The business interest expense deduction since TCJA

According to Thompson Greenspon,

Before Congress passed the Tax Cuts and Jobs Act (TCJA), most business-related interest expense was deductible... But for tax years beginning after 2017, the TCJA imposes a limit on business interest deductions, with exceptions...

Skipping over the exceptions -- businesses where the limit does not apply -- we come to this:

If the limit applies to your business, your annual deduction for business interest expense can’t exceed the sum of 1) your business interest income, if any, 2) your floor plan financing interest, if any, and 3) 30% of your adjusted taxable income.

Three factors determine the limit on business interest deductions. I want to look at all three (but not in order given).

First of all, what is "floor plan financing"? As Thompson Greenspon explains, it is used to stock automobile and appliance showrooms. The interest on this financing is deductible, it seems to me, because otherwise the types of business that use showrooms would have been hit harder by the tax than other types of business. So I guess it makes sense to allow the deduction for interest on floor plan financing. (Makes sense in the context of existing policy concepts, I mean.)

Floor plan financing aside, then, and exceptions aside (and leaving "your business interest income" for last), the business interest expense deduction is limited to 30% of adjusted taxable income. 30% seems like a lot to me. It's just the interest that's deductible, not the principal repaid. I don't have numbers for business sector debt service, but for households, debt service is about 10 to 12% of Disposable Personal Income (DPI). Say 12 percent. That includes interest and principal.

In the years since the crisis, interest has been about 50% of debt service (or 6% of DPI) with principal making up the rest. For most of the 1990s, interest was about 64% of debt service, or 7.68% of DPI. I'll look at both numbers.

Taxable Income (from the Individual tax form) is about 50% of DPI. So for $100 of DPI, Taxable Income is about $50. If we were talking business income, the interest deduction would be limited to 30% of that, or $15.

For $100 of DPI, $50 Taxable, the current number (6% of DPI) is 12% of Taxable Income and is below the limit on interest deductions. The number for the 1990s (7.68% of DPI, or $7.68) is 15.36% of Taxable Income, but it's still only $7.68. That's still well below the $15 limit. All of that interest expense would be deductible. If the interest costs were twice as much, almost all of it would still be deductible. Based on this godawful crude estimate, the limit on the business interest deduction tells businesses: We encourage you to borrow more today, but don't borrow more than twice as much as you did in the 1990s.

The limit on business interest deductions allows interest costs to rise to twice the level that household interest costs reached in the 1990s (relative to taxable income). It doesn't cap them at a lower level. It sets the limit high enough that it shouldn't impinge on the borrowing business wants to do. I'm disappointed.

Remember, this estimate is based on household debt service numbers, not business numbers. And I can't even guess if business debt service is comparable to household debt service. But I had to look.


We have not yet looked at the other limit on business interest deductions noted by Thompson Greenspon. So far, all of the interest on floor plan financing is deductible, plus all but the highest reaches of annual business interest expenditure. If you still have more interest expenses you want to deduct, you can turn to a third option: the limit set by your business interest income.

Remember, you get to add the three limits together to find your maximum interest deduction.

The Thompson Greenspon page explains this third option:

you can use an unlimited amount of business interest expense to offset business interest income

So when you're figuring out your taxes, you take all of the interest you paid for your floor plan financing and deduct the whole thing.

Then add up all your other interest expenses and compare that to your interest income. If the expenses are less (or equal to) the income, all those expenses are deductible. If not, deduct the amount equal to your interest income, and ponder the balance.

If the balance of your interest expenses is not over 30% of your adjusted taxable income, deduct it all. But anything over 30% is taxable.

By the way, I'm not offering advice on doing your taxes. I'm just trying to figure out what happens with interest expenses.

Seems to me this plan will do little to reduce the reliance on credit by business. Look at that one item: "You can use an unlimited amount of business interest expense to offset business interest income," Thompson Greenspon says. The more interest expense you have, the more interest income you can write off. The more money your business earns by interest, as opposed to producing and selling real output, the more of your interest expenses you can deduct. The business is rewarded for engaging in finance rather than the production of output.

 That's not an incentive to to reduce your financial expenses. It's an incentive to take your money out of your factories and start lending it. Come to think of it, Apple has been advertising its new credit card lately. A consequence of TCJA, perhaps?