About Those Changes to the Business Interest Deduction

tax reform toolkitThe business interest deduction has been a staple of the tax code for over a century and a key tool for the home building industry: Debt is a critical financing tool, and access to equity markets is challenging for the majority of home builders.

The new tax law places limitations on the business interest deduction and the treatment of business interest expenses. The good news: An exception was made for real estate businesses.

The result is that if these businesses like the way the business interest deduction previously functioned, they may keep the deduction in full. If they would rather abide by the broad limitation on deductibility, they may opt out of this exception.

The decision is particularly important because it locks a taxpayer indefinitely into whatever treatment they choose and comes with tradeoffs regarding the new depreciation rules.

The bottom line is that if your business typically spends less than $1 million on capital expenditures, you are already getting the benefit of expensing. Generally speaking, this means you can decide to keep the full business interest deduction without actually facing a tradeoff with more generous depreciation rules.

While deciding what option is best, business owners should keep in mind that real property (i.e. structures) must be depreciated using the Alternative Depreciation Schedule. For residential rental property, this means depreciating the cost over 30 years (3.33% per year) rather than 27.5 years (3.64% per year).

And here is some more good news: there’s a brand-new Tax Reform Tookit post on Eye on Housing that talks about the changes to the business interest deduction and common scenarios for builders in more detail. Read it here.

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