Form 8990, Limitation on Business Interest Expense Under Section 163(j)
Draft Instructions for Form 8990 (December 2018)
IRS has released the final version of Form 8990, Limitation on Business Interest Expense Under Section 163(j). The instructions to the form are presently available in draft form.
Background. For tax years beginning after Dec. 31, 2017, for certain taxpayers, the deduction allowed for business interest for any tax year can’t exceed the sum of: (1) the taxpayer’s business interest income for the tax year; (2) 30% of the taxpayer’s adjusted taxable income (ATI) for the tax year; plus (3) the taxpayer’s floor plan financing interest (certain interest paid by vehicle dealers) for the tax year. (Code Sec. 163(j)(1)) Disallowed business interest may be carried forward indefinitely, subject to certain restrictions applicable to partnerships.
In November 2018, IRS issued proposed regs on the new business interest deduction. For coverage of the proposed regs, see here for the rules for C corporations, here for the rules for partnerships and S corporations, here for the small taxpayer exemption and relation to other interest provisions, here for the election for excepted trades or businesses and the REIT safe harbor, and here for the rules for foreign corporations and shareholders and foreign persons with effectively connected income (ECI).
Final form issued. IRS has now released the final version of Form 8990.
Purpose of form. As described in the draft instructions, Form 8990 is used to figure the amount of business interest expense a taxpayer can deduct and the amount to carry forward to the next year.
Who must file. Unless an exclusion from filing applies (e.g., “small business” taxpayers with average annual gross receipts of $25 million or less for the three prior tax years), the form generally must be filed by a taxpayer with business interest expense, a disallowed business interest expense carryforward, or current year or prior year excess business interest expense.
A pass-through entity allocating excess taxable income or excess business interest income to its owners (i.e., a pass-through entity that is not a small business taxpayer) must file Form 8990, regardless of whether it has any interest expense.
A taxpayer who is a U.S. shareholder of an applicable controlled foreign corporation (CFC) that has business interest expense, ha a disallowed business interest expense carryforward, or is part of a CFC group election generally, must attach Form 8990 with Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations.
Form itself. Form 8990 is divided into three parts: Part I, Computation of Allowable Business Interest Expense, which must be completed by all taxpayers subject to Code Sec. 163(j); Part II, Partnership Pass-Through Items, which is completed by a partnership subject to Code Sec. 163(j); and Part III, S Corporation Pass-Through Items, which is completed by an S corporation subject to Code Sec. 163(j). There are also two Schedules: Schedule A, Summary of Partner’s Section 163(j) Excess Items; and Schedule B, Summary of S Corporation Shareholder’s Excess Taxable Income and Excess Business Interest Income.
…Part I—Computation of Allowable Business Interest Expense. To determine allowable business interest expense in Part I, taxpayers are required to compute their business interest expense, adjusted taxable income, business interest income, and Code Sec. 163(j) limitation calculation, as explained in greater detail below. A taxpayer who is a partner or shareholder in a pass-through entity subject to Code Sec. 163(j) must first complete Schedule A and Schedule B before completing Part I.
A taxpayer’s total business interest expense includes: (i) the taxpayer’s current year business interest expense; (ii) except for partnerships, the taxpayer’s disallowed business interest expense carryforwards from prior years (a partnership’s excess disallowed business interest expense is not carried over by the partnership but rather allocated to the partners); (iii) a partner’s excess business interest expense treated as paid or accrued in the current year (from Schedule A, line 44, column (h)), and (iv) floor plan financing interest expense. (Form 8990, Section I, lines 1-5)
A taxpayer’s adjusted taxable income is taxable income, computed as though all of the business interest expense is otherwise allowable business interest expense and taking into account all other applicable limitations (e.g., the at-risk limitation), with certain additions and reductions. The additions include, among other things, the amount of any net operating loss deduction under Code Sec. 172, the amount of any qualified business income (QBI) deduction under Code Sec. 199, and amounts allowable for depreciation, amortization, or depletion attributable to a trade or business. The reductions include, for example, items of income or gain which are not properly allocable to a trade or business of the taxpayer, such as gain from the sale of a principal residence. (Form 8990, Section II, lines 6-22)
A taxpayer’s business interest income includes any business interest income directly paid to or accrued by the taxpayer, as well as business interest income allocated from a pass-through entity not subject to the Code Sec. 163(j)limitation. (Form 8990, Section III, lines 23-25)
To calculate the Code Sec. 163(j) limitation (the 163(j) limitation), a taxpayer multiples its adjusted taxable income by 30%, adds its business interest income, and adds its floor plan financing interest expense. A taxpayer’s current year business interest deduction will be the smaller of the 163(j) limitation or the taxpayer’s total business interest expense. The difference between the taxpayer’s total business interest expense and the taxpayer’s 163(j) limitation is disallowed business interest expense, which can be carried forward. (Form 8990, Section IV, lines 26-31)
…Part II—Partnership pass-through items. This part is completed by a partnership that is subject to Code Sec. 163(j) and is required to file Form 8990. The partnership items are then allocated to the partners and are not carried forward by the partnership.
Lines 32 through 36 provide the steps for computing a partnership’s excess business interest expense, excess taxable income, and excess business interest income. The draft instructions to Form 8893 refer partnerships to the instructions for Form 1065, U.S. Return of Partnership Income, for how to report these amounts to the partners.
…Part III—S corporation pass-through items. This part is only completed by S corporations that are subject to Code Sec. 163(j). The S corporation items are then allocated to the shareholders.
Lines 38 through 42 provide the steps for computing an S corporation’s excess taxable income and excess business interest income. The draft instructions to Form 8893 refer S corporations to the instructions for Form 1120S, U.S. Income Tax Return for an S Corporation, for how to report these amounts to the shareholders.
…Schedule A—summary of partner’s Section 163(j) excess items. This Schedule must be completed before completing Part I by any taxpayer that is required to complete Part I and is a partner in a partnership that is subject to the Code Sec. 163(j) limitation. For foreign persons with an interest in a partnership engaged in a U.S. trade or business, the amount of excess items is limited by ECI.
The Schedule requires, for each partnership subject to Code Sec. 163(j) in which a taxpayer owns an interest, the name of the partnership, its EIN, excess business interest expense for the current year as well as any prior year carryforward, current year excess taxable income, current year excess business interest income, excess business interest expense treated as paid or incurred, and and current year excess business interest expense carryforward. (Form 8990, Lines 43-44)
…Schedule B—summary of S corporation shareholder’s excess taxable income and excess business interest income. Similar to Schedule A, this Schedule must be completed before completing Part I by any taxpayer that is required to complete Part I and is a shareholder in an S corporation that has excess taxable income or excess business interest income.
The Schedule requires the name of the S corporation, its EIN, its current year excess taxable income, and its current year excess business income. (Form 8990, Lines 45-46)
Worksheets in the Instructions. The draft instructions to Form 8990 provide two worksheets used by a partnership subject to the Code Sec. 163(j) limitation to allocate its deductible business interest expense and Code Sec. 163(j)excess items among its partners.
References: For the post-2017 business interest deduction limitation, see FTC 2d/FIN ¶K-5430 et seq.; United States Tax Reporter ¶1634.061.
