What is the limit on Tern's business interest deduction in the current year?

To determine the limit on Tern's business interest deduction for the current year, it is essential to understand the Tax Cuts and Jobs Act (TCJA) provisions regarding business interest expense deductions. Under these provisions, the deduction for business interest is generally limited to the sum of:

1. The business interest income.

2. 30% of the adjusted taxable income (ATI).

3. The floor plan financing interest.

In this case, if Tern's adjusted taxable income allows for a deduction of up to $3,000,000, but he incurs interest expenses that exceed this limit, he can only deduct $3,000,000 in the current year. The carryforward of $200,000 indicates that there is still an interest expense that could not be deducted in the current period but can be applied in future years.

This understanding frames the answer as C, which signifies that Tern can deduct $3,000,000 this year, while being allowed to carry forward an additional $200,000 of business interest expense, which can be utilized in subsequent tax years. This approach is aligned with the TCJA’s intent to balance tax incentives while still recognizing a business's need to deduct its interest expenses over time.