By Debbie Gregory.
Interest payments on a business line of credit, your business credit cards, and/or your office mortgage are all common business expenses. They can add up at the end of the year. The interest expenses a business incurs were fully deductible on business taxes until this year. Recent changes to the way businesses are taxed at the federal level have set new limits on what is allowed to be deducted by a business.
The most drastic, and potentially negative, change is referred to as the “30 percent limit” which, as you can probably guess, caps the amount of interest that you can deduct to 30%. The IRS now classifies all interest expenses incurred by the business as business interest.
The deduction is now calculated after adding these three items together:
- All business interest
- 30% of adjusted taxable income (defined below)
- Financing for any inventory
Adjusted taxable income refers to all income gained and does not take into consideration any losses, operating losses, qualified business income deductions, depreciation, amortization, or depletion in any tax years.
On the up-side any interest that cannot be deducted because of the 30% limited can be carried forward into the succeeding years until it is totally used up.
Some businesses can still deduct the full amount of their interest expenses. Business such as small businesses with less than $25 million in sales, farming businesses, real estate businesses, and utilities.
Rising federal interest rates coupled with these new deduction-limiting laws are going to make an impact on the capital needs of businesses and make borrowing a significantly less attractive option.
Always consult a financial or tax professional if you have questions or concerns about tax law changes and how they will affect you and your business.
