Sec. 1.381(c)(20)-1 Carryforward of disallowed business interest.
(a) Carryover requirement. Section 381(c)(20) provides that the acquiring corporation in a transaction described in section 381(a) will succeed to and take into account the carryover of disallowed business interest described in section 163(j)(2) to taxable years ending after the date of distribution or transfer.
(b) Carryover of disallowed business interest described in section 163(j)(2). For purposes of section 381(c)(20) and this section, the term carryover of disallowed business interest described in section 163(j)(2) means the disallowed business interest expense carryforward (as defined in §1.163(j)-1(b)(11)), including any disallowed disqualified interest (as defined in §1.163(j)-1(b)(12)), and including the distributor or transferor corporation’s disallowed business interest expense from the taxable year that ends on the date of distribution or transfer. For the application of section 382 to disallowed business interest expense described in section 163(j)(2), see the regulations in this part under section 382 of the Code, including but not limited to §1.382-2.
(c) Limitation on use of disallowed business interest expense carryforwards in the acquiring corporation’s first taxable year ending after the date of distribution or transfer.
(1) In general. In determining the extent to which the acquiring corporation may use disallowed business interest expense carryforwards in its first taxable year ending after the date of distribution or transfer, the principles of §§1.381(c)(1)-1 and 1.381(c)(1)-2 apply with appropriate adjustments, including but not limited to the adjustments described in paragraphs (c)(2) and (3) of this section.
(2) One date of distribution or transfer within the acquiring corporation’s taxable year. If the acquiring corporation succeeds to the disallowed business interest expense carryforwards of one or more distributor or transferor corporations on a single date of distribution or transfer within one taxable year of the acquiring corporation, then, for the acquiring corporation’s first taxable year ending after the date of distribution or transfer, that part of the acquiring corporation’s business interest expense deduction (if any) that is attributable to the disallowed business interest expense carryforwards of the distributor or transferor corporation is limited under this paragraph (c) to an amount equal to the post-acquisition portion of the acquiring corporation’s section 163(j) limitation, as defined in paragraph (c)(4) of this section.
(3) Two or more dates of distribution or transfer in the taxable year. If the acquiring corporation succeeds to the disallowed business interest expense carryforwards of two or more distributor or transferor corporations on two or more dates of distribution or transfer within one taxable year of the acquiring corporation, the limitation to be applied under this paragraph (c) is determined by applying the principles of §1.381(c)(1)-2(b) to the post-acquisition portion of the acquiring corporation’s section 163(j) limitation, as defined in paragraph (c)(4) of this section.
(4) Definition. For purposes of this paragraph (c), the term post-acquisition portion of the acquiring corporation’s section 163(j) limitation means the amount that bears the same ratio to the acquiring corporation’s section 163(j) limitation (within the meaning of §1.163(j)-1(b)(31)) (or, if the acquiring corporation is a member of a consolidated group, the consolidated group’s section 163(j) limitation) for the first taxable year ending after the date of distribution or transfer (taking into account items to which the acquiring corporation succeeds under section 381, other than disallowed business interest expense carryforwards) as the number of days in that year after the date of distribution or transfer bears to the total number of days in that year.
(5) Examples. For purposes of this paragraph (c)(5), unless otherwise stated, X, Y, and Z are taxable domestic C corporations that were incorporated on January 1, 2021 and that file their tax returns on a calendar-year basis; none of X, Y, or Z is a member of a consolidated group; the small business exemption in §1.163(j)-2(d) does not apply; interest expense is deductible except to the extent of the potential application of section 163(j); and the facts set forth the only corporate activity. The principles of this paragraph (c) are illustrated by the following examples.
(i) Example 1: Transfer before last day of acquiring corporation’s taxable year.
(A) Facts. On October 31, 2022, X transferred all of its assets to Y in a statutory merger to which section 361 applies. For the 2021 taxable year, X had $400x of disallowed business interest expense, and Y had $0 of disallowed business interest expense. For the taxable year ending October 31, 2022, X had an additional $350x of disallowed business interest expense (X did not deduct any of its 2021 carryforwards in its 2022 taxable year). For the taxable year ending December 31, 2022, Y had business interest expense of $100x, business interest income of $200x, and ATI of $1,000x. Y’s section 163(j) limitation for the 2022 taxable year was $500x ($200x + (30 percent x $1,000x) = $500x).
(B) Analysis. Pursuant to §1.163(j)-5(b)(2), Y deducts its $100x of current-year business interest expense (as defined in §1.163(j)-1(b)(9)) before any disallowed business interest expense carryforwards (including X’s carryforwards) from a prior taxable year are deducted. The aggregate disallowed business interest expense of X carried forward under section 381(c)(20) to Y’s taxable year ending December 31, 2022, is $750x. However, pursuant to paragraph (c)(2) of this section, for Y’s first taxable year ending after the date of distribution or transfer, the maximum amount of X’s disallowed business interest expense carryforwards that Y can deduct is equal to the post-acquisition portion of Y’s section 163(j) limitation. Pursuant to paragraph (c)(4) of this section, the post-acquisition portion of Y’s section 163(j) limitation means Y’s section 163(j) limitation times the ratio of the number of days in the taxable year after the date of distribution or transfer to the total number of days in that year. Therefore, only $84x of the aggregate amount ($500x x (61/365) = $84x) may be deducted by Y in that year, and the remaining $666x ($750x - $84x = $666x) is carried forward to the succeeding taxable year.
(C) Transfer on last day of acquiring corporation’s taxable year. The facts are the same as in Example 1 in paragraph (c)(5)(i)(A) of this section, except that X’s transfer of its assets to Y occurred on December 31, 2022. For the taxable year ending December 31, 2022, X had an additional $350x of disallowed business interest expense (X did not deduct any of its 2021 carryforwards in its 2022 taxable year). For the taxable year ending December 31, 2023, Y had business interest expense of $100x, business interest income of $200x, and ATI of $1,000x. Y’s section 163(j) limitation for the 2023 taxable year was $500x ($200x + (30 percent x $1,000x) = $500x). The aggregate disallowed business interest expense of X carried under section 381(c)(20) to Y’s taxable year ending December 31, 2023, is $750x. Paragraph (c)(2) of this section does not limit the amount of X’s disallowed business interest expense carryforwards that may be deducted by Y in the 2023 taxable year. Since the amount of Y’s section 163(j) limit for the 2023 taxable year was $500x, Y may deduct the full amount ($100x) of its own business interest expense for the 2023 taxable year, along with $400x of X’s disallowed business interest expense carryforwards.
(ii) Example 2: Multiple transferors on same date.
(A) Facts. On October 31, 2022, X and Y transferred all of their assets to Z in statutory mergers to which section 361 applies. For the 2021 taxable year, X had $300x of disallowed business interest expense, Y had $200x, and Z had $0. For the taxable year ending October 31, 2022, each of X and Y had an additional $125x of disallowed business interest expense (neither X nor Y deducted any of its 2021 carryforwards in 2022). For the taxable year ending December 31, 2022, Z had business interest expense of $100x, business interest income of $200x, and ATI of $1,000x. Z’s section 163(j) limitation for the 2022 taxable year was $500x ($200x + (30 percent x $1,000x) = $500x).
(B) Analysis. The aggregate disallowed business interest expense of X and Y carried under section 381(c)(20) to Z’s taxable year ending December 31, 2022, is $750x. However, pursuant to paragraph (c)(2) of this section, only $84x of the aggregate amount ($500x x (61/365) = $84x) may be deducted by Z in that year. Moreover, under paragraph (b)(2) of this section, this amount only may be deducted by Z in that year after Z has deducted its $100x of current-year business interest expense (as defined in §1.163(j)-1(b)(9)).
(d) Applicability date. This section applies to taxable years beginning on or after November 13, 2020. However, taxpayers and their related parties, within the meaning of sections 267(b) and 707(b)(1), may choose to apply the rules of this section to taxable year beginning after December 31, 2017, so long as the taxpayers and their related parties consistently apply the rules of the section 163(j) regulations (as defined in §1.163(j)-1(b)(37)), and, if applicable, §§1.263A-9, 1.263A-15, 1.382-1, 1.382-2, 1.382-5, 1.382-6, 1.382-7, 1.383-0, 1.383-1, 1.469-9, 1.469-11, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-36, 1.1502-79, 1.1502-91 through 1.1502-99 (to the extent they effectuate the rules of §§1.382-2, 1.382-5, 1.382-6, and 1.383-1), and 1.1504-4, to that taxable year.
[Added by T.D. 9905, 85 FR 56686-56845, Sept. 14, 2020.]
