IRS Issues Proposed Reliance Regs for New Business Interest Deduction Limitation

November 26, 2018

On November 26, 2018, IRS released 439 pages of proposed regulations, REG-106089-18, to apply the IRS § 163(j) business interest deduction limitation enacted by the Tax Cuts & Jobs Act. Taxpayers may rely upon the proposed regulations until final regulations issue.

The new business interest deduction limitation, when applicable, restricts a business interest deduction to the sum of:

  1. Business interest income
  2. 30 percent of adjusted taxable income
  3. Floor plan financing interest expense

Disallowed amounts are carried forward as business interest expense in future tax years. Significantly, the new limit is not applicable to taxpayers, other than a tax shelter, with average annual gross receipts of $25 million or less, as determined under IRC § 448(a)(3). Additionally, the limit does not apply to the trade or business of providing services as an employee, electing real property businesses, electing farming businesses, and certain regulated utility businesses.

This business interest deduction limitation is applied at the partnership level, with a partner’s adjusted taxable income increased by the partner’s share of excess taxable income, but not by the partner’s distributive share of income, gain, deduction, or loss. Excess business interest expense is carried forward at the partner level, but it may be deducted only if the partnership allocates excess business interest expense to that partner. Similar rules apply to S corporations and their shareholders.

In conjunction with issuing the proposed regulations, IRS issued a new FAQ regarding the limitation.

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