George operates a business that generated revenues of $55 million and allocable taxable income of $1.30 million. Included in the computation of allocable taxable income were deductible expenses of $242,500 of business interest and $252,500 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

Question

Quizplus · Accepted Answer

To calculate the maximum business interest deduction, we need to use the business interest expense limitation. According to the Tax Cuts and Jobs Act, the business interest expense deduction is limited to the sum of business interest income plus 30% of the taxpayer's adjusted taxable income (ATI). However, for taxable years beginning after December 31, 2019, the limitation is increased to 50% of ATI.

To calculate ATI, we need to add back deductions for depreciation, amortization, and depletion to taxable income. In this case, the taxable income is $1.3 million, and the depreciation expense is $252,500. Therefore, the ATI is $1,552,500 ($1.3 million + $252,500).

Next, we need to calculate 30% of ATI, which is $465,750 ($1,552,500 x 30%). Since the business interest expense ($242,500) is less than the limit ($465,750), George can deduct the full amount of the business interest expense. Therefore, the maximum business interest deduction George can claim this year is $242,500.

Option B is the correct answer, and none of the other choices are correct because they either exceed the limit set at 30% of ATI (before the increase after December 31, 2019) or they are less than the actual business interest expenses which George can deduct fully.

George Operates a Business That Generated Revenues of $55 Million