CARES Act Tax Provisions Series: Interest Expense Deductibility

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The COVID-19 pandemic has business as we know it turned on its head. With many customers unable to visit physical storefront locations and many employers being faced with furloughing their employees, uncertainty led Congress to pass the Coronavirus Aid, Relief, and. Economic Security (CARES) Act. The CARES Act provides several provisions intended on helping the American public and business community, including several tax provisions that can help businesses and individuals alike sustain this economic downturn. In this article, we will be exploring the easing of the rules surrounding interest expense deductibility. As with utilizing any tax provision found in the CARES Act, business owners should consult with a COVID-19 Business Survival Consultant prior to finalizing tax and business strategies that could have long-term effects.

How Is Interest Expense Limited?

Congress and the Treasury have viewed interest expense deductibility as a potential area of abuse for decades. Prior to tax reform, the tax law specifically targeted interest payments made to related parties. As part of the Tax Cuts and Jobs Act (TCJA), the Congress modified section 163(j) of the Internal Revenue Code, limiting a taxpayer’s ability to take a deduction for interest expense to 30 percent of their earnings before interest, taxes, depreciation, and amortization (EBITDA). Unlike section 163(j) pre-TCJA, the 30 percent interest expense deductibility limitation applies to all interest expenses and not only interest paid to related parties. This provision severely limited taxpayers’ ability to fully deduct their interest payments, especially companies that were highly leveraged.

How Does the CARES Act Modify the Interest Expense Deductibility Limitation? 

Under the CARES Act, section 163(j) is temporarily amended to allow taxpayers to deduct interest expenses up to 50 percent of their EBITDA in 2019 and 2020. Congress’s reasoning behind the modification to section 163(j) reflects the reality that businesses borrowing funds to pay their employees will have interest expenses associated with such debt. Furthermore, allowing for additional interest expense deductions will reduce 2019 bills and free up more capital for businesses.

Seeking Advice Prior to Taking Advantage of CARES Act Tax Provisions

If you are considering taking advantage of any of the CARES Act tax provisions for you or your business, it is imperative that you discuss the long-term implications and alternative options with a COVID-19 Business Survival Consultant. Consistent with the pre-COVID-19 tax landscape, utilization of tax provisions can have lasting impacts on a business. Your trusted tax and business advisors will ensure all available options have been considered and that the best decision is made for your business.

We Are Here For You

Regardless of your particular business or estate needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.

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