Question

What is the limitation for the deduction of business interest expense, and how is it calculated?

Answer 1

The deduction of business interest expense is limited to 30% of adjusted taxable income, with the calculation process involving deducting explicit costs from revenues to ascertain accounting profit which forms the basis for applying the interest deduction limit.

Step-by-step explanation:

The limitation for the deduction of business interest expense is based on the income of the business and other factors as per the Tax Cuts and Jobs Act. Typically, a business can deduct interest expenses up to 30% of its adjusted taxable income. However, there are exceptions and different rules for small businesses and farms.

To calculate the deduction limit for business interest expense, you would start by:

1. Calculating explicit costs, such as office rental and law clerk's salary, which would total $85,000 in this scenario.
2. Subtracting the explicit costs from the revenues which equals to the accounting profit. If we were to consider revenues of $200,000, then the accounting profit would be $115,000 after subtracting the explicit costs of $85,000.

The interest deduction limitation is then applied to the accounting profit to determine the maximum deductible interest expense. For small businesses meeting certain criteria, the limit may not apply.