As we have noted previously, the Tax Cuts and Jobs Act dramatically changed the limitation on the deductibility of interest expense under section 163(j) of the Internal Revenue Code. Under the revised provision, the limitation applies to all taxpayers (not just to corporations) and to business interest paid to unrelated (as well as related) parties, but not to investment interest. Amended section 163(j) reduces the percentage limitation on interest expense deductions to 30% of the borrower’s EBITDA (and further restricts it to 30% of EBIT after 2021) and introduces more restrictive rules relating to the interest expense of partnerships. Finally, the new provision permits certain real property, farming and utility businesses to avoid the limitation.
On November 26, 2018, the IRS released proposed regulations that provide more detail on how section 163(j) will be applied. The new rules are proposed to be effective for taxable years ending after the date that the final version of the proposed regulations are published in the Federal Register, although a taxpayer may generally apply the rules to taxable years beginning after December 31, 2017, provided that the parties related to the taxpayer also apply those rules.