In 2019, Nighthawk Corporation, a calendar year C corporation, has $3,700,000 of adjusted taxable income and $125,000 of business interest income. Nighthawk has no floor plan financing interest. The business interest expense is $1,400,000 for the year.

Assume that Nighthawk has average gross receipts for the prior three-year period of $33,000,000. Determine Nighthawk's current year deduction for business interest.

The deductible business interest expense in this case = $1,400,000

Explanation:

a. As the average gross receipts for the prior three-year period of $33,000,000, i. e It exceeds $ 2500000, the current year deduction for business interest is as follows:

The deductible limit applies, i. e deduction is limited to:

Business interest income = 125000

PLUS

30%*ATI 3700000 = 1110000

Hence Total = 125000 + 1110000 = 1235000

Nighthawk can deduct the lesser of 1400000 & 1235000 is allowed as deductible business interest expense

ie. $ 1235000

b. As the average gross receipts for the prior three-year period of $23,000,000, ie. It is below the $ 2500000 limit for small business, the current year deduction for business interest is as follows:

The deductible limit does not apply.

Hence the whole $ 1400000 is allowed.

i. e The deductible business interest expense in this case = $1,400,000