A monthly roundup of recent important tax developments affecting practitioners.

• Author: Schreiber, Sally P.
• Position: NEWS NOTES

Regulations

Regulations and other guidance on the business interest expense limitation issued

The IRS issued a long-awaited package of guidance regarding the Sec. 163(j) limitation on business interest expense deductions. The guidance includes final and proposed regulations as well as a proposed revenue procedure with a safe harbor for operators of qualified residential living facilities and FAQs on the aggregation rules for determining a taxpayer's gross receipts for purposes of the small business exception to the business interest expense limitation. The business interest expense limitation was enacted in the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and amended by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136.

Under Sec. 163(j), for tax years beginning after Dec. 31, 2017, business interest expense deductions are limited to the sum of:

* The taxpayer's business interest income;

* 30% (or 50% for 2019 and 2020, as amended by the CARES Act) of the taxpayer's adjusted taxable income (ATI); and

* The taxpayer's floor plan financing interest expense.

In a change made by the CARES Act, taxpayers can elect to use their 2019 ATI in computing the 2020 limit, helping taxpayers whose income declines in 2020. Taxpayers are also permitted to elect to apply the more restrictive 30%-of-ATI limit.

The business interest expense deduction limitation does not apply to certain small businesses whose gross receipts are $26 million or less, electing real property trades or businesses, electing farming businesses, and certain regulated public utilities. The $26 million gross receipts threshold, which applies for the 2020 tax year, is adjusted annually for inflation.

Final regulations

The 575-page final regulations (T.D. 9905) address how to calculate the interest expense limitation, what constitutes interest for purposes of the limitation, which taxpayers and trades or businesses are subject to the limitation, and how the limitation applies to consolidated groups, partnerships, internationally, and in other cases. They finalize, with some changes, proposed regulations (REG-106089-18) that were issued in 2018. The IRS received approximately 120 comments on the proposed regulations and made some changes based on those comments.

The 2018 proposed regulations contained a broad definition of business interest, which the IRS in the preamble called a "complete definition of interest that addresses all transactions that are commonly understood to produce interest income and expense, including transactions that otherwise may have been entered into to avoid the application of section 163(j)." Among the changes made in response to comments, the final regulations scale back the definition of interest somewhat, excluding, for example, commitment fees and debt issuance costs from the definition.

The IRS also eliminated certain income, deduction, gain, or loss from a derivative that alters a taxpayer's effective cost of borrowing with respect to a liability or a taxpayer's effective yield with respect to a debt instrument as an adjustment to the taxpayer's interest expense. However, in certain circumstances, the anti-avoidance rules in Regs. Sec. 1.163(j)-1(b)(22)(iv) may apply to require income, deduction, gain, or loss from certain hedging transactions to be taken into account for purposes of Sec. 163(j).

The rules regarding the computation of ATI were left largely intact from the proposed regulations, with what the IRS called the "notable" exception of amendments to the rules for the treatment of depreciation, amortization, or depletion when computing ATI.

The final regulations are effective 60 days after they are published as final in the Federal Register (as of this writing, a publication date had not been announced).

Proposed regulations

The proposed regulations (REG-107911-18) provide additional guidance on various business interest expense deduction...