On November 26, Treasury released proposed regulations (the Proposed Regulations) concerning the Section 163(j) interest expense limitation rules. The 2017 tax reform act (the Act) revised and broadened the existing interest expense limitation rules (‘old Section 163(j)’). The IRS released prior guidance under Section 163(j) in Notice 2018-28. (For prior coverage on the Act, see the ‘See also’ section at the end of this document). Also on November 26, the IRS released Rev. Proc. 2018-59, which provides a safe harbor allowing taxpayers to treat certain infrastructure projects as real property trades or businesses solely for purposes of qualifying as an electing real property trade or business under Section 163(j)(7)(B).
Section 163(j), as modified for tax years beginning after December 31, 2017 (‘new Section 163(j)’), generally limits business interest expense deductions. The Proposed Regulations provide needed guidance related to the mechanics of determining the interest expense limitation, and clarify the application of Section 163(j) to consolidated groups, RICs, REITs, partnerships, controlled foreign corporations (CFCs), and other foreign corporations.
The regulations are proposed to be effective for tax years ending after the date the regulations are published in final form in the Federal Register, although taxpayers may elect to apply the Proposed Regulations for tax years beginning after December 31, 2017, provided certain conditions are met. Some of the key highlights of the Proposed Regulations are set forth below. We will publish an in-depth Insight on the Proposed Regulations in the coming days. In addition, we will discuss the Section 163(j) guidance in an upcoming Tax Reform Readiness series webcast.
The Proposed Regulations closely follow the previous administrative guidance provided under Notice 2018-28, provide additional guidance related to the mechanics of determining the interest expense limitation, and clarify the application of Section 163(j) to consolidated groups, partnerships, and CFCs. The Proposed Regulations, however, reserve on the interactions between Section 163(j) and the BEAT provisions under Section 59A. Such guidance is anticipated in forthcoming regulatory guidance.
Taxpayers should review and assess the impact of the provisions in the Proposed Regulations, and consider commenting on issues that Treasury should address before issuing final Section 163(j) guidance.
The above-mentioned highlights are not an exhaustive list of the provisions in the Proposed Regulations. Stay tuned for our in-depth Insight to be published in the coming days.
Partner, Washington National Tax Services ITS Leader, PwC US