November 2018 / United States

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.

On 28 November 2018, the US Treasury Department and the US Internal Revenue Service (IRS) released proposed regulations (REG-105600-18) on the determination of the foreign tax credit (FTC) under the various provisions of the US Internal Revenue Code (IRC). The IRS also issued a News Release (IR-2018-235) dated 28 November 2018 to announce the issuance of the proposed regulations. The proposed regulations provide guidance related to changes made by the Tax Cuts and Jobs Act (TCJA), which was enacted on 22 December 2017. Those changes include:

• the repeal of rules for computing deemed-paid FTCs on dividends on the basis of foreign subsidiaries' cumulative pools of earnings and foreign taxes;
• the addition of two separate FTC limitation categories (baskets) for foreign branch income and amounts includible under the new Global Intangible Low-Taxed Income (GILTI) provisions; and
• the modification of how taxable income is calculated for the FTC limitation by disregarding certain expenses related to income eligible for the dividends-received deduction and repealing the use of the fair market value method for allocating interest expense.

The new FTC rules apply to tax years beginning after 31 December 2017.