Newly Proposed and Final Interest Deduction Limit Regulations Coming Soon

| 2/20/2020
Newly Proposed and Final Interest Deduction Limit Regulations Coming Soon

IRC Section 163(j), enacted by the Tax Cuts and Jobs Act of 2017 (TCJA), generally limits business interest expense deductions to 30% of adjusted taxable income effective for tax years beginning on or after Jan. 1, 2018. Proposed regulations were published on Dec. 28, 2018. 

The proposed regulations contain many controversial positions, including the treatment of debt issuance costs as interest expense and the inability to include cost of goods sold depreciation in adjusted taxable income. The proposed regulations do not contain guidance on key issues such as the application of the interest expense limitation to tiered partnerships.

Now, as most taxpayers are getting ready to file their 2019 federal income tax returns, the U.S. Department of the Treasury is finalizing the 2018 proposed regulations. The Office of Management and Budget (OMB) concluded its review of these regulations on Jan. 31, 2020. In addition, on Feb. 7, 2020, Treasury submitted a new package of proposed IRC Section 163(j) regulations to the OMB for review. 

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Under a recent agreement between Treasury and the OMB, the OMB generally will complete in 45 days its review of regulations implementing provisions enacted by the TCJA. Government officials have stated that the two regulations – the final and the proposed regulations – will be released to the public at the same time, so the later submission date of the proposed regulations is likely a better marker for predicting when both sets of regulations will be published. As recent experience demonstrates, in some cases OMB review will exceed 45 days, as was the case with the IRC Section 451(b) and IRC Section 451(c) regulations on revenue recognition. 

In any event, with the upcoming March 16, 2020, filing deadline for calendar year partnerships and S-corporation returns (March 15 is a Sunday) and the April 15, 2020, filing deadline for C-corporation returns, publication of new IRC Section 163(j) regulations during the next couple of months is sure to add complexity to the 2020 filing season. While delayed effective dates could mitigate some of this complexity, based on what has happened with other TCJA regulations, it is possible that the new IRC Section 163(j) regulations will provide taxpayers with the opportunity to choose to apply beneficial provisions to the 2019 tax year. Given this possibility, even if taxpayers are planning to extend their filing due date, they should contact their tax advisers now to prepare for what is shaping up to be a busy filing season.

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Andrew Eisinger
Howard Wagner - social
Howard Wagner
Partner, Washington National Tax