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IRS Revises Applicability Date of Business Interest Expense Deduction Limitation Final REGs

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The IRS has filed  Code Sec. 163(j) business interest expense deduction limitation final regs that revise a previous-released version of the regs. The filed version revises the dates for which taxpayers can apply the final regs.

Background.

The Tax Cuts and Jobs Act (TCJA, PL 115-97) provides that, for tax years beginning after December 31, 2017, the deduction allowed for business interest for any tax year can’t exceed the sum of (Code Sec. 163(j)(1)):

(1) the taxpayer’s business interest income for the tax year; (Code Sec. 163(j)(1)(A))

(2) 30% of the taxpayer’s adjusted taxable income (ATI) for the tax year; plus (Code Sec. 163(j)(1)(B))

(3) the taxpayer’s floor plan financing interest (certain interest paid by vehicle dealers, see below) for the tax year. (Code Sec. 163(j)(1)(C))

This limit is commonly referred to as the business interest expense deduction limitation.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, PL 116-136) temporarily increases the net business interest deduction limit from 30% of ATI to 50% for tax years beginning in 2019 or 2020, with special rules provided for partnerships.

In July, the IRS submitted final regs on the Code Sec. 163(j) business interest expense deduction limitation (“July final regs”). The July final regs said, in general, that if taxpayers wanted to apply the final regs to years before the final regs became effective, then they had to apply the final regs “in their entirety, to taxable years beginning after December 31, 2017…” (emphasis added) See  Final regs on business interest expense deduction limitation – Part I (07/30/2020) Final regs on business interest expense deduction limitation – Part II (07/30/2020) ; and  Final regs on business interest expense deduction limitation – Part III (07/30/2020).

The text of the July final regs notes that, “This document has been submitted to the Office of the Federal Register (OFR) for publication and is currently pending placement on public display at the OFR and publication in the Federal Register. The version of the Treasury Decision released today may vary slightly from the published document if minor editorial changes are made during the OFR review process. The document published in the Federal Register will be the official document.”

Revisions to applicability date. The IRS has issued TD 9905 now, without the above language and noting that it will be published on September 14, 2020 (“September final regs”) The September final regs have a revised applicability date.

The revised applicability date is as follows (the substantive changes are in italic):

The “general regs,” i.e., the regs covered by TD 9905, other than those under Code Sec. 382 and Code Sec. 1502, are generally applicable to taxable years beginning on or after November 13, 2020 (60 days after the regs are published on September 14, 2020). See, e.g., Reg §1.163(j)-1(c).

Taxpayers and their related parties, within the meaning of Code Sec. 267(b) and Code Sec. 707(b)(1), may apply the rules set forth in the general regs, in their entirety, to a taxable year beginning after December 31, 2017, and before November 13, 2020, so long as the taxpayers and their related parties consistently apply those rules, and, if applicable, Reg §1.263A-9Reg §1.263A-15Reg §1.381(c)(20)-1Reg §1.382-1Reg §1.382-2Reg §1.382-5Reg §1.382-6Reg §1.382-7Reg § 1.383-0Reg §1.383-1Reg §1.469-9Reg §1.469-11Reg §1.704-1Reg §1.882-5Reg §1.1362-3Reg §1.1368-1Reg §1.1377-1Reg §1.1502-13Reg §1.1502-21Reg §1.1502-36Reg §1.1502-79Reg §1.1502-90Reg §1.1502-91 through Reg §1.1502-99 (to the extent they effectuate the rules of Reg §1.382-2Reg §1.382-5Reg §1.382-6, and Reg §1.383-1), and Reg §1.1504-4, to that taxable year. See, e.g., Reg §1.163(j)-1(c).

Alternatively, taxpayers and their related parties, within the meaning of Code Sec. 267(b) and Code Sec. 707(b)(1), may rely on the proposed regs’ version of the general regs, in their entirety, for a taxable year beginning after December 31, 2017, and before November 13, 2020, so long as the taxpayers and their related parties consistently apply Prop Reg §1.163(j)-1 through Prop Reg §1.163(j)-11, and, if applicable, Prop Reg §1.263A-9Prop Reg §1.381(c)(20)-1,Prop Reg § 1.382-1Prop Reg §1.382-2Prop Reg §1.382-5Prop Reg §1.382-6Prop Reg §1.382-7Prop Reg §1.383-0Prop Reg §1.383-1Prop Reg §1.469-9Prop Reg §1.469-11Prop Reg § 1.882-5Prop Reg §1.1502-13Prop Reg §1.1502-21Prop Reg §1.1502-36Prop Reg §1.1502-79Prop Reg §1.1502-91 through Prop Reg §1.1502-99 (to the extent they effectuate the rules of Prop Reg §1.382-2Prop Reg §1.382-5Prop Reg §1.382-6, and Prop Reg §1.383-1), and Prop Reg §1.1504-4, to that taxable year. Notwithstanding the preceding sentence, taxpayers applying the provisions in the notice of proposed rulemaking may apply Reg §1.163(j)-1(b)(1)(iii) in these final regs for taxable years beginning after December 31, 2017. (Preamble to TD 9905)

With respect to Reg §1.382-2 and, if applicable, Reg §1.1502-91 through Reg §1.1502-99 (to the extent they effectuate the rules of Reg §1.382-2), and with respect to Reg §1.382-5 and, if applicable, Reg §1.1502-91 through Reg §1.1502-99 (to the extent they effectuate the rules of Reg §1.382-5), the regs apply to testing dates and ownership changes, respectively, occurring on or after November 13, 2020. See, e.g., Reg §1.382-2(b)(3).

The regs provide additional rules with respect to the regs under Code Sec. 382 and Code Sec. 1502, that are analogous to those contained in the above paragraphs that begin “Taxpayers and their related parties” and “Alternatively, taxpayers and their related parties.” Like the rules in those above paragraphs, these rules provide applicability rules for a taxable year that begins after December 31, 2017 and before November 13, 2020. (Preamble to TD 9905; also see, e.g., Reg §1.382-2(b)(3))

To continue your research on the business interest deduction limitation, see FTC 2d/FIN ¶K-5420 et seq.; United States Tax Reporter ¶1634.061.

 

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