On Nov. 26, 2018, the IRS issued proposed regulations under the Internal Revenue Code (IRC) § 163(j) enacted by the Tax Cuts and Jobs Act of 2017 (the Proposed Regulations). Generally, IRC § 163(j) limits certain taxpayers’ business interest expense deduction to the sum of (i) the taxpayer’s current year business interest income, (ii) 30 percent of the taxpayer’s adjusted taxable income (ATI) from a trade or business, and (iii) certain floor plan financing interest expense. Any disallowed business interest expense (i.e., excess business interest expense) can be carried forward indefinitely and treated as business interest expense in future years. Taxpayers with average annual gross receipts of 25 million or less, tested for the three taxable years immediately preceding the current taxable year, are not subject to the above limitations. In addition, certain activities (referred to as “excepted trades or businesses”) are excluded from the definition of a trade or business for purposes of IRC § 163(j). Such activities include (i) the trade or business of providing services as an employee; (ii) certain electing real property businesses; (iii) certain farming businesses; and (iv) certain regulated utility businesses.1
The Proposed Regulations are 439 pages long and are divided into eleven sections. Below is a high-level summary of key provisions of the proposed regulations.
1 IRC § 163(j)(7).