Final and New Proposed Regulations Issued for 163(j) Interest Deduction Limitation

On July 27, 2020 Treasury issued final regulations providing guidance on the interest limitation requirement of §163(j) which was enacted as part of the Tax Cuts and Jobs Act (TCJA). 

In addition to final regulations Treasury also issued new proposed regulations.  The new proposed regulations provide new rules and clarifications in a number of areas including:

  • Limitations on use of the corporate look through provisions to lower tier entities for purposes of 163(j)(7)
  • Interest characterization of S-corporation and partnership debt proceeds including proceeds used to make distributions
  • Interest characterization of debt proceeds of partners and shareholders allocated to acquisition of an interest in a partnership or S-corporation
  • Self-charged lending transactions
  • Trading partnerships
  • Publicly traded partnerships
  • Section 734(b) adjustments
  • Tiered partnership structures
  • Definition of real property development and real property redevelopment
  • Definition of a syndicate
  • Modifications to the definitions and general guidance of 1.163(j)-1, including proposed rules permitting taxpayers to apply a different computational method in determining Adjusted Taxable Income (ATI) to address certain sales or disposition transactions

The proposed regulations also provide rules for application of the limitation to United States shareholders of controlled foreign corporations and to foreign persons with effectively connected income in the United States. 

Finally, the proposed regulations provide guidance related to some of the changes made by the CARES Act, including treatment of excess business interest expense allocated to a partner in a tax year ending in 2019 and the election to use ATI from the last taxable year beginning in 2019 to determine a taxpayer’s section 163(j) limitation for a taxable year beginning in 2020.

In addition to regulations the IRS also issued Notice 2020-59 providing a safe harbor for taxpayers engaged in management or operations of certain residential living facilities allowing them to treat the trade or business as a real property trade or business for purposes of the 163(j) election.

Lastly, the IRS posted FAQs on the aggregation rules which apply for purposes of determining status as a small taxpayer for purposes of the 163(j) exemption.

Due to the interaction with various other code sections and the need to apply the limitation across groups or related taxpayers, application of the business interest limitation has proved to be challenging and complex.  Numerous comments were received by Treasury on the lengthy proposed §163(j) regulations that were issued in December of 2018. 

At this time DHG is in the process of reviewing the final and new proposed regulations in a comprehensive manner to identify key areas of change, or non-change, and the implications for our clients.  Please be on the lookout for additional information from DHG on this topic over the upcoming days and weeks.

If you have any questions, please reach out to us at tax@dhg.com.