Part of the IRS headquarters building (Photo: Allison Bell/TA) IRS headquarters in Washington. (Photo: Allison Bell/ALM)

The Internal Revenue Service issued proposed regulations Monday to limit the business interest expense deduction for certain small businesses whose gross receipts are $25 million or less. The proposal implements a provision of the Tax Cuts and Jobs Act.

For tax years beginning after Dec. 31, 2017, the deduction for business interest expense is generally limited to the sum of a taxpayer’s business interest income, 30% of adjusted taxable income and floor plan financing interest, the IRS explains.

Taxpayers will use new Form 8990, Limitation on Business Interest Expense Under Section 163(j), to calculate and report their deduction and the amount of disallowed business interest expense to carry forward to the next tax year.

“This limit does not apply to taxpayers whose average annual gross receipts are $25 million or less for the three prior tax years,” the IRS said. “This amount will be adjusted annually for inflation starting in 2019.”

Other exclusions from the limit are certain trades or businesses, including performing services as an employee, electing real property trades or businesses, electing farming businesses and certain regulated public utilities.

Taxpayers must elect to exempt a real property trade or business or a farming business from this limit.

Taxpayers may rely on the rules in the proposed regs until final rules are published in the Federal Register.

The IRS is taking comments for 60 days after publication in the Federal Register.

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