Source: https://www.bbh.com/en-us/insights/in-focus--rics-are-not-out-of-the-woods--understanding-business-interest-expense-deduction-limitations-33902
Timestamp: 2019-04-24 14:36:29+00:00

Document:
The Tax Cuts and Jobs Act of 2017 (TCJA) included a provision¹ that limits the amount of business interest a taxpayer is permitted to deduct in their tax return each year. The provision did not provide clear guidance leaving Regulated Investment Companies (RICs) wondering if they are subject to the new rules and, if so, how to calculate the amount of business interest expense they may deduct. Proposed Treasury Regulations² were issued at the end of November 2018 which address these questions, but at the same time, they include a very broad definition of interest expense and interest income that subjects RICs to burdensome rules and interest limitation calculations. RICs (and other investment companies such as investment partnerships, hedge funds and private equity) should be concerned now about how to calculate the business interest expense limitation and the breadth of items included in the definition of interest expense and interest income.
At best, a RIC’s determination of its net business interest expense deduction will be complicated. At worst, a RIC could suffer significant limitations to its investment expense deductions and losses because they are treated as business interest under the rules. Business interest for these purposes includes many more items than interest on debt instruments. RICs will have to monitor and track many items to determine their adjusted taxable income (ATI), business interest expense and business interest income. Additionally, RICs will have to track these items flowing from their investments in partnerships.
A RIC’s dividends paid deduction does not reduce ATI for these purposes.10 This was one of the primary questions facing RICs under the initial business interest expense limitation rules in the TCJA.
RICs and other investment companies should begin reviewing their portfolios and identifying items that will be treated as interest expense and income under these proposed regulations now. The heavy lifting will be in tracking “interest” and ATI and performing the calculations. Brown Brothers Harriman’s tax teams are ready to assist our clients in these efforts.
3. For US tax purposes, debt is primarily defined under IRC §1275(a) and Treasury Regulation §1.1275-1(d) and other IRC sections and Treasury Regulations and that is not treated as stock under Treasury Regulation §1.385-3.
10. By operation of the proposed regulations, §1.163(j)-4(b)(4)(ii), ATI is calculated excluding the adjustments in IRC §852(b)(2). Thus, the Dividends Paid Deduction is not taken; net capital gain is included in ATI; and the dividends received deduction (DRD) would be allowed except that the DRD is added back to ATI under §1.163(j)-4(b)(4)(iii). Other adjustments in IRC §852(b)(2) not mentioned here are also ignored when calculating ATI.
14.Treasury requested comments on the proposed regulations. They were due January 9, 2019.

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