Source: http://www.roedl.net/us/en/tax_reform/key_business_tax_provisions/new_interest_deduction_limitation_rules.html
Timestamp: 2019-06-26 03:49:03
Document Index: 4052596

Matched Legal Cases: ['§163', '§163', '§163', '§163', '§163', '§754', '§267', '§59']

Since all interest expense of corporations is deemed to be “business interest”, these rules will apply to all interest expense of a corporation including CFCs. It is possible for individuals and partnerships, however, to have investment interest expense, which would not be subject to these rules.
The definition of “interest expense” under §163(j) is very broad and includes unexpected items such as premiums, debt issuance costs, and guaranteed payments for use of capital. If there is doubt, please refer to the regulations on Sec 163(j) in determining all items that are included as “interest” in the limitation.
Certain trade or businesses such as real property businesses can make an irrevocable election to be exempt from the §163(j) imitation, but at the cost of less favorable write-offs.
The limitation applies to all taxpayers. The limitation applies to all taxpayers. The only exception to this is for “certain small businesses” (including partnerships and sole proprietors) generally defined as taxpayers with average gross receipts of less than $25 million (adjusted for inflation after 2018) for the preceding three tax years. In calculating average gross receipts, affiliated group rules apply to a member of an affiliated group with more than 50% common ownership. Foreign corporations can be included in the definition of affiliated group for this purpose, which could reduce the number of businesses that can claim this exception. This exception may not apply to partnerships with losses
“Adjusted Taxable Income” or ATI is calculated as follows:
+/- Depreciation, Amortization and Depletion*
- 100% FDII**
*Depreciation, amortization or depletion expenses that are subject to capitalization under section 263A and deducted in costs of goods sold are not added back. For tax years 2022 and after, the calculation is the same as above, but there is no adjustment for depreciation, amortization and depletion.
**FDII amounts must be calculated if there is interest expense, even if the full FDII benefit is limited by taxable income. However, if there is a loss position prior to FDII, no adjustment to ATI is needed. For example, if a taxpayer’s ATI is $100 and their full FDII before limitation is $200, the full $200 is included in the ATI adjustment. If a taxpayer has a net loss of $100 and no FDII at all, there are no adjustments to ATI for FDII.
Note that the limitation is generally computed at the entity level except for consolidated returns which computes the limitation at the consolidated level. Limitation and carryforwards are allocated among members based on the prorata share of interest expense and ATI.
Any interest that is limited under §163(j) is not deducted and is carried forward indefinitely to be treated as paid or accrued in the subsequent tax year. Exceptions to this rule for individuals or partnerships are described below. If a taxpayer calculates an excess limitation (i.e., the 30% of adjusted taxable income exceeds interest expense), this amount is not carried forward as prior §163(j) allowed.
Please note that pre-2018 excess limitation amounts are not carried forward into 2018.
In the partnership context, §163(j) is calculated at the partnership level. The excess interest expense is not carried over by the partnership, rather, it is allocated to each partner in the same manner as any tax item under the partnership agreement. Partnerships with special allocations must follow a complicated 11-step process to properly allocate the limitation or carryforward. Please consult with Rödl & Partner USA if there are §754 elections or partners receiving tax allocations different from economic allocations.
385 debt / equity classification rules continue to apply
Traditional §267 related-party rules require payment of the interest expense during the tax year.
Application to transactions:
Guidance for interactions with §59A (“BEAT”) has not yet been released.