Deduct those Business Interests: IRS Form 8990

Hey there, welcome to Bottomline-Tax.  Today we’re going to talk about a very important tax form that you might need to file: Form 8990. This form is used to calculate the limitation on business interest expense under section 163(j) of the Internal Revenue Code. Sounds complicated, right? Don’t worry, I’m here to help you understand what this form is, why you need it, and how to fill it out correctly. I’ll also share some useful resources for different audiences, such as taxpayers, tax professionals, educators, legal professionals, and financial advisors. So let’s get started!

Click on the section that is most relevant to you:

I. Introduction

Form 8990 is a tax form that was introduced in 2018 as part of the Tax Cuts and Jobs Act (TCJA). It is used to calculate the limitation on business interest expense under section 163(j) of the Internal Revenue Code. This limitation applies to certain taxpayers who have business interest expense that exceeds their business interest income plus 30% of their adjusted taxable income (ATI). The excess business interest expense is carried forward to the next tax year and may be deductible in the future, subject to the same limitation.

Understanding and correctly filling out Form 8990 is crucial for taxpayers who have business interest expense, as it can affect their tax liability and cash flow. It can also help them plan ahead and optimize their tax strategies. In this blog post, I will explain what Form 8990 is, who needs to file it, how to fill it out, and what resources are available for different audiences.

II. Detailed Explanation of Form 8990

The purpose of Form 8990 is to calculate the limitation on business interest expense under section 163(j) of the Internal Revenue Code. This limitation applies to certain taxpayers who have business interest expense that exceeds their business interest income plus 30% of their adjusted taxable income (ATI). The excess business interest expense is carried forward to the next tax year and may be deductible in the future, subject to the same limitation.

The form (download it here) has three parts and two schedules:

• Part I: Computation of Allowable Business Interest Expense. This part is completed by all taxpayers subject to section 163(j) to determine their total business interest expense, adjusted taxable income, business interest income, and allowable business interest expense deduction. This part also calculates the amount of disallowed business interest expense that can be carried forward to future years.
• Part II: Partnership Pass-Through Items. This part is only completed by partnerships that are subject to section 163(j) to allocate their excess business interest expense, excess taxable income, and excess business interest income to their partners. These items are not carried forward by the partnership, but by the partners.
• Part III: S Corporation Pass-Through Items. This part is only completed by S corporations that are subject to section 163(j) to allocate their excess taxable income and excess business interest income to their shareholders.
• Schedule A: Summary of Partner’s Section 163(j) Excess Items. This schedule is completed by any taxpayer that owns an interest in a partnership subject to section 163(j) before completing Part I. This schedule summarizes the partner’s share of current year and prior year excess business interest expense, current year excess taxable income, current year excess business interest income, and excess business interest expense treated as paid or accrued in the current year.
• Schedule B: Summary of S Corporation Shareholder’s Excess Taxable Income and Excess Business Interest Income. This schedule is completed by any taxpayer that is required to complete Part I and is a shareholder in an S corporation that has excess taxable income or excess business interest income before completing Part I. This schedule summarizes the shareholder’s share of current year excess taxable income and current year excess business interest income.

Who needs to file Form 8990? Generally, the following taxpayers are required to file Form 8990:

– Any taxpayer that has business interest expense (other than investment interest expense) for the tax year.
– Any taxpayer that has excess business interest expense from a partnership or an S corporation for the tax year.
– Any taxpayer that has current year or carryforward disallowed business interest expense from a C corporation for the tax year.

There are some exceptions and special rules that apply to certain types of taxpayers, such as small businesses, electing real property trades or businesses, electing farming businesses, regulated public utilities, floor plan financing businesses, and tax-exempt entities. For more details on these exceptions and special rules, please refer to the instructions for Form 8990 or consult a qualified tax professional.

Section 163(j) limitation on business interest expense is calculated as follows:

– Step 1: Determine the amount of business interest income and business interest expense for the tax year.
– Step 2: Calculate the adjusted taxable income (ATI) for the tax year. ATI is generally defined as taxable income without regard to any item of income, gain, deduction, or loss that is not properly allocable to a trade or business; any business interest income or expense; any net operating loss deduction; any qualified business income deduction; any deduction for depreciation, amortization, or depletion; and in the case of taxable years beginning before January 1, 2022, any deduction allowable for depreciation under section 168(k).
– Step 3: Calculate the section 163(j) limitation by adding the business interest income and 30% of the ATI.
– Step 4: Compare the business interest expense with the section 163(j) limitation. If the business interest expense is less than or equal to the section 163(j) limitation, then there is no excess business interest expense and no limitation applies. If the business interest expense is greater than the section 163(j) limitation, then the excess business interest expense is the difference between the two amounts and the limitation applies.

III. Guide for Taxpayers

As a taxpayer, you may need to file Form 8990 if you have business interest expense for the tax year. You may also need to file Form 8990 if you have excess business interest expense from a partnership or an S corporation, or if you have current year or carryforward disallowed business interest expense from a C corporation. Filing Form 8990 correctly can help you avoid penalties and optimize your tax situation.

Here are three common cases of taxpayers who might need to file this form, followed by step-by-step instructions on how to it fill out:

Case 1: Individual Taxpayer with Excess Business Interest Expense from a Partnership

Example: John is an individual taxpayer who is a partner in a partnership. The partnership has $10,000 in business interest expense, but only $7,000 in business interest income and adjusted taxable income. The partnership has an excess business interest expense of $3,000, which is allocated to John on his Schedule K-1. John must file Form 8990 to report this excess business interest expense. Let’s see how this is done:

• In Part I, Section I, he should enter $0 on line 1, since he has no current year business interest expense other than from the partnership. He should also enter $0 on line 2, since he has no disallowed business interest expense carryforward from prior years. He should enter $3,000 on line 3, which is his partner’s excess business interest expense treated as paid or accrued in the current year. He should enter $0 on line 4, since he has no floor plan financing interest expense. He should add lines 1 through 4 and enter $3,000 on line 5, which is his total business interest expense.
• In Part I, Section II, he should enter his tentative taxable income on line 6. This is his taxable income before any adjustments for business interest expense or income. He should also make any additions or reductions to his tentative taxable income on lines 7 through 21, following the instructions for each line. He should combine lines 6, 16, and 21 and enter the result on line 22, which is his adjusted taxable income.
• In Part I, Section III, he should enter his current year business interest income on line 23. This is his interest income that is properly allocable to a trade or business. He should also enter his excess business interest income from pass-through entities on line 24. This is the total of Schedule A, line 44, column (g), and Schedule B, line 46, column (d). He should add lines 23 and 24 and enter the result on line 25, which is his total business interest income.
• In Part I, Section IV, he should multiply his adjusted taxable income from line 22 by the applicable percentage and enter the result on line 26. The applicable percentage is generally 30%, unless he elects to use the alternative depreciation system for certain property or he is a real property trade or business that made an election under section 163(j)(7)(B). He should also enter his business interest income from line 25 on line 27 and his floor plan financing interest expense from line 4 on line 28. He should add lines 26, 27, and 28 and enter the result on line 29, which is his limitation on business interest expense.
• In Part I, Section IV, he should enter the smaller of line 5 or line 29 on line 30. This is his total current year business interest expense deduction. He should subtract line 29 from line 5 and enter the result on line 31. This is his disallowed business interest expense that can be carried forward to future years.
• In Schedule A, he should list the name, EIN, current year excess business interest expense, prior year excess business interest expense carryforward, total excess business interest expense, current year excess taxable income, current year excess business interest income, and excess business interest expense treated as paid or accrued for each partnership that he owns an interest in that is subject to section 163(j). He should also enter the totals for each column on line 44.

Case 2: Corporation with Business Interest Expense and Disallowed Business Interest Expense Carryforward

Example: ABC Corp is a corporation that had $20,000 in business interest expense last year, but was only able to deduct $15,000 due to the section 163(j) limitation. The remaining $5,000 was carried forward as a disallowed business interest expense. This year, ABC Corp has another $20,000 in business interest expense. ABC Corp must file Form 8990 to calculate its allowable business interest expense deduction for this year and its disallowed business interest expense carryforward for next year.

• In Part I, Section I, they should enter $20,000 on line 1, which is their current year business interest expense (not including floor plan financing interest expense). They should also enter $5,000 on line 2, which is their disallowed business interest expense carryforward from prior years. They should enter $0 on lines 3 and 4, since they have no partner’s excess business interest expense or floor plan financing interest expense. They should add lines 1 through 4 and enter $25,000 on line 5, which is their total business interest expense.
• In Part I, Section II, they should enter their tentative taxable income on line 6. This is their taxable income before any adjustments for business interest expense or income. They should also make any additions or reductions to their tentative taxable income on lines 7 through 21, following the instructions for each line. They should combine lines 6, 16, and 21 and enter the result on line 22, which is their adjusted taxable income.
• In Part I, Section III, they should enter their current year business interest income on line 23. This is their interest income that is properly allocable to a trade or business. They should also enter $0 on line 24, since they have no excess business interest income from pass-through entities. They should add lines 23 and 24 and enter the result on line 25, which is their total business interest income.
• In Part I, Section IV, they should multiply their adjusted taxable income from line 22 by the applicable percentage and enter the result on line 26. The applicable percentage is generally 30%, unless they elect to use the alternative depreciation system for certain property or they are a real property trade or business that made an election under section 163(j)(7)(B). They should also enter their business interest income from line 25 on line 27 and $0 on line 28, since they have no floor plan financing interest expense. They should add lines 26, 27, and 28 and enter the result on line 29, which is their limitation on business interest expense.
• In Part I, Section IV, they should enter the smaller of line 5 or line 29 on line 30. This is their total current year business interest expense deduction. They should subtract line 29 from line 5 and enter the result on line 31. This is their disallowed business interest expense that can be carried forward to future years.

Case 3: S Corporation Allocating Excess Taxable Income or Excess Business Interest Income to Shareholders

Example: XYZ Inc is an S corporation that has $30,000 in adjusted taxable income and $10,000 in business interest income this year. However, it only has $5,000 in business interest expense. XYZ Inc has excess taxable income of $20,000 and excess business interest income of $5,000 that it must allocate to its shareholders. XYZ Inc must file Form 8990 to report these amounts.

• In Part I, Section I, they should enter $5,000 on line 1, which is their current year business interest expense (not including floor plan financing interest expense). They should also enter $0 on lines 2, 3, and 4, since they have no disallowed business interest expense carryforward from prior years, no partner’s excess business interest expense, and no floor plan financing interest expense. They should add lines 1 through 4 and enter $5,000 on line 5, which is their total business interest expense.
• In Part I, Section II, they should enter their tentative taxable income on line 6. This is their taxable income before any adjustments for business interest expense or income. They should also make any additions or reductions to their tentative taxable income on lines 7 through 21, following the instructions for each line. They should combine lines 6, 16, and 21 and enter the result on line 22, which is their adjusted taxable income. In this case, it is $30,000.
• In Part I, Section III, they should enter their current year business interest income on line 23. This is their interest income that is properly allocable to a trade or business. In this case, it is $10,000. They should also enter $0 on line 24, since they have no excess business interest income from pass-through entities. They should add lines 23 and 24 and enter the result on line 25, which is their total business interest income.
• In Part I, Section IV, they should multiply their adjusted taxable income from line 22 by the applicable percentage and enter the result on line 26. The applicable percentage is generally 30%, unless they elect to use the alternative depreciation system for certain property or they are a real property trade or business that made an election under section 163(j)(7)(B). In this case, it is $9,000. They should also enter their business interest income from line 25 on line 27 and $0 on line 28, since they have no floor plan financing interest expense. They should add lines 26, 27, and 28 and enter the result on line 29, which is their limitation on business interest expense. In this case, it is $19,000.
• In Part I, Section IV, they should enter the smaller of line 5 or line 29 on line 30. This is their total current year business interest expense deduction. In this case, it is $5,000. They should subtract line 29 from line 5 and enter the result on line 31. This is their disallowed business interest expense that can be carried forward to future years. In this case, it is $0.
• In Part III, they should subtract the sum of lines 4 and 25 from line 5 and enter the result on line 38. This is the amount by which their business interest expense exceeds their business interest income and floor plan financing interest expense. In this case, it is -$5,000. They should subtract line 38 from line 26 and enter the result on line 39. This is the amount by which their adjusted taxable income exceeds their excess business interest expense (if any). In this case, it is $14,000. They should divide line 39 by line 26 and enter the result as a decimal on line 40. This is the percentage of adjusted taxable income that exceeds excess business interest expense (if any). In this case, it is .1556. They should multiply line 40 by line 22 and enter the result on line 41. This is their excess taxable income that must be allocated to their shareholders. In this case, it is $4,668.
• In Part III, they should subtract the sum of lines 1,2,and 3 from line 25 and enter the result on line 42. This is their excess business interest income that must be allocated to their shareholders. In this case, it is $5,000.

IV. Information for Tax Professionals

The limitation on business interest expense deduction can have significant implications for taxpayers’ tax liability and cash flow. Therefore, it is important for tax professionals to understand the rules and requirements of Form 8990 and related tax laws, and to assist their clients with accurate and timely filing of the form.

Some of the latest updates and changes to Form 8990 and related tax laws include:

– The Consolidated Appropriations Act, 2021 (CAA), which was enacted on December 27, 2020, made several changes to section 163(j) and Form 8990, such as allowing taxpayers to elect to use their 2019 income instead of 2020 income for calculating the limitation, increasing the limitation percentage from 30% to 50% for certain years, and providing special rules for partnerships and real estate businesses.
– The IRS issued final regulations on section 163(j) and Form 8990 on September 14, 2020, which provide guidance on various aspects of the limitation, such as the definition of interest, the allocation of interest expense and income, the treatment of disallowed interest carryforwards, and the application of the limitation to consolidated groups, partnerships, S corporations, foreign corporations, and exempt organizations.
– The IRS also issued proposed regulations on section 163(j) and Form 8990 on September 14, 2020, which address some issues that were not covered by the final regulations, such as the interaction of section 163(j) with other tax provisions, the treatment of floor plan financing interest, and the reporting requirements for partnerships and S corporations.

Below you can find resources for further reading about these updates:

1. Instructions for Form 8990 (12/2022) | Internal Revenue Service: This page provides the latest instructions for Form 8990, including changes made by the Consolidated Appropriations Act, 2021.
2. Practical considerations from the 2021 final Section 163 (j) regulations: This article discusses the final regulations issued by the Treasury and the IRS on section 163(j) and Form 8990.
3. Consolidated Appropriations Act, 2021 applies TCJA depreciation …: This article provides information about the changes made to section 163(j) by the Consolidated Appropriations Act, 2021.
4. IRS issues final regulations and other guidance on business interest …: This page provides information about the final regulations and other guidance issued by the IRS on section 163(j) and Form 8990.
5. Additional Guidance Regarding Limitation on Deduction for Business …: This page provides information about the proposed regulations issued by the IRS on section 163(j) and Form 8990.

Some of the tips and best practices for tax professionals when assisting clients with Form 8990 include:

– Reviewing the client’s business activities and financial statements to determine whether they are subject to the limitation on business interest expense deduction, and whether they qualify for any exceptions or elections under section 163(j) and Form 8990.
– Gathering all the necessary information and documentation to support the calculation of the limitation and the filing of Form 8990, such as interest expense and income statements, tax returns, financial statements, debt agreements, and ownership structures.
– Keeping track of the changes and updates to Form 8990 and related tax laws, and evaluating their impact on the client’s tax situation and planning strategies.
– Communicating with the client about the importance and implications of Form 8990, and advising them on how to optimize their business interest expense deduction and comply with the tax rules.

V. Learning Resources for Educators

Form 8990 is a tax form that can be a useful learning resource for students who are studying taxation or accounting. It can help them understand how the tax law limits the deductibility of business interest expense, how this limitation affects different types of taxpayers and businesses, and how to calculate and report the limitation on Form 8990.

Some of the ways that Form 8990 can be used in the context of tax law coursework include:

– Explaining the rationale and objectives of section 163(j) and Form 8990, and how they relate to the broader tax policy and principles.
– Comparing and contrasting section 163(j) and Form 8990 with other tax provisions that limit or affect the deductibility of interest expense, such as section 163(h), section 163(l), section 267A, and section 385.
– Illustrating the mechanics and computation of the limitation on business interest expense deduction, and the filing requirements of Form 8990, using examples and scenarios that reflect real-world situations.
– Discussing the implications and consequences of section 163(j) and Form 8990 for various taxpayers and businesses, such as corporations, partnerships, S corporations, foreign corporations, real estate businesses, and exempt organizations.
– Evaluating the advantages and disadvantages of section 163(j) and Form 8990 for taxpayers and businesses, and how they affect their tax planning and decision making.

Here are some sample lesson plans and activities related to Form 8990:

– A lecture or a video that explains the purpose and overview of section 163(j) and Form 8990, followed by a group discussion or a quiz that tests the students’ understanding of the main points.
– A worksheet or a spreadsheet that guides the students through the steps of calculating the limitation on business interest expense deduction using Form 8990, followed by a feedback session or a review that checks the students’ accuracy and comprehension.
– A case study or a simulation that presents a realistic scenario involving section 163(j) and Form 8990, followed by an individual or a group project that requires the students to apply their knowledge and skills to solve the problem or complete the task.

We also have some assignments and research topics related to Form 8990:

– Preparing a mock Form 8990 for a hypothetical taxpayer or business, based on given facts and assumptions, and explaining the results and implications of the limitation on business interest expense deduction.
– Analyzing a case study or a news article that involves section 163(j) and Form 8990, and identifying the key issues, challenges, and opportunities for the taxpayer or business involved.
– Researching and summarizing the latest updates and changes to section 163(j) and Form 8990, and assessing their impact on taxpayers and businesses.
– Writing a paper or a presentation that critically examines section 163(j) and Form 8990 from a tax policy perspective, such as their effectiveness, efficiency, equity, simplicity, or administrability.

Finally, here are some resources that a tax law educator can use in their curriculum to teach about IRS Form 8990 and Section 163(j):

1. Instructions for Form 8990 (12/2022) | Internal Revenue Service: This page provides detailed instructions for Form 8990, including changes in adjusted taxable income (ATI) computation, a new worksheet, and general instructions for the form.
2. About Form 8990, Limitation on Business Interest Expense Under Section …: This page provides information about Form 8990, including recent updates, related forms, and instructions on how to file.
3. Sec. 163(j) business interest limitation: New rules for 2022: This article discusses the business interest expense deductibility limitation provisions of Sec. 163(j), how the rules for calculating ATI have changed for 2022 and beyond, and how this affects the deductibility limit.
4. Basic questions and answers about the limitation on the deduction for …: This page provides answers to some basic questions about the limitation on the deduction for business interest expense, also known as the “section 163(j) limitation”.
5. US proposed regulations offer much-needed guidance on Section 163(j) business interest expense limitation: This article offers guidance on Section 163(j) business interest expense limitation.
6. Section 163(j)- Overview and 2021 Updates – Morris Manning & Martin, LLP: This document provides an overview of Section 163(j) and updates for 2021.

VI. Legal Aspects of Form 8990 for Legal Professionals

Form 8990 is a tax form that has important legal aspects for professionals who are involved in tax law or tax litigation. It can affect the rights and obligations of taxpayers who have business interest expense, as well as their potential exposure to penalties, audits, disputes, or lawsuits related to their filing of Form 8990.

Some of the legal implications of incorrectly filling out or not filing Form 8990 include:

– The IRS may disallow some or all of the taxpayer’s business interest expense deduction, resulting in an increase in taxable income and tax liability.
– The IRS may impose accuracy-related penalties under section 6662 or fraud penalties under section 6663 on the taxpayer for understating their tax liability due to negligence, disregard of rules or regulations, substantial understatement of income tax, or fraudulent intent.
– The IRS may initiate an audit or an examination of the taxpayer’s tax return and related records to verify the accuracy and completeness of their filing of Form 8990, which could lead to additional scrutiny of other aspects of the taxpayer’s tax situation.
– The taxpayer may be required to amend their tax return and refile it, which could result in additional filing fees and administrative burdens.
– In extreme cases, the IRS may initiate legal proceedings against the taxpayer for tax evasion or fraud, which could result in criminal charges, fines, or imprisonment.
– Lastly, the taxpayer’s reputation could be damaged, particularly if they are a business owner or professional, as such issues could undermine trust and confidence among clients, customers, or other stakeholders.

Some of the case studies that illustrate the legal aspects of Form 8990 are:

– A corporation that had a large amount of business interest expense in 2020 but did not file Form 8990 because it did not know about the new limitation rules. The IRS assessed a penalty of 20% of the underpayment of tax due to the disallowed interest deduction and initiated an audit of the corporation’s tax returns.
– A partnership that filed Form 8990 correctly but did not allocate the business interest expense limitation among its partners according to their distributive shares. One of the partners sued the partnership for breach of contract and fiduciary duty, claiming that he was entitled to a larger share of the interest deduction than he received.
– A sole proprietorship that filed Form 8990 incorrectly by using the wrong method to calculate its adjusted taxable income. The sole proprietor was audited by the IRS and found to have overstated his interest deduction by $10,000. He was also sued by a creditor who claimed that he had fraudulently concealed his income and assets by inflating his interest expense.

Failing to file this form or filing it incorrectly can have serious legal consequences, such as penalties, audits, or litigation. Therefore, it is important for legal professionals to understand the rules and requirements of Form 8990 and advise their clients accordingly.

VII. Financial Planning Considerations for Financial Advisors

Form 8990 can have a significant impact on the tax planning strategies of taxpayers who have business interest expense. Financial advisors should be aware of how Form 8990 affects their clients’ tax liability, cash flow, and investment decisions. Some of the advice that financial advisors can give to their clients regarding Form 8990 are:

– Review your business interest expense and income for the current and previous years and project them for the future years. Determine whether you are subject to the limitation rules and how much of your interest expense you can deduct each year.
– Be aware that carrying forward business interest expense to the next tax year can be undesirable due to the immediate cash flow impact and the time value of money, which suggests that a tax deduction today is more valuable than one in the future. Additionally, future deductions are uncertain and depend on sufficient taxable income in those years. The administrative burden of tracking carried forward expenses and their potential impact on financial statements and ratios are also considerations. Therefore, optimizing interest expenses and deductions to maximize current year tax savings is often a priority for businesses.
– Consider restructuring your debt or refinancing your loans to reduce your interest expense or increase your interest income. For example, you may want to pay off some of your high-interest debt or convert some of your debt into equity.
– Explore other tax deductions or credits that can offset your taxable income and increase your adjusted taxable income. For example, you may want to take advantage of the depreciation deductions, the qualified business income deduction, or the research and development credit.
– Communicate with your tax preparer or accountant and provide them with all the necessary information and documentation to file Form 8990 correctly and timely. Avoid errors or omissions that can trigger penalties or audits.

VIII. Conclusion

IRS Form 8990 is a crucial document for taxpayers, tax professionals, educators & students, legal professionals, and financial advisors. It plays a pivotal role in the calculation and reporting of business interest expense deductions under the tax code’s Section 163(j). For taxpayers, understanding and correctly filling out Form 8990 can lead to significant tax savings. For tax professionals and financial advisors, expertise in Form 8990 is essential for providing accurate advice and maximizing their clients’ tax benefits. Educators, students, and legal professionals also need to understand this form as it is a critical part of corporate taxation and legal tax considerations. In essence, Form 8990 serves as a key tool in navigating the complexities of business interest expense deductions and optimizing a company’s tax position.

Form 8990 is also an example of how tax laws and forms can change over time and require continuous learning and updating. Legal professionals and financial advisors should stay informed of the latest developments and trends in tax legislation and regulation and adapt their practices accordingly.