The US IRS on July 28 released final and proposed regulations that implement limits to the tax deduction for interest expense enacted in the 2017 Tax Cuts and Jobs Act and the 2020 Coronavirus Aid, Relief, and Economic Security Act.
Beginning in 2018, businesses with gross receipts over USD 26 million must limit interest expense deductions to the taxpayer’s business interest income plus 30 percent (or in some cases 50 percent) of the taxpayer’s adjusted taxable income, plus the taxpayer’s floor plan financing interest expense.
The final regulations provide guidance on how to calculate the new interest deduction limitation; describe what constitutes interest for purposes of the limitation; address which taxpayers and trades or businesses are subject to the new interest deduction limitation; and describe and how the limitation applies to consolidated groups, partnerships, and in international and other contexts.
The proposed regulations include rules that characterize interest expense associated with debt proceeds of partnerships and S corporations, address special rules for dividends paid by RICs, and cover interest deduction limits on US shareholders of controlled foreign corporations and on foreign persons with effectively connected income.
The two releases were accompanied by Notice 2020-59 (PDF), applicable to businesses that manage or operate a qualified residential living facility and FAQs regarding aggregation rules under section 448(c)(2) that apply to the Section 163(j) small business exemption.
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