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CARES Act Could Compound 163(j) Issue for Separate Filers

Posted on Apr. 16, 2020

An existing section 163(j) conformity issue for states that require separate company reporting could be exacerbated by modifications to the net business interest deduction included in the recent coronavirus economic relief package. 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) increased the limitation on the deductibility of business interest expense under section 163(j) from 30 percent of adjusted taxable income — as established by the Tax Cuts and Jobs Act — to 50 percent of ATI for tax years beginning in 2019 and 2020. 

Treasury and the IRS still haven’t released final regulations on section 163(j). But under the proposed regs (REG-106089-18) published in December 2018, the calculation of the limitation would be done at the federal consolidated group level. How the limitation would apply for state tax purposes is unclear, given the mismatch between federal and state filing methods; the disconnect is most acute for states that require separate company reporting.

“We’ve been waiting for guidance on [section 163(j) changes] for quite some time. States have been extremely slow to put out guidance, if any. And the current state of affairs is only likely to exacerbate that issue,” Todd Betor of Eversheds Sutherland (US) LLP said during an April 14 webcast hosted by the firm.

“Taxpayers are going to have to make this carry-through calculation or tracking of 163(j) limitations depending on the makeup of the taxpayer,” Betor explained during the webcast.

Using New Jersey as an example of a state that has typically adopted changes on a rolling basis to section 163(j), Betor noted that the New Jersey Division of Taxation issued guidance in April 2019 addressing section 163(j) changes under the TCJA.

Observing that the state adopted mandatory unitary combined reporting for 2019, Betor said a “separate company calculation should be somewhat alleviated going forward.”

However, he said that the guidance as it applies to the calculation of separate company filers when there is a different unitary combined group versus a federal consolidated group “will still control.”

Pennsylvania also issued guidance in April 2019 addressing the issue under the TCJA. Noting that the state adopted the section 163(j) changes on a rolling basis, Betor said Pennsylvania's guidance provides for a separate calculation method on a separate-company basis.

Pennsylvania applies the limitation on a separate-company basis, which Betor said is "very, very beneficial" and something that other states should do.

Norman Lobins of Deloitte Tax LLP told Tax Notes he would like to see additional guidance on section 163(j) changes under the CARES Act. "However, as we saw with tax reform, it will be slower than taxpayers would prefer — and that was without a pandemic," Lobins said. 

Meanwhile, Betor warned that there is a "hidden trap" in the CARES Act related to global intangible low-taxed income. 

While the section 163(j) and net operating loss changes under the CARES Act are beneficial to taxpayers, Betor said that “there is a domino effect especially with respect to section 250,” which provides a deduction for GILTI.

“A company’s utilization of carryback provisions to NOLs and/or section 163(j)(10) will result in a decrease in taxable income, thereby reducing or eliminating a company’s section 250 deduction,” Betor said. 

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