Lease Accounting

New Interest Deduction Limitation

Much has been written about The Tax Cuts and Jobs Act. Indeed, most of the headlines focusing on the Act, which went into effect January 1, 2018, focused on the individual income tax breaks and the repatriating of money from offshore accounts.

But nestled within the new law was a significant change in the way that businesses can deduct interest expense. This impact could be substantial but there also exists at least one strategy that could dull its effect.

First, let’s look at the new rules of engagement. Beginning in 2018, businesses with gross receipts in excess of $25 million will no longer be able to deduct all of their interest expense for tax purposes. The deduction will be capped at 30% of their taxable income (exclusive of interest, depreciation and amortization). Any unused interest deductions can be carried forward to future years. It should also be noted that the reduction in the highest marginal corporate tax rates from 35% to 21% may mitigate much of the impact.

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