The Tax Cuts and Jobs Act places limits on the deduction of business interest for larger business entities as determined by sales volume.
Prior Law
Through December 31, 2017
Under the law as it existed, there was no limit on the deduction of interest on business debt.
New Law
Effective for tax years beginning after December 31, 2017
For entities that have average sales (over the past three years) of more than $25 million, the deduction for interest on business debt is limited to 30% of adjusted taxable income. For 2018 through 2021 adjusted taxable income is calculated before deductions for depreciation, amortization and depletion. Certain industries are exempt from the limit while other businesses can avoid this provision by electing the alternative depreciation system.
Floor plan interest for the acquisition of inventory (such as motor vehicles) where the inventory secures the debt, is also exempt from the interest deduction limit.
Commentary
The limit is designed to level the playing field between companies that finance via equity versus debt.
