FruAgro Company has average annual gross receipts of $30 million annually. This year, FruAgro earned $1 million of business interest income, incurred $7 million of business interest expense and has adjusted taxable income of $ 17 million. Compute FruAgro's current deduction for business interest and the amount of any business interest carryforward.

Answer:

Sec 163(j) of IRS applies here which allows only 30% of adjusted taxable income as Business Interest expense

and the balance can be carried forward to future years

This Limitation is relaxed and not applicable for businesses having annual receipts less than 25 million or less in previous 3 years as small business

In this case Average Annual Gross receipts is $ 30 million So Limitation in deduction of business interest is applicable

Net Interest Expense in this case is ($7-$1) =$ 6 million

Business Interest Income is reduced from Business Interest expense to arrive at Net Interest Expense as the amount deductible cannot exceed the sum of Business Interest Income for the year

So In this case Adjusted Total Income = $ 17 million

So allowable limit for business interest deduction is $ 17 million*30%=$ 5100000 (5.1 million)

So Fru Agro Current Deduction is $ 5.1 million

and Carried Forward Business Interest expense  is $ 6 million-$5.1 million= $0.9 million

Note: Farming Business ,Real property trade can elect to be excepted from this Limitation