Interest Deduction Limitations Under Section 163(j): IRS Final Regs, State Tax Issues, Partnerships, CFC

Rules for Computing ATI, Determining Deduction Cap, Special Carryover and Transition Rules, Elections and Exemptions

Recording of a 90-minute premium CLE/CPE video webinar with Q&A

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Conducted on Tuesday, October 26, 2021

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Course Materials

This CLE/CPE course will address recent final IRS regulations on interest deduction limitations under Section 163(j). The panel will discuss the impact of the regulations on partnerships and CFCs, rules for computing ATI and determining the deduction cap, special carryover and transition rules, and elections and exemptions, as well as offer methods to ensure tax savings.

Description

The 2017 tax reform law amended Section 163(j). Before, old Section 163(j) limited the deductibility of interest paid or accrued by a corporate taxpayer to a related person if that interest was exempt (in whole or in part) from U.S. tax. After tax reform, new Section 163(j) limits the deductibility of interest in many additional situations.

Section 163(j) limitations on business interest deductibility create significant tax consequences for many partnerships. This broad business interest limitation rule applies to all taxpayers, with limited exceptions, reducing a taxpayer's ability to deduct interest expenses. Effective as of Nov. 13, 2020, the IRS final regulations provide some modifications to Section 163(j). Tax advisers to partnerships need a clear understanding of the impact of these rules limiting deductibility and regulations to avoid unanticipated tax costs.

Under Section 163(j), a taxpayer cannot deduct business interest expense for a taxable year to the extent that the interest expense exceeds the sum of:

  • The taxpayer's business interest income for the taxable year;
  • 30 percent of the taxpayer's ATI for the taxable year, or zero if the taxpayer's ATI for the taxable year is less than zero; and,
  • The taxpayer's floor plan financing interest expense for the taxable year (this relates mostly to car and boat dealers).

After 2021, the ATI calculation will include depreciation and amortization, making taxpayers more likely to be subject to the limitation.

The deduction limitations will likely hit many partnerships particularly hard, especially those holding leveraged real estate. The law contains exceptions for defined small businesses, as well as elections for certain real estate partnerships. Advisers must also consider the rules' impact on CFCs and their shareholders.

Listen as our experienced panel provides a thorough and practical guide to the new Section 163(j) business interest deduction limitations for partnerships, CFCs, and their shareholders.

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Outline

  1. Federal Treatment
    1. Contrasting Section 163(j) treatment of business interest with prior statute treatment
    2. The impact of Section 163(j) on partnerships and CFCs
    3. Calculating ATI to arrive at 30 percent deduction limitation
    4. Small business exception
    5. Aggregation rules
    6. The opt-out election for specific real estate partnerships
    7. Partnership carryover special rules
  2. State Tax Issues
    1. State conformity updates
    2. Comparison of state approaches
    3. Partnership and partner tracking of state adjustments

Benefits

The panel will review these and other relevant topics:

  • The impact of Section 163(j) on partnerships and CFCs
  • Critical provisions of the final regulations
  • Specific exceptions to the application of Section 163(j)
  • How to calculate ATI for purposes of determining deduction limitations
  • Elections for real property trades or businesses
  • Special carryforward rules on excess partnership interest expense

Faculty

Mandarino, Joseph
Joseph C. Mandarino

Partner
Smith Gambrell & Russell

Mr. Mandarino's practice focuses on corporate, tax and finance law. He is involved with a wide variety of...  |  Read More

Wilhelmson, Bradley
Bradley R. Wilhelmson

Senior Manager, Tax
KPMG

Mr. Wilhelmson practices in the firm’s State and Local Tax (SALT) practice and serves as a dedicated resource for...  |  Read More

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