IRS issues additional rules on the business interest expense limitation

Final regulations posted by the IRS on Jan. 4 (T.D. 9943) provide additional guidance regarding the limitation on the business interest expense deduction under Sec. 163(j) to reflect amendments made by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136. Specifically, the regulations address the application of the limitation in contexts involving passthrough entities, regulated investment companies (RICs), and controlled foreign corporations. The regulations also provide guidanceregarding the definitions of real property development, real property redevelopment, and syndicates.

Sec. 163(j) generally limits the amount of business interest expense that can be deducted in the current tax year. Under Sec. 163(j)(1), a taxpayer’s deduction for interest is limited to the sum of (1) the taxpayer’s business interest income for the tax year; (2) 30% of the taxpayer’s adjusted taxable income for the tax year; and (3) the taxpayer’s floor plan financing interest expense for the tax year (in sum, the Sec. 163(j) limitation).

The final regulations adopt most of the proposed regulations under Sec. 163(j) issued in July 2020 (REG-107911-18), retaining the same basic structure as the proposed regulations with a number of revisions in response to comments the IRS received. The IRS plans to finalize other portions of the 2020 proposed regulations separately to allow additional time to consider the comments received.

The regulations were effective the date they were published in the Federal Register, Jan. 19. Many of the rules do not apply until 60 days after they are published, but taxpayers and their related parties may choose to apply the rules to tax years ending after Dec. 31, 2017, and before 60 days after the final regulations are published, providing they apply the rules consistently and in their entirety.