Treasury and the IRS, on January 5, released final regulations on the Section 163(j) interest expense limitation rules. The regulations finalize, with certain key changes and reservations, proposed regulations published in the Federal Register on September 14, 2020. Section 163(j), which was modified by the 2017 tax reform legislation and 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, and the taxpayer’s floor plan financing interest for the tax year.
The 2021 final regulations closely follow the 2020 proposed regulations, and provide additional guidance related to the mechanics of determining the interest expense limitation. The regulations also clarify the application of Section 163(j) to consolidated groups, partnerships, and US shareholders of CFCs. The 2021 final regulations, however, reserve on a number of issues, such as foreign persons with ECI and increases to a US shareholder’s ATI by certain specified deemed inclusions, among others. Taxpayers should review and assess the impact of the 2021 final regulations and consider commenting on issues that Treasury should address before issuing additional 163(j) guidance.