Section 163(j) of the Internal Revenue Code (Code) as amended by the Tax Cut and Jobs Act (Tax Act) provides for 30% adjustable taxable income (ATI) limitation for business interest. Starting in 2018, business interest expenses are deductible only to the extent of business interest income plus 30% of ATI. “Business interest” is interest paid or accrued with respect to indebtedness allocable to a trade or business. It does not include investment interest expense. Interest disallowed amount may be carried forward indefinitely. Businesses with average annual gross receipts of $25 million or less are exempt from the limitation. On Nov. 26, 2018, the Internal Revenue Service (IRS) released Proposed Regulations (Prop. Regs.) providing guidance on the interest deduction limitation rules under §163(j).

The limit on the deductibility of net business interest expense equal to 30% of an amount that is similar to earnings before interest, taxes, depreciation, and amortization (EBITDA) for taxable years 2018 through 2021, and similar to earnings before interest and taxes (EBIT) for taxable years 2022 and thereafter. In both cases, the Tax Act permits the indefinite carryforward of any disallowed interest expense. The Tax Act does not provide any grandfather provision for outstanding debt; the interest deduction limitation applies to all interest that is paid or accrued on and after Jan. 1, 2018. Partnerships are evaluated on a separate entity basis, with excess ATI allowed to flow up to partners in certain circumstances. The limitation on deductibility of interest effectively places a cap on the amount of debt in a capital structure of an entity.