IRS Proposes New Rules on Business Interest Expense Limit
On November 26, the Internal Revenue Service (“IRS”) issued proposed regulations providing additional clarification on the new business interest expense deduction limitation under Internal Revenue Code Section 163(j). The proposed regulations provide general rules and definitions for the deduction under Section 163(j), including new rules for calculating the limitation in the context of consolidated groups and partnerships.
The Tax Cuts and Jobs Act of 2017 (“the Act”) revised the limitation on the business interest expense deduction. Prior to tax reform, businesses were able to deduct business interest expense, subject to a few income stripping provisions that could limit the deduction for “disqualified interest.” For tax years beginning after December 31, 2017, the Act repeals the previous provisions under Section 163(j) and limits the business interest expense deduction to the sum of the business interest income, 30% of the adjusted taxable income, and the floor plan financing interest (interest expense incurred for the purpose of securing an inventory held for sale or lease) of the taxpayer for the year. Any business interest not allowed under the new limitation can be carried forward to the next tax year. This limitation does not apply to certain small businesses with average gross receipts of less than $25 million for the three prior tax years.
The proposed regulations can be relied upon by taxpayers until final regulations are published in the Federal register. The IRS has requested written or electronic commentary on these proposed regulations, and a public hearing has been scheduled for February 25, 2019. The full text of the proposed regulations is available here.