Not all taxpayers will want to take advantage of the changes to the interest deduction limitation in the latest round of coronavirus legislation, according to a practitioner.
“Being able to deduct more interest for many taxpayers will be a good thing, but if you deduct more interest, your taxable income will go down,” Pat Brown of PwC said March 30 during a webinar hosted by his firm. “For taxpayers who are subject to the [base erosion and antiabuse tax], having your regular taxable income go down may actually increase your liability under the BEAT.”
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), which was signed into law by President Trump on March 27, made significant changes to the section 163(j) interest deduction limitation. Under the Tax Cuts and Jobs Act, the deduction for business interest expenses under section 163(j) was limited to interest income, 30 percent of adjusted taxable income, and floor plan financing interest.
The CARES Act modifies the net business interest deduction limit from 30 percent of ATI to 50 percent for tax years beginning in 2019 or 2020. For tax years beginning in 2020, businesses may elect to compute the interest expense limitation based on their 2019 ATI, which will likely be higher because of the economic downturn.
Brown noted that these changes to section 163(j) were generally intended to be taxpayer favorable, but they are also elective.
“Allowing these provisions to be made elective affords taxpayers the ability to make an assessment as to whether they’ll be better off or worse off,” Brown said.
Brown said the interaction between section 163(j) and the BEAT was “just scratching the surface” of some of the interactions resulting from the CARES Act. Other practitioners have also said that many of the changes in the bill intended to be business friendly — like the section 163(j) changes and the changes to net operating losses — could have negative interactions with the TCJA’s international provisions.