Modifications to 163(j) Limitation – Robert Bell, CPA, Auditor
Starting in 2018, businesses became subject to an annual business interest expense deduction limitation under code 163(j). This limitation is based on a percentage of adjusted taxable income (ATI). The ATI calculation begins with federal taxable income and has myriad additions and subtractions; two of the core addbacks to this ATI calculation historically have included depreciation and amortization. Starting in the 2022 tax year, these two additions in the ATI calculation will no longer be included.
What does that mean? The expiration of the depreciation and amortization addback will lower the business interest expense limitation and may reduce interest deductions for more businesses than before. As your business evaluates the impact of this, there is an option to elect out of these rules. The opt out election from 163(j) does come with the caveat of required alternative depreciation system, which has longer depreciable lives for assets and does not allow the use of bonus depreciation. If you have previously evaluated and decided not to opt out, it may be time to re- evaluate in light of these changes.