Charley Inc. is a large corporation that reported a revenue of $80 million and expenses, excluding interest, of $78 million in 2019. The expenses include a depreciation of $300,000. In 2019, Charley Inc. paid $1 million in business interest. What is the maximum allowable interest expense deduction for this year?

Answer: To calculate the maximum allowable interest expense deduction for Charley Inc. in 2019, we must consider the regulations of the Internal Revenue Service (IRS) under the Tax Cuts and Jobs Act (TCJA) enacted in December 2017.

Under the TCJA, the deduction for business interest is limited to the sum of: 1. Business interest income 2. 30% of the adjusted taxable income (ATI) 3. Floor plan financing interest (if applicable)

For Charley Inc., we do not have information about business interest income or floor plan financing interest, so we will focus on the 30% of ATI limit.

The adjusted taxable income is computed by taking the taxable income before the interest expense deduction, and then adjusting for certain items like depreciation. However, for tax years beginning before January 1, 2022, taxpayers can add back 100% of their depreciation and amortization expenses, which means the full amount of these deductions is not subtracted from the taxable income when calculating ATI.

Let's calculate the ATI for Charley Inc.:

Revenue: $80 million Expenses (excluding interest): $78 million Depreciation (included in expenses): $300,000

ATI is calculated as: ATI = Revenue - Expenses (excluding interest) + Depreciation ATI = $80 million - $78 million + $300,000 ATI = $2 million + $300,000 ATI = $2.3 million

Now, we calculate 30% of the ATI: 30% of ATI = 0.30 * $2.3 million 30% of ATI = $690,000

Charley Inc. paid $1 million in business interest, but the maximum allowable deduction is limited to the lesser of the actual business interest paid or 30% of the company's ATI.