Before the 2017 Tax Cuts and Jobs Act (TCJA), Section 163(j) of the Internal Revenue Code imposed few limitations on deducting business interest. However, as of 2023, there is now a 30 percent taxable income limitation.
The changes limit interest deductions to 30 percent of a tax-adjusted “EBIT” (Earnings Before Interest and Taxes), meaning taxpayers can no longer include depreciation and amortization when calculating adjusted tax income (ATI). Many businesses are exempt. If your average annual gross sales for the past three years fall below $29 million, you are exempt from this rule.
Exercise caution! The 30 percent limitation is based on taxable income after adding back interest expenses. It is not based on financial statement net income.
Please be aware that this is a simplified explanation and example. For a comprehensive analysis, contact us, as there are special rules that might be applicable.
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