Preliminary highlights from the final and proposed Section 163(j) regulations

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July 2020

Overview

Treasury and the IRS on July 28 released final regulations and proposed regulations (the 2020 proposed regulations) under Section 163(j). Section 163(j), which was modified by the 2017 tax reform 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 the taxpayer’s 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. The preamble to the final regulations allows taxpayers and related parties alternatively to apply proposed regulations published in 2018 (the 2018 proposed regulations) before the final regulations become effective. The 2020 proposed regulations are proposed to apply 60 days after they are published as final regulations in the Federal Register but allow taxpayers and related parties to apply them in tax years beginning after 2017 and before final regulations are published, subject to certain exceptions. 

Simultaneously, Treasury and the IRS 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 certain small businesses.

This insight provides a high-level summary of new rules and changes to the 2018 proposed regulations. A forthcoming PwC Insight will discuss in detail the final regulations, the 2020 proposed regulations, Notice 2020-59, and the FAQs. PwC practitioners will discuss the Section 163(j) guidance on an August 11 PwC Tax Readiness webcast, from 2:00pm to 3:30pm EDT. Registration will be available soon.

The takeaway

The final regulations provide welcome clarifications of, and revisions to, certain rules in the 2018 proposed regulations. The 2020 proposed regulations offer important clarification on how the limitation applies to partnerships, US shareholders of CFCs, and foreign persons with ECI, and on the definition of interest.

The above-mentioned highlights are not an exhaustive list of the provisions in the final and 2020 proposed regulations. We expect to publish an in-depth Insight in the coming days.

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Doug McHoney

International Tax Services Leader, PwC US

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