Question

Calculate the allowed interest expense deduction under IRC 163j based on the following income statement: Gross Sales $35,000,000 Cost of Goods Sold 22,000,000 Gross Profit 13,000,000 Interest Expense- regular 7,000,000 Depreciation 1,000,000 Interest Expense Floor Plan 200,000 All other deductions 3,000,000 Total Business Deductions 11,200,000 Net Income 1,800,000 Interest Income Earned 40,000 Capital Gain - non-business 50,000 Taxable Income before 163j limit $1,890,000

Answer 1

Answer:

Taxpayers can deduct interest expense paid or accrued in the taxable year. However, if section 163(j) applies, the amount of deductible business interest expense in a taxable year cannot exceed the sum of:

1. The taxpayer’s business interest income for the year
2. 30% of the taxpayer’s adjusted taxable income for the year
3. The taxpayer’s floor plan financing interest expense for the year.

Busines interest income: 40000

30% of Adjusted taxable income: $ 1890000*30% = 567000

Taxpayers floor plan interest expense; 200000

sum of the above: $40000+567000+200000= $ 807000.

Hence the Maximum of interest expense that can be allowed as deduction for the current year cannot exceed $ 8,07,000.