Final Section 163(j) regulations - an inbound perspective

December 2020


Treasury and the IRS (Treasury) on September 14 published final regulations and proposed regulations (the 2020 proposed regulations) on the Section 163(j) interest expense limitation rules. Treasury also has released Notice 2020-59, which proposes a revenue procedure applicable to taxpayers engaged in certain ‘electing real property trades or businesses,’ and frequently asked questions (FAQs) that provide guidance on Section 448(c)(2) aggregation for small businesses. The final regulations generally finalize proposed regulations published in November 2018 (2018 proposed regulations).

Section 163(j), which was amended by the 2017 tax reform legislation and by the CARES Act, generally limits US business interest expense deductions to the sum of business interest income, 30% (or 50%, as applicable) of adjusted taxable income (ATI), and floor-plan financing interest for the tax year. 

The final regulations generally apply to tax years beginning on or after November 13, 2020, although taxpayers (and related parties) may apply the final regulations in their entirety to tax years beginning after December 31, 2017, and before November 13, 2020, as stated in the regulations. Alternatively, taxpayers and related parties may apply the 2018 proposed regulations in their entirety for tax years prior to when the final regulations become effective, as stated in the final regulations. Finally, the 2020 proposed regulations are proposed to apply 60 days after they are published as final regulations in the Federal Register, but generally may be applied by taxpayers and related parties in tax years beginning after 2017 and before final regulations are published.

This Insight describes key changes from the 2018 proposed regulations as these changes affect US inbound companies.

The takeaway

The final regulations retain the overall architecture of the 2018 proposed regulations but make a number of changes that either clarify, expand, or narrow the reach of the 2018 proposed regulations, potentially impacting US inbound companies. In addition, the 2020 proposed regulations would offer important clarifications on how the Section 163(j) limitation applies to foreign persons with ECI.

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Oren Penn

Principal, US Inbound Tax and International Tax Services, PwC US

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