Form 8926 Filing Instructions and Requirements
Understand the tax compliance requirements for corporate interest paid to related parties. Learn how to correctly calculate and report these amounts using Form 8926.
Form 8990, “Limitation on Business Interest Expense Under Section 163(j),” is a tax form used by taxpayers to figure the amount of their business interest expense deduction that is disallowed for a given tax year. The rules for limiting business interest expense were changed by the Tax Cuts and Jobs Act of 2017. The form guides the filer through a calculation that limits the deduction for net business interest expense to a computed percentage of adjusted taxable income.
Who Must File Form 8990
The limitation on deducting business interest expense is broad and can apply to many types of taxpayers, including corporations, partnerships, and individuals. Generally, any taxpayer with business interest expense may need to file Form 8990 unless they qualify for an exception. An exception is for small businesses that meet the gross receipts test. A taxpayer is exempt from filing if they meet the gross receipts test, which is met if the taxpayer’s average annual gross receipts for the three prior tax years are below an inflation-adjusted threshold. Certain other specific exceptions may also apply, such as for electing real property or farming businesses.
Required Information and Calculations
The form is structured to walk the filer through the process of determining the amount of disallowed interest. The deduction for business interest expense is limited to the sum of the taxpayer’s business interest income, 30% of its adjusted taxable income (ATI), and its floor plan financing interest for the tax year. Any business interest expense that exceeds the calculated limit is disallowed for the current year, and this disallowed amount is reported on the appropriate line of the taxpayer’s income tax return.
A component of this calculation is adjusted taxable income (ATI). The calculation for ATI begins with taxable income and is modified for certain items. However, for tax years beginning after December 31, 2021, deductions for depreciation and amortization are no longer added back when calculating ATI. This change often results in a lower ATI and, consequently, a lower limit on deductible interest expense.
Carryforward of Disallowed Interest
When a portion of a taxpayer’s business interest expense is disallowed in a given year, the amount is not permanently lost as a tax deduction. Instead, the disallowed interest is carried forward to the next tax year. The carryforward period for this disallowed interest is indefinite.
The rules for partnerships are different. A partnership does not carry forward its disallowed business interest expense. Instead, the disallowed amount is passed through to its partners. Each partner treats their share as “excess business interest expense” (EBIE), which they can carry forward and potentially deduct in a future year, subject to limitations at the partner level.
How to File the Completed Form
The form does not get filed by itself. Instead, it must be attached to the taxpayer’s main annual income tax return for the year. For example, a corporation would attach it to Form 1120, while a partnership would attach it to Form 1065. The taxpayer must ensure that the form is included with their return and that the figures from the form are correctly reflected on the main tax return. The entire package must be filed by the regular due date of the tax return, including any extensions.