Tax News Update    Email this document    Print this document  

January 5, 2021

BREAKING TAX NEWS | IRS releases additional final regulations on IRC Section 163(j) limits on business interest expense deductions

Today, the Treasury Department released additional final regulations (TD 9943) (the 2021 Final Regulations) with guidance on the business interest expense limitation under IRC Section 163(j) (the Section 163(j) Limitation). The Section 163(j) Limitation was modified in December 2017 by the Tax Cuts and Jobs Act (TCJA), and in March 2020 by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The 2021 Final Regulations adopt (with some revisions), clarify and reserve on certain aspects of the proposed regulations on the Section 163(j) Limitation that were published in September 2020 (the 2020 Proposed Regulations). The 2020 Proposed Regulations were issued concurrently with 2020 final regulations on the Section 163(j) Limitation (see Tax Alert 2020-1961).

The 2021 Final Regulations retain the same basic structure as the 2020 Proposed Regulations and include certain definitions and rules for applying the Section 163(j) limitation to controlled foreign corporations (CFCs) and to partnerships, including trading partnerships, publicly-traded partnerships, and partnership self-charged lending transactions.

Significant changes in the 2021 Final Regulations, as compared to the 2020 Proposed Regulations, include:

  • Modifying, in certain circumstances, the "lesser of standard" for dispositions of certain property for purposes of determining any negative adjustments to tentative taxable income with respect to depreciation, amortization and depletion deductions allowed or allowable for tax years beginning after December 31, 2017 and before January 1, 2022
  • Not reducing a CFC's adjusted taxable income (ATI) by foreign income taxes eligible for a foreign tax credit
  • Specifying that a CFC group member's ATI may be less than zero
  • Allowing taxpayers to make an initial CFC group election without waiting 60 months
  • Expanding the anti-abuse rule for intra-CFC groups when a principal purpose of entering the transaction is to increase a CFC group or CFC group member's business interest income (BII)
  • Requiring the filing of an annual statement when a CFC group election is in effect
  • Expanding the CFC safe harbor election to include CFCs and CFC groups with BII that is greater than or equal to business interest expense

The Treasury Department continues to study certain aspects of the 2020 Proposed Regulations, and the 2021 Final Regulations reserve on some provisions, including:

  • The treatment of interest expense from debt-financed acquisitions of, and distributions from, passthrough entities
  • Rules on partnership and partner basis adjustments upon partner dispositions
  • Rules on the treatment of excess business interest expense in tiered partnerships
  • The computation of a US shareholder's ATI when a CFC group election is in place
  • The treatment of foreign persons with effectively connected income

The 2021 Final Regulations apply to tax years beginning on or after the date that is 60 days after the regulations are published in the Federal Register. The 2021 Final Regulations allow taxpayers to apply the rules retroactively, subject to certain requirements.

A Tax Alert is forthcoming.