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

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.

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

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

Learning Objectives

After completing this course, you will be able to:

• Recognize the change in business interest deductibility under Section 163(j)
• Understand the impact of Section 163(j) on partnerships and CFCs
• Determine how to calculate ATI for purposes of arriving at 30 percent deduction limitation
• Identify the exemptions, exceptions, and elections out of the 30 percent interest deductibility treatment
• Discern the special rules on 163(j) interest deductibility applicable to partnerships

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules, supervising other preparers/accountants. Specific knowledge and understanding of partnership and corporate structure, agreements and liquidation, including capital accounts, debt allocation and distributions; familiarity rules governing transactions between a partnership and its partner(s); familiarity with deferred foreign-source income, earnings and profits, controlled foreign corporations, specified foreign corporations, and repatriation of deferred foreign earnings.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).