Understanding the 163j Small Business Exception: A Comprehensive Guide
As a small business owner, it’s vital to understand every aspect of your finances so that you can make informed decisions. One such aspect is the 163j small business exception. In this article, we’ll explore what the 163j small business exception is, who it applies to, how to calculate it, and provide some examples to help you better understand it.
What is the 163j Small Business Exception?
The 163j small business exception is a provision in the Tax Cuts and Jobs Act (TCJA) that allows certain small businesses to deduct their interest expenses from their taxable income. It’s crucial to know that interest expenses are those that are incurred from loans or other related financial obligations.
This exception came as a relief to small businesses, as it removed the previous limitation on interest deductions that were set at 30% of a business’s adjusted taxable income. It is valid for tax years starting from 2018 onwards.
Who Does the 163j Small Business Exception Apply to?
The 163j small business exception applies to small businesses that meet specific revenue and asset thresholds. The exceptions apply to businesses with an average annual gross receipt of $26 million or less for the previous three years and businesses whose assets’ worth doesn’t exceed $26 million.
However, it’s crucial to note that there are some limitations to the exception that apply to specific types of businesses, such as tax-exempt organizations, syndicates, and businesses engaged in specific trades.
How to Calculate the 163j Small Business Exception?
If your business meets the revenue and asset thresholds, you’ll need to determine the amount of your interest expenses that are deductible. To do this, you’ll need to calculate your business’s adjusted taxable income. This figure is calculated by subtracting any allowable deductions from your gross income.
Once you have your adjusted taxable income, you can now determine the amount of deductible interest. This amount is the lesser of your actual interest expense or 30% of your adjusted taxable income. However, the good news is that if your actual interest expense is less than 30% of your adjusted taxable income, you can deduct the full amount of your interest expense.
Examples of How the 163j Small Business Exception Works
To better illustrate how the 163j small business exception works, let’s take the example of a small business with an average annual gross receipt of $20 million. This business also has an adjusted taxable income of $5 million and incurs interest expenses of $1,500,000.
The maximum amount of interest expense that this business can deduct is 30% of its adjusted taxable income, which is $1,500,000 (30% x $5,000,000). However, the business’s actual interest expense is $1,500,000, which means that it can deduct the full interest expense amount.
In another example, suppose a small business has an average annual gross receipt of $30 million. This business also has an adjusted taxable income of $5 million and incurs interest expenses of $2,000,000. In this scenario, the maximum amount of interest expense that can be deducted is $1,500,000 (30% x $5,000,000). This $1,500,000 is the maximum amount that the business can deduct from its interest expenses.
Conclusion
In conclusion, the 163j small business exception is beneficial to small businesses that meet certain revenue and asset thresholds. By allowing businesses to deduct their interest expenses from taxable income, they can reduce their tax liability and take advantage of their financial resources. However, while understanding the 163j small business exception is crucial, it is essential to consult with a tax professional to ensure proper compliance with the guidelines.
