Dear [CLIENT NAME]:

The amount of business interest expense that can be deducted for many taxpayers is limited from year-to-year. Exceptions are made for small taxpayers whose average business gross receipts for the three years are less than $30 million in 2024 ($__ million for 2025). However, there are many scenarios where “small taxpayers” will still find themselves subject to the new business interest limitation rules (e.g., if they are considered a “tax shelter”). Additionally, certain real estate and farming businesses have the option to elect out of the new rules (at a cost).

In short, the deduction for business interest expense is limited to the sum of:

• Business interest income;
• 30% of business “adjusted taxable income”; and
• Floor plan financing.

The business interest limitation rules have many complicated nuances, including:

• An expansive definition of business interest expense that encompasses more than the typical bank-type interest expense;
• An expansive definition of “tax shelter” for any flowthrough business (such as a partnership, LLC, or S corporation) if more than 35% of losses during the taxable year are allocated to limited partners or limited entrepreneurs; and
• Special reporting requirements for tracking and carrying over disallowed business interest expense to future tax years.

If you are a business or you are an investor in a partnership, LLC, or S corporation, then we should schedule some time to discuss the business interest limitation rules and how they may affect you. Don’t be fooled by the $30 million threshold for small businesses because even small investors can be blindsided by exceptions.

Sincerely,

Your tax professional