Question

a) For the last 3 years, the JCR corporation has averaged annual gross receipts of $27 million. This year, JCR has EBITDA of $6,000,000, and it has incurred $2,100,000 in business interest expense. What can JCR deduct as business interest in the current year?

b) Assume that in the following year, JCR has EBITDA of $7,000,000, and it has incurred $1,500,000 in business interest expense. What can JCR deduct as business interest?

Answer 1

Answer a)

As per TCJA (Tax Cuts Jobs Act), if taxpayer's average annual gross receipts is more than 25 millions in last 3 years then the deduction for business interest expense is limited to 30 % of EBITDA.

In the given case , JCR corporation has averaged annual gross receipts of $27 million. Thus maximum amount of deduction that JCR is allowed to deduct as business interest in the current year = $6,000,000 * 30 % = $1,800,000.

Since  business interest expense incurred ($2,100,000) is more than the maximum allowable limit of thus in the current year the amount of deduction that JCR is allowed to deduct as business interest is $1,800,000    

The remaining disallowed amount of business interest expense of $300,000 [$2,100,000 - $1800,000] can be may be carryover for indefinite period.     

Answer b)

In the following year, JCR has EBITDA of $7,000,000. Thus maximum amount of deduction that JCR is allowed to deduct as business interest in the following year = $7,000,000 * 30 % = $2,100,000.

The amount of business interest expense incurred by JCR that is eligible for deduction is $1,500,000 + $300,000 [ the carryover from previous year] = $1,800,000

Since  business interest expense incurred is within the limit of maximum allowable limit of thus the amount of deduction that JCR is allowed to deduct as business interest is $1,800,000