As the joys of tax season approaches, the IRS released a Proposed Notice of Rule Making regarding the proposed interest expense regulations (163(j)) for business, which could potentially affect your tax liability.
Prior to tax reform, businesses could write off interest and depreciation they accrued, which would shrink their tax liability by an equal amount of interest. After tax reform, and from now until 2021, a formula was implemented to determine the amount that businesses can deduct. The amount cannot be more than 30% of earnings before interest, taxes, depreciation and amortization. This also is known as, EBITDA, in the tax world.
Example: $100 (earnings before interest, taxes, depreciation, and amortization)
30% of 100 is $30. You could deduct $30 from your tax liability.
However, the Proposed Notice of Rule Making would limit the current formula to EXCLUDE depreciation and amortization. This would make the amount that businesses could deduct even smaller. So in the above example, the formula would stop after taxes. This would essentially make it an EBIT formula.
Example: $100 (earnings before interest and taxes)
The depreciation and amortization that would normally be included is $40 However, since you cannot include that anymore, you would take the $100 and subtract the $40 of depreciation and amortization. This leaves you with a total of $60. You can then write off the usual 30%, which in this example is $18.
Your tax deduction and write off went from $30 in the first example, to $18 in this example. $12 might not seem like a huge difference in these examples, but the numbers your company will be using will be significantly higher than the ones used here. This Proposed Rule Making will affect your company when it comes to taxes and what can be deducted.
Although, the rule would not be in effect until 2022, unfortunately some companies are already seeing the Treasury Department start to implement this, even though it is not Congress’ intent! That is why Congress and the Treasury Department need to hear from you!
You can find the full regulation here. The deadline to submit comments is Feb. 26.