The Section 163 deduction allowed for business interest for any tax year can't exceed the sum of:
(1) the taxpayer's business interest income for the tax year;
(2) 30% of the taxpayer's “adjusted taxable income” for the tax year, plus
(3) the taxpayer's floor plan financing interest (i.e., interest on debt used to finance the acquisition of motor vehicles, boats, or farm equipment held for sale or lease, where the debt is secured by that inventory) for the tax year.
Thus, floor plan financing interest addressed in 163(j) is fully deductible. The deduction for business net interest expense (less floor plan financing interest) is limited to 30% of adjusted taxable income.
Carryforward: Disallowed business interest may be carried forward indefinitely under Section 163, subject to certain restrictions that apply to partnerships.
Exception - Annual gross receipts: Per Section 163, taxpayers whose average annual gross receipts for the three-tax year period ending with the prior tax year don't exceed $25 million are exempt from the limitation on net business interest.
Exceptions: utilities, real property businesses, farming businesses. The business interest limitation doesn't apply to certain regulated public utilities and electric cooperatives. Real property trades or businesses can elect out of the provision if they use the alternative depreciation system (ADS) to depreciate applicable real property used in a trade or business. Farming businesses can also elect out if they use ADS to depreciate any property used in the farming business with a recovery period of ten years or more.
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