are varying degrees of conformity to the federal business interest expense limitations discussed above. Accordingly, businesses may have the added complexity of tracking business interest expense limitations at the state level, which only gets compounded for those businesses operating in multiple jurisdictions. There are currently 35 states that conform to some version of the 163(j) business interest expense limitation, and of these, 22 states conform to the recently increased limitation provided in the CARES Act of 50%, whereas 13 of these states conform to 163(j) as it was originally adopted in the Tax Cuts and Jobs Act of 2017.
If you are a business who is subject to the limitation on business interest expense, and seek guidance in this area, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.