Question

True/False

The limitation on the deduction of business interest does not apply to businesses that qualify under the gross receipts test

Answer 1

Hi there,

Here is my Answer to the question asked.

The option is "TRUE".

Yes, the limitation on deduction of business interest does NOT APPLY whe the business qualify under GROSS RECEIPTS TEST.

Generally, 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 (ATI) for the year; and
3. the taxpayer’s floor plan financing interest expense for the year.

What is considered to be Interest under section 163(j) :

  Interest is any amount that is paid, received, or accrued as compensation for the use or forbearance of money under the terms of an instrument or contractual arrangement or that is treated as interest under the Internal Revenue Code or the regulations thereunder. Interest also includes certain amounts that are closely related to interest such as substitute interest payments, debt issuance costs, loan commitment fees, and certain amounts that affect the economic cost of funds or yield of a borrowing or an interest-generating asset. Under an anti-abuse rule, certain amounts predominantly associated with the time value of money also may be treated as interest expense for purposes of section 163(j). Section 1.163(j)-1(b)(20) of the proposed regulations provides additional information on what constitutes interest under section 163(j).

For tax years beginning after 2017, the limitation applies to all taxpayers who have business interest expense, other than certain small businesses that meet the gross receipts test in section 448(c) (“exempt small business”) (see Q/A 3-4). The limitation does not apply to certain excepted trades or businesses (see Q/A 5-6).

GROSS RECEIPTS TEST:

   A business generally meets the gross receipts test of section 448(c) when it is not a tax shelter (as defined in section 448(a)(3)) and has average annual gross receipts of $25 million or less in the previous three years. For tax year 2019 and subsequent years, the $25 million amount will be adjusted for inflation.