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Preliminary highlights from the 2021 final Section 163(j) regulations

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January 2021

Overview

Treasury and the IRS on January 5 released final regulations under Section 163(j) (the 2021 final regulations).  The regulations finalize, with certain key changes and reservations, proposed regulations published in the Federal Register on September 14, 2020 (the 2020 proposed regulations).  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.

Although the 2021 final regulations are “effective” on the date the regulations are filed at the Federal Register, these 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 2021 final regulations in their entirety to tax years beginning after December 31, 2017.  As of this date, the regulations have not been filed or published in the Federal Register.

Taxpayers that early adopt the 2021 final regulations must also apply final regulations published in the Federal Register on September 14, 2020 (the 2020 final regulations), as revised by the 2021 final regulations.  The preamble to the 2021 final regulations also allows taxpayers (and related parties) to rely on portions of the 2020 proposed regulations not finalized by the 2021 final regulations, subject to certain exceptions.

This insight provides a high-level summary of the 2021 final regulations, including certain new rules and changes to the 2020 proposed regulations.  A forthcoming PwC Insight will discuss the 2021 final regulations in detail. PwC professionals will discuss the new regulations on an upcoming Tax Readiness webcast on Tuesday, January 26th.

The takeaway

The 2021 final regulations provide welcome clarifications of, and revisions to, certain rules in the 2020 proposed regulations.  The 2021 final regulations offer important clarification on how the limitation applies to partnerships, US shareholders of CFCs, and corporations, as well as the computation of ATI.

The above-mentioned highlights are not an exhaustive list of the provisions in the 2021 final regulations.  We expect to publish an in-depth Insight in the coming days.

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Doug McHoney

International Tax Services Co-Leader, PwC US

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