Navigating Asset Acquisitions with Potential Business Interest Limitations
Matt Gardiner, CPA, CFE, Audit Manager
When it comes to building and acquiring new assets for your business, there are several avenues to consider in order to finance the costs: you can either borrow funds to purchase the asset from your lender, or you can finance the asset through a leasing arrangement. Each method of financing has benefits and drawbacks, but with consideration of the business interest limitation – IRS Code Section 163(j) – leasing appears to be a more attractive option than borrowing funds to acquire the asset.
Under Section 163(j), the deductibility of interest expenses is limited for businesses based on the calculation to the right. Essentially, the more debt a business has, the less interest expense it can deduct on its taxes if it does not anticipate a high bottom-line at the end of the year.
+ Interest Expense
- Interest Income
= Adjusted Taxable Income x 30%
= Interest Limitation
For GAAP leased assets have interest expense, however for tax, the principal payments get deducted. What this means for businesses that have a high interest expense, but acquire assets through leasing arrangements, is that they are more likely to get to fully utilize their interest expense deduction while also getting to deduct the principal payments on the lease.
There is some additional complexity for leases due to recently-issued accounting standard ASC 842, but our firm is prepared to assist in implementing, managing and providing guidance on the treatment for GAAP and tax. Please reach out to one of our staff if you have any questions on Section 163(j) and any potential impact it may have on your business.