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Practical considerations from the 2021 final Section 163(j) regulations
January 2021
Overview
Treasury and the IRS, on January 5, released final regulations on the Section 163(j) interest expense limitation rules. The regulations finalize, with certain key changes and reservations, proposed regulations published in the Federal Register on September 14, 2020. Section 163(j), which was modified by the 2017 tax reform legislation and the CARES Act, generally limits US business interest expense deductions to the sum of business interest income, 30% (or 50%, as applicable) of adjusted taxable income, and the taxpayer’s floor plan financing interest for the tax year.
The takeaway
The 2021 final regulations closely follow the 2020 proposed regulations, and provide additional guidance related to the mechanics of determining the interest expense limitation. The regulations also clarify the application of Section 163(j) to consolidated groups, partnerships, and US shareholders of CFCs. The 2021 final regulations, however, reserve on a number of issues, such as foreign persons with ECI and increases to a US shareholder’s ATI by certain specified deemed inclusions, among others. Taxpayers should review and assess the impact of the 2021 final regulations and consider commenting on issues that Treasury should address before issuing additional 163(j) guidance.
See also:
- Tax Insight: First guidance under amended interest expense limitation clarifies high-profile issues (April 5, 2018)
- Tax Insight: Preliminary highlights of the proposed regulations under Section 163(j) (November 27, 2018)
- Tax Insight: Treasury issues proposed rules under Section 163(j) (December 7, 2018)
- Tax Insight: CARES Act permits NOL carrybacks, increases interest deduction limitation (April 6, 2020)
- Tax Insight: Preliminary highlights from the final and proposed Section 163(j) regulations (July 31, 2020)
- Tax Insight: Practical considerations from the final and proposed Section 163(j) regulations (August 10, 2020)
- Tax Insight: Preliminary highlights from the 2021 final Section 163(j) regulations (January 11, 2021)
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