Practical considerations from the final and proposed Section 163(j) regulations

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August 2020

Overview

Treasury and the IRS (Treasury), on July 28, released final regulations and proposed regulations (the 2020 proposed regulations) on the Section 163(j) interest expense limitation rules. Treasury also 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 Tax Cuts and Jobs Act 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 (ATI), and floor plan financing interest for the tax year. 

The final regulations generally apply to tax years beginning on or after the date that is 60 days after the regulations are published in the Federal Register, although taxpayers (and related parties) may apply the final regulations in their entirety to tax years beginning after December 31, 2017. Alternatively, taxpayers and related parties may apply the 2018 proposed regulations for tax years prior to when the final regulations become effective. 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.

Our prior PwC Insight outlined highlights of the new regulations. This Insight describes the most significant changes from the 2018 proposed regulations in more detail. A forthcoming PwC Insight will discuss in detail the new regulations and Notice 2020-59 on the ability of real property trades or businesses to elect out of Section 163(j), real estate investment trusts (REITs), and other real property-related issues. PwC professionals will discuss the new regulations on a Tax Readiness webcast on August 11, 2020.

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 and thus may impact how taxpayers are affected by these rules. The 2020 proposed regulations offer important clarifications on how the limitation applies to partnerships, corporations, US shareholders of CFCs, and foreign persons with ECI, and on the definition of interest.

Taxpayers should review and assess the impact of the provisions in the final regulations, and consider commenting on issues that Treasury should address with respect to the 2020 proposed regulations. Public comments are due 60 days after publication in the Federal Register

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Doug McHoney

International Tax Services Leader, PwC US

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