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Video instructions and help with filling out and completing Why Form 5495 Limitation

Instructions and Help about Why Form 5495 Limitation

Hi in this module I'm discussing the limitations on the deduction of business interest this is an area that has changed quite a bit for businesses in the initial political talk there was quite a bit of rhetoric about how we were going to lower the corporate tax rate but closed a lot of loopholes well this is a very big loophole but they're attempting to close throughout this module I'm going to start with corporations and then adding a little bit about flow-through entities that applies to both partnerships and S corporations and then finally add some specifics that apply only to partnerships so this is a bit of a complex module and it's a good one to take notes on now the corporate interest expense abduction is now much more limited than what it was in the past the pre 2022 law says interest paid or accrued is generally deductible but with some limitations in certain cases these limitations are where interest is paid or accrued and is disallowed because the corporation is something called a thinly capitalized corporation it's very thinly capitalized you would see this where maybe somebody wanted to form a corporation for example and took a million dollars to do it and so they sold themselves one shares stock at what dollar so shareholder and then run the corporation of 999,999 dollars well of course when you start looking at that and say oh of course you couldn't do that then the owner comes back and says ok I'll sell a share of stock the two dollars and then load myself the rest at eight dollars and there's some kind of bargaining as to what's reasonable and that reasonableness line has never really clarified anywhere its flaws I qualify through a small body of case law but there's also a safe harbor ratio out there and that safe harbor ratio says that if the debt to equity ratio is more than one point five to one and the corporation's net interest expense exceeds 50% of its adjusted taxable income which is defined generally as taxable income before net income expense yet I'm sorry that interest expense that interest income minus that interest expense then operating losses section 199 domestic production activities depreciation amortization and depletion okay then we might see interest being disallowed because the interest we feel is not really fully capitalizing what economically is happening a couple of notes here there's section 199 domestic production activities as part of the tcga is also fully repealed so this again is part of the old law now the law beginning in 2022 says that net interest expense net interest income for business - netting tryst expense for business that net interest expense that that is more than 30% of adjusted taxable income is disallowed adjust a taxable income has that same definition by large that it had before now the net interest expense disallowance is determined at the tax filer level and that's important for consolidated returns so you could have more than 30% interest expensive one subsidiary provided the corporation as a whole that is filing as a u.s. tax there does not have interest expense in excess of 30% if it does have have interest expense in excess of about 30% threshold that excess is disallowed and then carry forward to future years when you are below that 30% of thresholds now small businesses are exempt from this limitation so exemptions from limitations taxpayers with annual gross receipts for the three-year period ending with prior tax year that don't exceed 25 million and let me see that's a big race and the past we were looking at smaller corporations for example with alternative minimum tax is having 7.5% I'm sorry 7.5 million now we're looking at them as as having 25 million so that's quite a step up but then again it's been a long time since we've revised some of these tax laws so small corporations are exempt from the limitation a certain regulated public utilities an electronic crops are electric cooperatives are also exempt real property businesses can elect out of this provision if they use the alternative depreciation system to depreciate the real property used in business so we're seeing a complexity where an industry which is known for mortgages and high interest expenses are still limited but with some flexibility and flexibility of course is often a code word for opportunity for tax planning and so if you've got a real property business you sit down and you say hey would I rather use ABS or would I rather limit my interest expense similarly farming businesses can elect out if they use ABS to depreciate property used in the farming business with the recovery period of ten years or more this could also cause problems for car dealerships for example so we provide a specific exemption or for plan financing let me explain what for plan financing is floor plan financing is where car dealers and boat dealers of farm machinery dealers that sell and lease cars to customers don't actually buy those cars from say General Motors but rather they buy them with financing that is secured by those cars so let's look at the structure of that industry just a little bit more an auto dealer can't afford to put that many cars on the lot and buy them outright so they buy them from save General Motors but they finance the deal and General Motors carries the note securing it with the in with the inventory and that note then carries an interest rate and that interest is integral to a car dealer being able to heat the car dealership owner open so that's called floor plan financing and the interest on floor plan financing is also exempted now these are the rules of four corporations but I said we'd also talk about partnerships and S corporations flow-through entities and then come back and.

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