CARES Act Eases Limitation on Deducting Business Interest Expenses

By: Amanda Wilson

The 2017 Tax Cuts and Jobs Act introduced a new Section 163(j) limitation on taxpayers deducting business interest expense (our prior discussion of this tax law change can be found here). Under this limitation, businesses could generally only deduct net business interest expense in any given year equal to 30% of adjusted taxable income. This provision was intended as a revenue raiser to offset the cost of the tax cuts associated with the Tax Cuts and Jobs Act.

To assist businesses struggling in the current economic environment, the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act enacted last month provides a temporary easing of this deduction limitation.

Specifically, Section 2306 of the CARES Act increases the limitation from 30% of adjusted taxable income to 50% of adjusted taxable income for the 2019 and 2020 tax years, allowing businesses to take a larger interest expense deduction. In the case of partnerships, the increased limitation is only available for the 2020 tax year. This relief is not mandatory, as a taxpayer may elect to continue to apply the 30% limitation if they wish to do so.

In addition to increasing the percentage limitation, the CARES Act also allows taxpayers to elect to use their 2019 adjusted taxable income in calculating their 2020 limitation. This change recognizes that, for the majority of taxpayers, the 2019 adjusted taxable income will be higher than their 2020 adjusted taxable income, and therefore will provide more of a benefit.

Taxpayers who have already filed their 2019 tax returns may want to consult their tax advisors and consider filing an amended return to take advantage of this recent tax change.

Be sure to visit our Coronavirus (COVID-19) Resource Center to keep up to date on the latest news.

No Tax Deduction for Medical Marijuana Company

piggy banksBy:  Amanda Wilson

As more and more states are allowing for medical marijuana or other legal uses of marijuana, it is important to recognize that the federal government’s treatment of marijuana as a controlled substance can have more than criminal consequences.  It can result in a hefty tax bill!

Section 280E  of the tax code denies deductions for expenses paid or incurred in the carrying on of any trade or business involving a federal controlled substance.  As a result, the IRS’s position is that any business that deals with marijuana cannot deduct their operating expenses (including employee salaries).  The IRS’s position was recently upheld by the Tax Court in the case Canna Care Inc. v. Commissioner, T.C. Memo. 2015-206.  The inability to deduct operating expenses may drastically impact the viability of this growing new industry.


Worthless Debt Deduction – A Cautionary Tale

rain taxesBy:  Amanda Wilson

For partnership, individuals and other types of taxpayers that are not in the business of making loans, the main avenue for tax relief when a loan goes bad is Section 166 – the bad debt deduction.  In order to claim this deduction, the taxpayer must show that the debt has become wholly worthless during the tax year in which the deduction is claimed.  This can often be a very difficult burden for taxpayers, especially if there is no external event that they can identify as a trigger for worthlessness.  Even if there is such an event (such as the borrower declaring bankruptcy), worthlessness can be difficult to establish.

A recent Tax Court decision illustrates the difficulties that taxpayers face when claiming a worthless debt deduction.  In Cooper v. Commissioner (T.C. Memo 2015-191), the Tax Court found that the taxpayers failed to show that a debt became worthless in 2008, the year that they claimed the deduction.   This was despite the fact that the borrower declared bankruptcy in 2008.  The Tax Court pointed to the fact that (i) the taxpayers did not initially claim the debt as worthless on their tax return (they claimed the deduction in 2010 when they filed an amended 2008 return), (ii) they listed the loan as an asset in 2009 on statements of net worth, and (iii) they did not issue the borrower a 1099 in 2008 reflecting cancellation of debt income.  While the Tax Court did not specifically state when the debt became worthless, it seemed to indicate that this occurred in 2010.   Of course, had the taxpayers claimed that the debt became wholly worthless in 2010, the IRS may very well have taken the position that the debt was in fact wholly worthless in 2008, when the bankruptcy petition was filed, especially if enough time had passed that the taxpayers would have been barred from filing an amended 2008 return.


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