Business Interest Expense Limitation in 2023

What Is Business Interest Expense?

Business interest expense refers to the amount of interest that a business pays on loans or other forms of credit. This interest can be on loans for business equipment, property, or other investments that the company makes. Interest is the cost of borrowing money, and it is considered an expense for the business, which reduces the amount of taxable income.

Interest expenses can vary depending on the type of loan, the interest rate, and the length of time the loan is taken out for. The interest can be calculated as a percentage of the loan amount or as a fixed amount of money.

Interest expense can be a significant cost for businesses, especially those that rely on credit to fund their operations. To reduce the  cost of borrowing, businesses may try to negotiate lower interest rates or refinance their loans to more favorable terms. However, there are limits to the amount of interest that businesses can deduct from their taxes, which is called the Business Interest Expense Limitation.

What is The Business Interest Expense Limitation?

The Business Interest Expense Limitation is a provision of the tax code that limits the amount of business interest expense that can be deducted on a tax return. Under the Tax Cuts and Jobs Act (TCJA) of 2017, the deduction for business interest expense was limited to 30% of the taxpayer's adjusted taxable income (ATI).

Adjusted taxable income is calculated by adding back certain deductions, such as depreciation, amortization, and depletion, to taxable income. This means that taxpayers cannot deduct more than 30% of their ATI in interest expense in a given year. Any interest expense that exceeds the 30% limit can be carried forward to future tax years.

The limitation applies to all types of businesses, including corporations, partnerships, and sole proprietorships. It also applies to foreign corporations that are engaged in a trade or business in the United States.

The purpose of the Business Interest Expense Limitation is to prevent companies from using excessive debt to finance their operations, which can lead to financial instability and increase the risk of default. The limit helps to ensure that businesses are using a reasonable amount of debt financing and not overburdening themselves with interest payments.

Basics About Business Interest Expense Limitations

The business interest expense limitation is a provision in the tax code that limits the amount of interest expense a business can deduct on its tax return. The limitation was established by the Tax Cuts and Jobs Act of 2017, which limits the deduction for net interest expense to 30% of the business's adjusted taxable income (ATI).

What Is The Business Interest Expense Deduction in 2023?

The Tax Cuts and Jobs Act of 2017 introduced a limitation on the tax deduction for interest expense for businesses. The legislation capped the deduction at 30% of adjusted taxable income (ATI), which was based on earnings before interest, taxes, depreciation, and amortization (EBITDA). For tax years beginning in 2022, the calculation of ATI will be based on earnings before interest and taxes (EBIT), which will reduce the base for the interest expense limitation.

This change means that businesses will have a more restrictive limitation on the amount of interest they can deduct from their taxable income, which could increase their after-tax cost of capital. As a result, some companies may reduce their investments, leading to slower economic growth and lower labor productivity.

It is important to note that Congress is considering imposing an additional global ratio limitation on top of the 30% limitation. This could further restrict the interest expense deduction for businesses, particularly those with high levels of debt. Taxpayers and tax advisors should be aware of these changes and plan accordingly to minimize their tax liabilities.