Interest Deduction Limitations
A tax deduction is allowed at the federal, state and local levels for interest expense incurred by a corporation in carrying out its business activities. Where such interest is paid to related parties, such deduction may be limited. The classification of instruments as debt on which interest is deductible or as equity with respect to which distributions are not deductible is highly complex and based on court-developed law. The courts have considered 26 factors in deciding whether an instrument is debt or equity, and no single factor predominates.
Federal tax rules also limit the deduction of interest expense paid by corporations to foreign shareholders based on a complex calculation designed to limit the deduction to 50% of cash flow. Some states have other limitations on related party payments of interest and royalties.
| Largest Tax Deductions, Credits, and Deferrals for Corporations 2005-2009 |
Total Amount (2005-2009) (Billions of dollars) |
|---|---|
| Depreciation of equipment in excess of alternative depreciation system | 71.3 |
| Exclusion of interest on public purpose state and local government debt | 38.3 |
| Inventory property sales source rule exception | 30.9 |
| Expensing of research and experimental expenditures | 28.5 |
| Deferral of active income of controlled foreign corporations | 25.8 |
| Reduced rates for first $10,000,000 of corporate taxable income | 23.7 |
| Deduction for income attributable to domestic production activities | 19.8 |
| Tax credit for low-income housing | 17.5 |
| Exclusion of investment income on life insurance and annuity contracts | 12.8 |
| Tax credit for qualified research expenditures | 10.7 |
Read more about this topic: Corporate Tax In The United States
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