IRS issues proposed regulations for new limit on interest deduction

Tax Hot Topics newsletterThe IRS has issued highly anticipated proposed regulations (REG-106089-18) on the new Section 163(j) limitation to the deduction of business interest expense and related issues. The regulations expand on guidance provided last April in Notice 2018-28, offering general clarifications and those specific to particular entities and industries.

Section 163(j) was substantially amended by the Tax Cuts and Jobs Act (TCJA) to limit the deduction of business interest for tax years beginning after Dec. 31, 2017, to the sum of a taxpayer’s business interest income, floor-plan financing interest, and 30% of its adjusted taxable income for a given taxable year. The proposed regulations provide significant guidance regarding the scope, key definitions, and operating rules for Section 163(j). They also provide special rules for C corporations, consolidated groups, partnerships, S corporations, real estate investment trusts, regulated investment companies, tax-exempt corporations, controlled foreign corporations and foreign persons.

The proposed regulations are not effective until final, but taxpayers may be able to glean where the IRS is headed on a number of issues. Some questions remain unanswered and may require further guidance. The IRS is expecting extensive public comment and a hearing is scheduled on Feb. 25, 2019, but there is no guarantee significant changes will be adopted. Taxpayers should thus carefully assess how the proposed regulations impact their specific tax circumstances.

For more details, see our Tax Flash.

Grace Kim
Washington National Tax Office
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Joshua Brady
Washington National Tax Office
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Jeff Borghino
Washington National Tax Office
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Greg Fairbanks
Managing Director
Washington National Tax Office
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Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

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