Notice 2018-28, 2018-16 IRB 1, announces that the Treasury Department and the IRS intend to issue proposed regulations providing guidance to assist taxpayers in complying with Section 163(j), which was amended by the Tax Cut and Jobs Act (TCJA) to provide new rules limiting the deduction of business interest expense for taxable years beginning after Dec. 31, 2017. For any taxpayer to which Section 163(j) applies, Section 163(j)(1) now limits the annual deduction for business interest expense to the sum of (1) the taxpayer’s business interest income (as defined in Section 163(j)(6)) for the taxable year; (2) 30 percent of the taxpayer’s adjusted taxable income (as defined in Section 163(j)(8)) for the taxable year; and (3) the taxpayer’s floor plan financing interest (as defined in Section 163(j)(9)) for the taxable year.
The Treasury Department and the IRS intend to issue regulations clarifying that taxpayers with disqualified interest disallowed under prior Section 163(j)(1)(A) for the last taxable year beginning before Jan. 1, 2018, may carry such interest forward as business interest to the taxpayer’s first taxable year beginning after Dec. 31, 2017. The regulations will also clarify that business interest carried forward will be subject to potential disallowance.
The regulations are expected to clarify that, solely for purposes of Section 163(j), in the case of a taxpayer that is a C corporation, (1) all interest paid or accrued by the C corporation on indebtedness of such C corporation will be business interest within the meaning of Section 163(j)(5), (2) all interest on indebtedness held by the C corporation that is includable in the gross income of such C corporation will be business interest income within the meaning of Section 163(j)(6), and (3) the disallowance and carryforward of a deduction for a C corporation’s business interest expense under Section 163(j) will not affect whether or when such business interest expense reduces earnings and profits of the payor C corporation. The regulations will also clarify that the limitation in Section 163(j)(1) on the amount allowed as a deduction for business interest applies at the level of the consolidated group (as defined in Treasury Regulation Section 1.1502-1(h)). The regulations will also address business interest income and floor plan financing of partnerships, partners, S corporations and S corporation shareholders.