Tax Reform: What it Means For Businesses – Business Interest Limitation & Credits
September 26, 2018

This week we take a look at new limits on the deductibility of business interest. We will also review two important business tax credits.

 

Limitation on Deduction of Business Interest

The deduction of business interest is now limited to the sum of:

  • Business interest income
  • Floor plan financing interest
  • 30 percent of adjusted taxable income

Business interest is defined as any interest paid or accrued on debt allocated to a trade or business of the taxpayer and does not include investment interest.

Floor plan financing is interest paid or accrued on debt used to finance the purchase of motor vehicles held for sale or lease and secured by the inventory. Motor vehicles include boats and farm machinery or equipment.

The business interest deduction limits do not apply to small businesses with average gross receipts of less than $25 million. Elections are also available to exclude real property trade or businesses and farm businesses from the limitation. If an exclusion election is made, then the business must use the alternative depreciation system (ADS) for certain depreciable property.

Generally, any disallowed interest may be carried forward indefinitely. The deduction limitation applies at the entity level, so in the case of a partnership or S corporation, the disallowed interest is allocated to each partner or shareholder as excess business interest. This limitation is effective for tax years beginning after 2017.

 

Rehabilitation Credit

The rehabilitation credit is now limited to certified historic structures only and is claimed over five years, beginning in the year the building is placed in service. The tax credit is still 20 percent of qualified rehabilitation expenses. The 10 percent tax credit for pre-1936 non-certified historic buildings has been eliminated. The new rules apply to qualified rehabilitation expenses paid after December 31, 2017.

 

Paid Family and Medical Leave Credit

For wages paid in 2018 and 2019, employers may claim a general business tax credit for paid leave provided to qualifying employees under the Family and Medical Leave Act (FMLA). To qualify for the credit, an employer must pay the employee at least 50% of their regular pay during the FMLA leave period. The credit ranges from 12.5 to 25 percent of wages paid to employees on FMLA leave. The credit percentage increases based on the percentage of normal compensation paid during the leave.

The employer must have a written policy that requires payment of at least 50 percent of normal compensation during an FMLA leave to employees who earn less than $72,000 per year. FMLA leave is in addition to vacation and paid time off. Employers are not required to offer paid leave and an employer may elect not to claim the credit.

 

Have questions about how these changes will impact your business? Give BMM call.