Question

Describe the gross receipts test and identify how this test relates to the business interest deduction.

Answer 1

Gross receipts test.-A taxpayer meets the gross receipts test if the taxpayer has average annual gross receipts of $26 million or less for the 3 prior tax years.

A taxpayer's average annual gross receipts for the 3 prior tax years is determined by:

1. Adding the gross receipts for the 3 prior tax years, and

2. Dividing the total by 3.

For purposes of section 163(j) limitation, the gross receipts test applies to all taxpayers. In the case of any taxpayer, which is not a corporation or a partnership, and except as provided below, the gross receipts test is applied in the same manner as if such taxpayer were a corporation or a partnership.

Business interest expense deductions-Gross receipts test relates to the business interest deduction as it explains various situations in which benefits of interest expense deductions are allowed to certain taxpayers. Like-A small business meeting the Sec. 448(c) gross receipts test for any tax year will not be subject to the interest limitation for that year.

Under Sec. 163(j), for tax years beginning after Dec. 31, 2017, business interest expense deductions are limited to the sum of:

• The taxpayer’s business interest income;
• 30% (or 50% for 2019 and 2020, as amended by the CARES Act) of the taxpayer’s adjusted taxable income (ATI); and
• The taxpayer’s floor plan financing interest expense.

In a change made by the CARES Act, taxpayers can elect to use their 2019 ATI in computing the 2020 limit, helping taxpayers whose income declines in 2020. Taxpayers are also permitted to elect to apply the more restrictive 30%-of-ATI limit.

The business interest expense deduction limitation does not apply to certain small businesses whose gross receipts are $26 million or less, electing real property trades or businesses, electing farming businesses, and certain regulated public utilities. The $26 million gross receipts threshold, which applies for the 2020 tax year, is adjusted annually for inflation.

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