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Small Businesses Still Must Be Wary of ‘Tax Shelter’ Definition

July 31, 2020, 7:00 PM

Unwary small businesses with outside investors could still face a 2017 tax law restriction on debt interest write-offs meant for bigger companies, despite recent rules narrowing what some call a trap.

The tax code overhaul’s cap on the amount of debt interest companies can deduct from their taxable income doesn’t apply to businesses that earn $26 million or less in gross receipts, adjusted for inflation. However, businesses beneath that threshold can still be subject to the limit if they are considered a “tax shelter.”

In proposed rules released Tuesday the IRS reined in the exception, which some tax professionals...

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