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IRC 163(j) Business Interest Deduction Limitation Rules and How to Avoid Them

Investment Assets, Small Businesses, and Real Property

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Thursday, January 11, 2024

Recorded event now available

or call 1-800-926-7926

This course will guide partnership tax advisers and compliance professionals in navigating the Section 163(j) Business Interest Deduction Limitation rules as they apply to individuals, partnerships, and other pass-through entities. The panel will discuss the interest expenses subject to limitation and its various exceptions and the final regulations issued January 2021.

Description

Section 163(j) limitations on business interest deductibility create serious tax consequences for many U.S. businesses. Unlike the prior version of Section 163(j), which generally applied only to corporations that owed money to foreign related parties, Section 163(j) now applies to all taxpayers, individuals, and partnerships and all interest expense paid to both related and unrelated parties. Interest is defined very broadly for this purpose.

Entities that could deduct all or most of their business interest expense before will suddenly face caps on the financing costs they may deduct, up to 30 percent of its adjusted taxable income (ATI), which is similar to EBITDA through 2021 and to EBIT after that. The provision also has some implementation and compliance costs, including an 11-step computation process for impacted partnerships.

Due to the increased substantive and procedural tax costs of new Section 163(j), taxpayers may consider using the various exceptions to the limitations, which do not apply to investment interest (including on investment real estate), certain small businesses, and real property trades or businesses.

The interest deduction limitations do not apply to small businesses with less than $25 million of gross receipts unless the small business is a tax shelter. A tax shelter is loosely defined for this purpose and may include any LLC with more than 35 percent of its losses allocated to non-managing members. There are also complex aggregation rules with related and unrelated entities in determining the taxpayer's gross receipts. For brother-sister partnerships, is the aggregation threshold for common ownership 50 percent or 80 percent? Yes.

Certain real estate businesses can elect out of the limitations at a cost of less depreciation for some real property. The availability and effects of such elections are subject to some debate, including the interaction between partnership-level and partner-level elections.

Listen as our experienced panel provides a thorough and practical guide to Section 163(j) business interest deduction limitations and how to avoid applying them.

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Outline

  1. Overview of Section 163(j) treatment of business interest
  2. Definitions of ATI and business interest
  3. Exemption for investment interest
    1. Trading partnerships
    2. Real estate investments
  4. Exemption for small business
    1. Aggregation rules
    2. Tax shelters
  5. Election for real property trade or business
  6. 11-step process for partnership allocation of Section 163(j) items
  7. Recent regulations

Benefits

The panel will discuss these and other relevant topics:

  • Anticipated regulations
  • How ATI changed after 2021
  • Impact of the real property trade or business election on depreciation for old and new properties
  • Carryover rules, including for small businesses and electing real property trades or businesses

Faculty

Busch, Amber
Amber Busch, CPA, MST
CPA, MST, Shareholder
Clark Nuber

Ms. Busch is a shareholder in the firm’s Tax Services Group, she uses her extensive experience to manage and...  |  Read More

Gheorghita, Andreea
Andreea Gheorghita, CPA
Tax Manager
Clark Nuber

Ms. Gheorghita a is a manager in the firm’s Tax Services Group. She enjoys working with a variety of clients,...  |  Read More

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