Understanding the 163(j) Small Business Exception: What You Need to Know
As a small business owner, staying apprised of the latest tax regulations can feel overwhelming, especially when terms like “163(j) small business exception” are thrown into the mix. However, understanding this exception can save you money and hassle come tax season. In this article, we’ll outline the basics of the 163(j) small business exception, what you need to know to take advantage of it, and how it could benefit your business.
What is the 163(j) Small Business Exception?
In short, the 163(j) small business exception is a tax law that allows small businesses with less than $25 million in average annual gross receipts for the three preceding tax years to deduct the full amount of business interest expense in the year it’s paid or accrued. This exception was added to the tax code in 2017 as part of the Tax Cuts and Jobs Act (TCJA) to help small businesses compete with larger corporations that have the advantage of economies of scale.
How does it work?
Before the TCJA, businesses could only deduct business interest expenses up to the amount of their business income. This limitation had the potential to significantly impact small businesses, particularly those that financed operations through debt. However, under the 163(j) small business exception, companies that meet the gross receipts threshold can deduct interest expenses without this limitation.
It’s worth noting that businesses that don’t meet the gross receipts threshold are subject to the limitation. Additionally, the 163(j) exception doesn’t apply to partnerships, as they’re subject to their own set of rules for business interest deductions.
What are the benefits?
At first glance, the 163(j) small business exception may seem like a small tweak to the tax code. However, the potential savings for small businesses can be significant. By allowing businesses to deduct the full amount of their business interest expenses, rather than being limited by their income, the 163(j) exception can help companies reduce their tax burden overall. This can free up cash flow for businesses to invest in growth opportunities, such as hiring additional staff, expanding operations, or investing in new technology.
What do you need to know to take advantage of it?
To benefit from the 163(j) small business exception, you’ll need to ensure your business meets the gross receipts threshold. This means tracking your business’s average annual gross receipts from the three preceding tax years. Additionally, it’s important to note that the 163(j) exception only applies to business interest expenses and not investment interest expenses.
It’s also worth consulting with a tax professional to ensure you’re taking full advantage of all available tax breaks and deductions. A qualified accountant can help ensure your business is adhering to the latest tax laws and can advise on other strategies to help reduce your tax burden.
Conclusion
In conclusion, the 163(j) small business exception is a tax law that allows small businesses to deduct the full amount of business interest expenses if they meet the gross receipts threshold. While this exception may seem minor, it can have significant benefits for small businesses looking to reduce their tax burden and invest in growth opportunities. By staying informed and taking advantage of available tax deductions, small businesses can help ensure their long-term success.
