IRS Publishes Proposed Regs on Business Interest Expense Deduction Limit

IRS Publishes Proposed Regs on Business Interest Expense Deduction Limit

Internal Revenue Service

The IRS published proposed regulations (<a href="/lr/resolve/source-document/28mmy" title="Source document">REG-106089-18</a>) on the business interest expense deduction limit, providing general rules and rules for calculating the limitation in consolidated group, partnership, and international contexts and withdrawing proposed regs on the disallowance of a deduction for some interest paid or accrued by a corporation. Comments and discussion topic outlines for the February 27 hearing are due by February 26. In April 2018 the IRS issued guidance (<a href="/lr/resolve//27xr9">Notice 2018-28</a>) announcing its intent to issue proposed regs to provide guidance to help taxpayers comply with section 163(j). Where applicable, comments on that guidance are addressed in the preamble to the proposed regs. The proposed regs limit a taxpayer’s deduction for business interest expense to the sum of the taxpayer’s current-year business interest income, 30 percent of the taxpayer’s adjusted taxable income, and some floor plan financing interest expense. The regs provide that any amount of business interest expense that cannot be deducted because of the <a href="/research/federal/usc26/163#cqcf-0000170" resolve="/lr/resolve/163j1/cqcf#cqcf-0000170" title="163(j)(1)">section 163(j)(1)</a> limitation can be carried forward and treated as business interest expense in future years. The regs also provide special rules for the business interest expense carried forward (disallowed business interest expense carryforwards) by passthrough entities, corporations, and consolidated groups. Amounts carried forward under old section 163(j) as disallowed disqualified interest are included as disallowed business interest expense carryforwards of a taxpayer to the extent that the amounts otherwise qualify as business interest expense of the taxpayer under the proposed regs. The proposed regs are organized into 11 sections, the first of which provides common definitions used throughout the regs. The regs provide general rules on the computation of a taxpayer’s <a href="/research/federal/usc26/163#cqcf-0000169" resolve="/lr/resolve/163j/cqcf#cqcf-0000169" title="163(j)">section 163(j)</a> limitation along with ordering and other rules regarding the relationship of the section 163(j) limitation and other provisions of the tax code affecting interest. Other sections of the regs provide rules applicable to corporations and tax-exempt corporations and rules governing the disallowed business interest expense carryforwards of C corporations. Special rules under the regs apply the section 163(j) limitation to partnerships and S corporations. Other rules address the application of section 163(j) to foreign corporations and their shareholders and foreign persons with effectively connected income. The regs also provide rules regarding elections for excepted trades or businesses and a safe harbor for some real estate investment trusts. Lastly, the regs provide rules to allocate expense and income between non-excepted and excepted trades or businesses and some transition rules regarding the application of the section 163(j) limitation. The preamble to the proposed regs discusses those 11 sections and related conforming and coordinating provisions under the regs. The regs are generally proposed to be effective for tax years ending after the date they are finalized. Other provisions are proposed to be effective for ownership changes occurring on or after the date the regs are finalized. Taxpayers and their related parties may apply the rules under the regs to a tax year (or an ownership change occurring in a tax year) beginning after December 31, 2017, as long as specified rules are consistently applied to those tax years.

Related <a href="/lr/resolve//28mmx">IRS news release</a>, <a href="/lr/resolve//28mn2">FAQ</a>, and <a href="/lr/resolve//28mmv">revenue procedure</a>.

The IRS published proposed regulations (REG-106089-18) on the business interest expense deduction limit, providing general rules and rules for calculating the limitation in consolidated group, partnership, and international contexts and withdrawing proposed regs on the disallowance of a deduction for some interest paid or accrued by a corporation.

The IRS published proposed regulations (REG-106089-18) on the business interest expense deduction limit, providing general rules and rules for calculating the limitation in consolidated group, partnership, and international contexts and withdrawing proposed regs on the disallowance of a deduction for some interest paid or accrued by a corporation. Comments and discussion topic outlines for the February 27 hearing are due by February 26. In April 2018 the IRS issued guidance (Notice 2018-28) announcing its intent to issue proposed regs to provide guidance to help taxpayers comply with section 163(j). Where applicable, comments on that guidance are addressed in the preamble to the proposed regs. The proposed regs limit a taxpayer’s deduction for business interest expense to the sum of the taxpayer’s current-year business interest income, 30 percent of the taxpayer’s adjusted taxable income, and some floor plan financing interest expense. The regs provide that any amount of business interest expense that cannot be deducted because of the section 163(j)(1) limitation can be carried forward and treated as business interest expense in future years. The regs also provide special rules for the business interest expense carried forward (disallowed business interest expense carryforwards) by passthrough entities, corporations, and consolidated groups. Amounts carried forward under old section 163(j) as disallowed disqualified interest are included as disallowed business interest expense carryforwards of a taxpayer to the extent that the amounts otherwise qualify as business interest expense of the taxpayer under the proposed regs. The proposed regs are organized into 11 sections, the first of which provides common definitions used throughout the regs. The regs provide general rules on the computation of a taxpayer’s section 163(j) limitation along with ordering and other rules regarding the relationship of the section 163(j) limitation and other provisions of the tax code affecting interest. Other sections of the regs provide rules applicable to corporations and tax-exempt corporations and rules governing the disallowed business interest expense carryforwards of C corporations. Special rules under the regs apply the section 163(j) limitation to partnerships and S corporations. Other rules address the application of section 163(j) to foreign corporations and their shareholders and foreign persons with effectively connected income. The regs also provide rules regarding elections for excepted trades or businesses and a safe harbor for some real estate investment trusts. Lastly, the regs provide rules to allocate expense and income between non-excepted and excepted trades or businesses and some transition rules regarding the application of the section 163(j) limitation. The preamble to the proposed regs discusses those 11 sections and related conforming and coordinating provisions under the regs. The regs are generally proposed to be effective for tax years ending after the date they are finalized. Other provisions are proposed to be effective for ownership changes occurring on or after the date the regs are finalized. Taxpayers and their related parties may apply the rules under the regs to a tax year (or an ownership change occurring in a tax year) beginning after December 31, 2017, as long as specified rules are consistently applied to those tax years. 

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IRS Publishes Proposed Regs on Business Interest Expense Deduction Limit