IRS Tax Form 8990: Limitation on Business Interest Expense Under Section 163(j)

IRS Tax Form 8990: Limitation on Business Interest Expense Under Section 163(j)

IRS Form 8990, Limitation on Business Interest Expense Under Section 163(j), is used by businesses to calculate the allowable deduction for business interest expenses. This form ensures compliance with the tax law limitation imposed under Section 163(j) of the Internal Revenue Code. The primary purpose of Section 163(j) is to limit the amount of business interest expense that can be deducted on a taxpayer’s income tax return.

Businesses, particularly those with substantial interest expenses, need to be aware of the rules surrounding this limitation, especially since the Tax Cuts and Jobs Act (TCJA) introduced new provisions that significantly impact the way business interest expenses are deducted.

What is IRS Form 8990?

Form 8990 is used by taxpayers to calculate the business interest expense deduction limitation under Section 163(j). The form is required when a business’s interest expense exceeds a certain threshold in relation to its taxable income. The IRS uses Form 8990 to determine how much interest expense a business can deduct for the tax year and ensures that the business is in compliance with the limitations set by the tax code.

The interest expense deduction limitation can be particularly relevant for businesses in industries such as real estate, utilities, or any sector that typically carries significant debt. By filing Form 8990, taxpayers can determine whether they are subject to the limitation and, if so, how much interest expense they are allowed to deduct.

Who Needs to File IRS Form 8990?

Not every business needs to file Form 8990. Businesses that fall under the following categories must file this form:

1. Businesses with Interest Expense:
   If your business has a significant amount of business interest expense (such as loans, bonds, or other forms of debt), you may need to file Form 8990 to calculate the allowable deduction under Section 163(j).

2. Businesses Affected by the Limitation:
   Under Section 163(j), businesses with average annual gross receipts of $25 million or more over the last three years are subject to limitations on their business interest expense deductions. If your business’s interest expense exceeds this threshold, you’ll need to file Form 8990.

3. Taxpayers Who Are Corporations or Partnerships:
   Form 8990 applies to corporations, partnerships, and any other taxpayer claiming a deduction for business interest expense, including S corporations.

4. Businesses That Elect to Apply Section 163(j):
   Certain businesses may choose to apply the provisions of Section 163(j) for tax years where they are subject to the limitation on business interest expense.

Key Sections of IRS Form 8990

Form 8990 consists of several sections that guide businesses through the calculation of the allowable business interest expense deduction. Below is an overview of the key sections:

1. Part I: Business Interest Expense Limitation
   This section is used to calculate the limitation on your business interest expense. It begins with the amount of interest expense you’ve incurred during the year and adjusts it by considering factors like taxable income, earnings before interest, taxes, depreciation, and amortization (EBITDA), as well as any applicable exemptions.

2. Part II: Business Interest Expense Deduction
   Part II calculates the total interest expense deduction after applying the limitation. This will determine how much interest expense your business can deduct for the year, based on the formula set out in Section 163(j).

3. Part III: Additional Adjustments
   In this section, adjustments are made for any carried-over interest expenses from previous years. It’s important to track unused deductions, as these can be carried forward to future tax years.

4. Part IV: Reporting of Other Adjustments
   Businesses need to report any additional adjustments, such as for partnerships or consolidated returns. This section ensures that the business interest expense limitation is applied consistently across different entities.

5. Part V: Exemption Elections
   Some businesses may qualify for exemptions under Section 163(j), and this section provides a place to elect such exemptions. For instance, businesses in the farming, real estate, and certain other sectors can choose to apply special rules or exclusions from the limitation.

How the Section 163(j) Limitation Works

Under Section 163(j), the IRS limits the amount of interest expense that can be deducted in a tax year to 30% of the taxpayer’s adjusted taxable income (ATI). Adjusted taxable income is similar to EBITDA, which is earnings before interest, taxes, depreciation, and amortization.

For the purposes of Section 163(j), businesses are allowed to deduct interest expenses that don’t exceed 30% of their adjusted taxable income. If your interest expenses exceed that threshold, the remaining interest expenses are not deductible in the current tax year. However, they may be carried forward to future tax years.

This limitation was introduced as part of the Tax Cuts and Jobs Act (TCJA), which significantly altered how businesses handle interest expense deductions.

Exemptions Under Section 163(j)

Certain businesses can be exempt from the limitations set by Section 163(j). These exemptions typically apply to businesses in specific industries or those that meet certain size requirements. Some common exemptions include:

1. Small Businesses with Gross Receipts Below $25 Million:
   Businesses with average annual gross receipts of $25 million or less over the past three years are generally not subject to the business interest expense deduction limitation. If your business falls into this category, you do not need to file Form 8990.

2. Real Property Trades or Businesses:
   Real property trades or businesses can elect to apply special rules under Section 163(j) that allow them to avoid the limitation, although they must depreciate property over a longer period.

3. Farming Businesses:
   Similar to real property trades, farming businesses can elect out of the Section 163(j) limitation, but they must apply special rules and handle their depreciation differently.

4. Electing Pass-Through Entities:
   Partnerships, S corporations, and other pass-through entities may elect to apply the exemption for business interest expenses, provided that they meet specific criteria.