On July 28, the U.S. Department of the Treasury and the IRS released an unofficial version of the long-awaited final regulations regarding the limitation on the deduction of business interest expense under IRC Section 163(j) as amended by the Tax Cuts and Jobs Act of 2017 and the Coronavirus Aid, Relief, and Economic Security Act. On Sept. 3, Treasury and the IRS officially filed the regulations with the Federal Register for publication on Sept. 14, 2020. Among other things, the updated regulations clarify the effective date provisions. The regulations filed on Sept. 3 make significant changes in the IRC Section 163(j) proposed regulations that were published in 2018, including taxpayer-favorable changes such as reversing the rule that prevented cost of goods sold from increasing adjusted taxable income (ATI).
Effective date clarified for Section 163(j) regulations
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The final regulations generally are effective for tax years beginning on or after Nov. 13, 2020. However, under the clarified effective date provisions, taxpayers have the following options to determine which regulations to apply to tax years beginning after Dec. 31, 2017, and before the general effective date:
- Adopt the final regulations for all tax years after Dec. 31, 2017, amending returns (or filing an administrative adjustment request (AAR) in the case of a partnership subject to the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015) for years for which returns already have been filed.
- Adopt the final regulations for some but not all tax years beginning after Dec. 31, 2017, amending returns (or filing an AAR) for years for which returns already have been filed.
- Continue to use the 2018 proposed regulations for tax years beginning after Dec. 31, 2017, and before Nov. 13, 2020.
- Continue to use the 2018 proposed regulations for tax years beginning after Dec. 31, 2017, and before Nov. 13, 2020, but with early adoption of the change in the final regulations that allows cost of goods sold depreciation to increase ATI.
The effective date provisions in the unofficial version of the regulations left the impression that taxpayers could not apply the taxpayer-favorable rules in the final regulations to years prior to the final regulations’ effective date unless the taxpayer consistently applied the final regulations to all tax years beginning after Dec. 31, 2017. This requirement would have required taxpayers to amend both 2018 and, if already filed, 2019 returns to adopt the final regulations or the ATI depreciation change. The revised preamble eliminates this uncertainty, clarifying that taxpayers can use any of the options listed earlier.
Taxpayers should work with their tax adviser to determine whether to apply the final regulations to any particular tax year beginning after Dec. 31, 2017; whether to file an amended return (or an AAR) for a return that already has been filed; or whether to continue to use the 2018 proposed regulations.
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