Question

Question Andersen Corporation, a calendar year, accrual method, C-Corporation, is in the business of manufacturing glass based product. In 2018, Andersen Corporation had taxable income before any limitations of $500,000. Andersen Corporation’s had average annual gross receipts over the previous three tax years of $27,000,000. The following items of income and deductions are included in the computation of taxable income: ·        $400,000 interest expense ·        $250,000 depreciation ·        $30,000 interest income ·        $75,000 amortization ·        $100,000 research and development expenses ·        $200,000 executive compensation Given the information above, how much interest expense can Andersen Corporation deduct in 2018? How would your answer change if Andersen Corporation had average annual gross receipts of $23,000,000 over the previous three years? ·

Answer 1

Computation of Adjusted Taxable income
Taxable income	$500,000
Add: Interest expense	$400,000
Depreciation	$250,000
Amortization	$75,000
Less: Interest Income	$30,000
Adjusted Taxable Income (EBITDA)	$1,195,000
Net Interest Expense
Interest expense	$400,000
Less: Interest income	($30,000)
Net Interest Expense	$370,000
As per new tax law, interest expense is deductible upto 30% of
adjusted taxable income. Any amount in excess of that is carried
forward indefinitely.
Thus allowable interest expense deduction is limited to $358500
($1195000 x 30%) and remaining $11500 will be carried forward
If Andersen Corporation had an average annual gross receipts of
$23 million over the previous three years, it will get exemption from
limitation on interest deductibility and the net interest expense of
$370,000 will be deducted as business expense.
TCJA provide an exemption from limitation on interest deductibility
whose average annual gross receipts did not exceed $25 million.