The 2017 tax reform act (the Act) introduced to the Code new Section 163(j), which limits business interest expense deductions to the sum of business interest income, 30% of adjusted taxable income, and the taxpayer’s floor plan financing interest for the tax year. The IRS on November 26 issued proposed regulations under new Section 163(j), effective for tax years ending after the date the final regulations are published in the Federal Register. The regulations state that taxpayers may elect to apply the regulations to tax years beginning after December 31, 2017, if certain conditions are met.
The proposed regulations raise a number of important issues. PwC on December 6 hosted a webcast featuring PwC specialists who discussed some of these issues. This Insight highlights those discussions. Watch the webcast replay and register for future webcasts in PwC’s Tax Reform Readiness series, which addresses other areas affected by tax reform.
The next webcast — Tax reform readiness: Q4 financial reporting considerations — is scheduled for Thursday, January 3, 2019, from 2:00 PM - 3:00 PM (EDT).
The Section 163(j) regulations are complex and introduce a highly technical set of rules and computations. In addition to providing that Section 163(j) applies to applicable CFCs and foreign persons with ECI, the regulations cover how the rules apply at the partnership level. Because of the expanded definition of ‘interest’ and the entities subject to the rule, taxpayers should reexamine the the potential impact of Section 163(j) on their businesses.
Observation: When asked during the December 6 webcast which topic covered by the proposed Section 163(j) regulations they believe will have the biggest impact on their companies, respondents cited general mechanical issues and the broad definition of ‘interest’ (44%), but substantial percentages chose application to CFCs (30%) and effect on partnerships and partners (25%).
Principal, International Tax Services, PwC US