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to determine if the stock is eligible for the unwillingness of some companies
the Sec. 1202 exclusion, the tax return to provide information to shareholders
preparer should not assume that he or places taxpayers and tax practitioners in
she can avoid the penalty by relying on a difficult situation. The tax practitioner
the client’s statement that the stock is could report the Sec. 1202 exclusion
eligible if the client does not have access without all of the information neces-
to the financial records needed to deter- sary to prove that the stock is eligible
mine that it qualifies. for the exclusion and thereby open the
Another factor for the IRS to con- taxpayer and the tax return preparer up
sider under Regs. Sec. 1.6694-2(e)(1) to potential Secs. 6662 and 6694 penal-
in deciding not to impose a penalty ties. Another option is for the tax practi-
due to the preparer’s reasonable cause tioner to prepare the tax return without
and acting in good faith is whether the the Sec. 1202 exclusion, resulting in the
error resulted from a provision that was taxpayer’s potentially paying more tax
complex, uncommon, or highly techni- than is legally required. But this is not
cal, and a competent tax return preparer what Congress intended when it created
could have reasonably made the error. Sec. 1202.
Since there is limited guidance related to From Dana McCartney, CPA, Maxwell
Sec. 1202, a tax return preparer might be Locke & Ritter LLP, Austin, Texas
able to avoid the penalty by relying upon The Code subsection was expanded
this provision if the information pro- by the TCJA to apply to all businesses,
vided by the client is reasonable on its Interest Income & Expense with certain exceptions described below.
face to conclude that the stock is eligible In addition, the maximum deduction
for the Sec. 1202 exclusion. Sec. 163(j) business interest allowed for business interest now be-
Tax practitioners also need to limitation: New rules for 2022 came limited to the sum of:
consider whether disclosure of a Sec. The business interest expense deduct- ■ The taxpayer’s business interest
1202 exclusion through an adjustment ibility limitation provisions of Sec. income for the tax year;
code on Form 8949, Sales and Other 163(j) have taken on a broader scope ■ 30% of the taxpayer’s ATI for the
Dispositions of Capital Assets, constitutes since the passage of the law known as tax year; and
adequate disclosure, given the facts and the Tax Cuts and Jobs Act (TCJA), P.L. ■ Floor plan financing interest
circumstances, or whether Form 8275, 115-97. Under the TCJA, many busi- expense.
Disclosure Statement, should also be filed. nesses that rely on debt financing and Any interest disallowed can be car-
Since, as previously discussed, little guid- historically received interest expense ried forward, subject to the provisions
ance is available other than the statu- deductions associated with it must use of Sec. 163(j) in the succeeding tax year.
tory language for determining whether a mechanical computation to deter- The 30% ATI limitation was increased
the stock meets the active business mine the deductibility of their interest to 50% of ATI for the 2019 and 2020
requirement — especially involving the expense. For tax years beginning after tax years by the Coronavirus Aid, Re-
definition of a qualified business — tax 2021, the starting point for the compu- lief, and Economic Security (CARES)
return preparers should consider filing tation, adjusted taxable income (ATI), Act, P.L. 116-136, then reverted back
Form 8275 to meet the requirements of was recently modified in a way that can to the 30% limitation for the 2021
Regs. Sec. 1.6694-2(d) for reasonable make the business interest limitation tax year.
basis and adequate disclosure if they are more restrictive. After providing some
uncertain whether the company meets background on the Sec. 163(j) business Exemptions
IMAGE BY BLACKRED/GETTY IMAGES mote investment in startup companies. changed for 2022 and beyond and how An exemption is generally available
interest limitation, this item discusses
Some types of taxpayers are exempt
the definition.
Congress enacted Sec. 1202 to pro-
how the rules for calculating ATI have
from Sec. 163(j)’s deductibility limit.
this affects the deductibility limit.
for small businesses — defined as
Sec. 1202 anticipated the need for
businesses whose average annual
regulations for companies to provide
History
gross receipts for a three-year period
information to confirm that stock is
eligible for the Sec. 1202 exclusion. The
do not exceed $27 million (the
Prior to the TCJA, the provisions of
lack of guidance and regulations and
December 2022 11
www.thetaxadviser.com Sec. 163(j) had a narrow application. inflation-adjusted amount for tax years