IRC 163(j) Business Interest Deduction Limitation Rules and How to Avoid Them

Section 163(j) limitations on business interest deductibility create serious tax consequences for many U.S. businesses. Unlike the prior version of Section 163(j), which generally applied only to corporations that owed money to foreign related parties, Section 163(j) now applies to all taxpayers, individuals, and partnerships and all interest expense paid to both related and unrelated parties. Interest is defined very broadly for this purpose.

Entities that could deduct all or most of their business interest expense before will suddenly face caps on the financing costs they may deduct, up to 30 percent of its adjusted taxable income (ATI), which is similar to EBITDA through 2021 and to EBIT after that. The provision also has some implementation and compliance costs, including an 11-step computation process for impacted partnerships.

Due to the increased substantive and procedural tax costs of new Section 163(j), taxpayers may consider using the various exceptions to the limitations, which do not apply to investment interest (including on investment real estate), certain small businesses, and real property trades or businesses.

The interest deduction limitations do not apply to small businesses with less than $25 million of gross receipts unless the small business is a tax shelter. A tax shelter is loosely defined for this purpose and may include any LLC with more than 35 percent of its losses allocated to non-managing members. There are also complex aggregation rules with related and unrelated entities in determining the taxpayer's gross receipts. For brother-sister partnerships, is the aggregation threshold for common ownership 50 percent or 80 percent? Yes.

Certain real estate businesses can elect out of the limitations at a cost of less depreciation for some real property. The availability and effects of such elections are subject to some debate, including the interaction between partnership-level and partner-level elections.

Listen as our experienced panel provides a thorough and practical guide to Section 163(j) business interest deduction limitations and how to avoid applying them.

1. Overview of Section 163(j) treatment of business interest
2. Definitions of ATI and business interest
3. Exemption for investment interest
   • Trading partnerships
   • Real estate investments
4. Exemption for small business
   • Aggregation rules
   • Tax shelters
5. Election for real property trade or business
6. 11-step process for partnership allocation of Section 163(j) items
7. Recent regulations

The panel will discuss these and other relevant topics:

• Final regulations and current guidelines
• Electing out for certain real estate businesses
• Impact of the real property trade or business election on depreciation for old and new properties
• Carryover rules, including for small businesses and electing real property trades or businesses

Learning Objectives

After completing this course, you will be able to:

• Distinguish the newer IRC Section 163(j) tax provisions and recent regulations from the previous IRC 163(j) rules
• Recognize the impact that the new IRC Section 163(j) provisions have on partnership and pass-through entities
• Identify the exceptions that allow a business to avoid the consequences of IRC 163(j)
• Ascertain whether a business is eligible to be exempt from IRC Section 163(j) under complex small business rules
• Decide whether a real estate business may elect to opt out of the IRC Section 163(j) limitations and whether it is advantageous to do so

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules, supervising other preparers/accountants. Specific knowledge and understanding of partnership structure, operating agreements and liquidation, including partner capital accounts, debt allocation and distributions; familiarity with the debt allocation provisions of Section 752; familiarity with the disguised sales provisions of IRC Section 707 and the rules governing transactions between a partnership and its partner(s).

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).