The Internal Revenue Service and the Treasury Department recently issued proposed regulations addressing the limitation on deductions for business interest expense under Section 163(j) of the Internal Revenue Code. As discussed in more detail in this memorandum, the Proposed Regulations provide critical guidance regarding many of the technical provisions in Section 163(j) as well as the application of Section 163(j) to different types of entities, including partnerships, controlled foreign corporations and corporate members of a tax consolidated group.
Highlights of the Proposed Regulations include the following:
- The definition of “interest” for Section 163(j) purposes is defined broadly to include not only amounts generally treated as interest for federal income tax purposes, but also certain items of income and expense that are related to debt instruments, such as substitute interest payments under a securities loan, gains and losses from hedges of debt instruments, commitment fees and debt issuance costs.
- The Proposed Regulations include a broad anti-avoidance rule under which any deductible expense or loss “predominantly incurred in consideration of the time value of money” would also be treated as interest expense for Section 163(j) purposes.
- The determination as to whether interest expense that is incurred by a partnership is subject to Section 163(j) is made at the partnership level based on the income and expenses of the partnership. Any disallowed interest under Section 163(j) would then be allocated to the partners in the partnership.
- A controlled foreign corporation (“CFC”) would be subject to the Section 163(j) limitation for purposes of computing subpart F income, GILTI tested income or loss, and income effectively connected to a United States trade or business.