On 26 November 2018, the US Treasury Department and the US Internal Revenue Service (IRS) released proposed regulations (REG-106089-18) with regard to the limitation on the deduction for business interest expense under section 163(j) of the US Internal Revenue Code (IRC) as amended by the Tax Cuts and Jobs Act (TCJA). The IRS also issued a related News Release (IR-2018-233) dated 26 November 2018.
For tax years beginning after 31 December 2017, the deduction for business interest expense is generally limited to the sum of a taxpayer's business interest income, 30% of adjusted taxable income and floor plan financing interest. Certain small businesses whose gross receipts are USD 25 million or less (adjusted for inflation) and certain trades or businesses are not subject to the limitation under IRC section 163(j).
The proposed regulations provide the following guidance:
- general rules relating to the computation of a taxpayer's section 163(j) limitation;
- ordering and other rules regarding the relationship of the section 163(j) limitation and other provisions of the IRC affecting interest;
- rules applicable to C corporations (including real estate investment trusts (REITs), regulated investment companies (RICs) and consolidated group members) and tax-exempt corporations;
- rules governing the disallowed business interest expense carryforwards of C corporations;
- special rules for applying the section 163(j) limitation to partnerships and S corporations;
- rules regarding the application of IRC section 163(j) to foreign corporations and their shareholders;
- rules regarding the application of IRC section 163(j) to foreign persons with US effectively connected income;
- rules regarding elections for excepted trades or businesses, as well as a safe harbour for certain REITs;
- rules to allocate expense and income between non-excepted and excepted trades or businesses; and
- certain transition rules relating to the application of the section 163(j) limitation.
Taxpayers may rely on the rules in the proposed regulations until final regulations are published in the Federal Register.