Section 163(j) and Business Interest Limitations

Section 163(j) and Business Interest Limitations

One of the many changes that businesses will experience when filing taxes this year is the business interest limitations. The IRS Section 163(j) rules were first included in the Tax Cuts and Jobs Act of 2017, but an additional provision began with the 2022 tax year. Here are the business interest limitations that you need to know.

What Is Section 163(j)?

This part of the tax code limits whether businesses can deduct current year business interest expenses. Unless you are a small business or considered exempt, you are required to follow the rules outlined in this section. Small businesses are considered those with average annual gross receipts for the previous three years below $25 million (or $26 million when indexed for inflation). Your accountant can help you determine whether or not you are subject to these business interest limitations.

What Did the CARES Act Change?

In 2020, the CARES Act made some changes to different parts of the tax code, including business interest limitations. Instead of using previous standards, for 2019 and 2020, businesses could use 50% instead of 30% of their Adjustable Taxable Income (ATI) when calculating their taxes. Businesses were also allowed to use 2019 ATI figures when determining their 2020 liability. However, this was a limited-time offer designed to keep businesses afloat during the early stages of the COVID-19 pandemic.

What Are the New Business Interest Limitations?

Based on the original TCA, businesses are subject to new rules that began on January 1, 2022. Depreciation, depletion, and amortization cannot be factored into your ATI calculation any longer. Your accountant can help you in determining what your new ATI figure will look like and how this will impact your tax liability. There are many companies that have not experienced the new ATI figure yet, so there may be a certain amount of sticker shock when calculating taxes after the new changes.

Can There Still Be Changes?

The short answer is yes. President Biden has been considering whether this provision should be applied at the shareholder or partner level instead of the entity level. Additionally, the President is also considering different carryover of interest rules. Because this is a developing situation, it’s critical to work with your accountant to determine what your exact liability will be for 2022.

Master the Tax Filing Process with Help from MKS&H

MKS&H provides tax and accounting services to businesses of every size and in every industry. We can work with you to make taxes easily and avoid the most common mistakes. Contact us today for a consultation.

About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.

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