Interest Expense Limitation is a regulation that restricts a business's interest expenses to a certain percentage. This type of limitation aims to prevent businesses from excessively borrowing and increasing interest payments. Such a limitation, determined by the tax legislation in a country, prevents businesses from overleveraging to gain tax advantages.
Interest Expense Limitation typically restricts a business from deducting interest expenses beyond a certain percentage of their tax base. This prevents businesses from excessively leveraging to gain tax advantages.
When making accounting entries, the Interest Expense Limitation should be taken into account. The accounting entry is generally made as follows:
Interest Expense Entry:
- Firstly, record the interest payments made by the business as an interest expense.
Interest Expense Limitation Entry:
- Subsequently, determine the restricted amount for interest expenses based on the applicable limitation percentage. Record this limitation amount to reflect that the tax advantage cannot be gained beyond this limit.
These entries reflect the intention to limit the business's interest expenses to a certain level, ensuring that excessive borrowing for tax benefits is prevented. However, the details and application of such limitations may vary from country to country. It is crucial to collaborate with an accounting professional familiar with the tax regulations in the country where the business operates.
