The Tennessee Department of Revenue recently issued Notice #20-16, Interest Expense Carryforward, addressing the carryforward of disallowed interest expense under section 163(j) of the Internal Revenue Code from tax years 2018 and 2019. The interest limitation was enacted as part of the federal Tax Cuts and Jobs Act (TCJA) and limited the deductibility of interest expense for a tax year to the sum of the taxpayer’s business interest income, its floor plan financing interest, and 30% of its adjusted taxable income. Tennessee decoupled from the limitation for tax years beginning on or after Jan. 1, 2020, but not for tax years 2018 and 2019.
The notice explains that for tax years beginning on or after Jan. 1, 2020, taxpayers may deduct 2018 and 2019 carryforwards to the extent they are deducted for federal income tax purposes. The carryforward is, according to the department “limited in the same manner it is for federal income tax purposes under section 163(j), as amended by the TCJA.” The notice further provides that members of federal consolidated groups should allocate the federal consolidated group’s carryforward of business interest expense for its 2018 and 2019 tax years in the same manner as the allocation of the group’s interest expense deduction for those tax years.
The decoupling from the interest expense limitation beginning Jan. 1, 2020 under section 163(j) provides businesses with an opportunity to claim more interest expense deductions than they were previously able to claim. Businesses also have the opportunity to claim interest deduction carryforwards from 2018 and 2019.
Businesses should be aware that the department notice also explains that taxpayers should maintain in their records sufficient information to verify the 2018 and/or 2019 carryforward amount(s) taken, including but not limited to total interest expense before the section 163(j) limitation, interest expense deducted under the section 163(j) limitation, carryforward available at the end beginning of 2020 tax year, carryforward deducted for federal income tax purposes by tax year, and carryforward balanceremaining by tax year. Such record keeping appears to be a minimum requirement to justify the carryforward. Taxpayers reconciling state conformity with both TCJA and CARES Act section 163(j) changes should consult with their state and local tax advisers for more information.