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Sunday, April 08, 2018

IRS Guidance Issued on New Interest Stripping Rules

The Tax Cuts and Jobs Act substantially modified the interest stripping rules of Code §163(j). In a recent IRS notice, the IRS provided guidance on some of the provisions of the revised limitation and what new regulations will say. Here are some highlights:

a. The old provision allowed for the carryforward of disallowed interest expense to future years. The notice advises that any disallowed interest expense for the last tax year beginning before 1/1/2018 can be carried over (to be subject to the new provisions in the next year). Such a carryforward does not apply to an “excess limitation carryforward” from such prior year. A similar provision applies to such a carryover in regard to the Code §59A base erosion minimum tax.

b. The new rules allow interest to be deducted to the extent of the taxpayer’s business interest income, plus 30% of adjusted taxable income, plus floor plan financing interest. The notice indicates that any interest paid or accrued by a C corporation on its indebtedness will be business interest income for these purposes. This is based on the premise, noted in the legislative history, that a corporation does not earn investment interest or investment income. This treatment will not apply to S corporations, however. The regulations will also address C corporations that are partners in partnerships paying interest.

c. The notice provides that the new provision applies at the level of a consolidated group, and also that regulations when issued will address other consolidated group issues.

d. The notice provides that the IRS will be issuing regulations to the effect that a disallowance and carryforward of an interest expense deduction under Code §164(j) will not impact the reduction in earnings and profits of a payor C corporation.

e. The notice indicates regulations will be issued regarding the application of Code §163(j) in the partnership scenario.

Notice 2018-28, 2018-16 IRB

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