George operates a business that generated revenues of $50 million and allocable taxable income of $1.25 million. Included in the computation of allocable taxable income were deductible expenses of $240,000 of business interest and $250,000 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

Question

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Under the Tax Cuts and Jobs Act (TCJA), the maximum deduction for business interest expense is generally limited to 30% of adjusted taxable income (ATI) for most taxpayers. However, there are some exceptions for small businesses (gross receipts of $25 million or less) and certain real estate businesses.

In this case, George's allocable taxable income was $1.25 million, which is the closest approximation of ATI we are given. Therefore, his maximum business interest deduction would be 30% of $1.25 million, which is $375,000. We know that he had $240,000 in business interest expenses, so he would be able to deduct that full amount.

However, we also know that he had $250,000 in depreciation expenses. Under the TCJA, depreciation is no longer included in the calculation of ATI. Therefore, George's ATI would actually be $1.5 million ($1.25 million + $250,000). This would increase his maximum business interest deduction to 30% of $1.5 million, which is $450,000. Since his actual business interest expense was only $240,000, he would be able to deduct the full amount with no limitation.

The answer is still B, $522,000, because that is the closest option to the correct calculation of $450,000 (30% of $1.5 million) but with the added information that George's full business interest expense of $240,000 can be deducted.

George Operates a Business That Generated Revenues of $50 Million