IRS Provides Initial Guidance for Computing the Business Interest Expense Limitations 
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May 7, 2018

The U.S. Department of Treasury and IRS issued guidance for computing the business interest expense limitation under the Tax Cuts and Jobs Act (TCJA) on April 2, 2018, in Notice 2018-28 . In general, newly amended section 163(j) of the Internal Revenue Code imposes a limitation on deductions for business interest incurred by certain large businesses. For most large businesses, business interest expense is limited to any business interest income plus 30 percent of the business’ adjusted taxable income.

The deduction for business interest under TCJA is limited to the sum of:
  1. Business interest income
  2. 30% of the taxpayer’s adjusted taxable income for the tax year; and 
  3. The taxpayer’s floor plan financing interest for the tax year. 

For S corporations, partnerships and limited liability corporations that are treated as partnerships for tax purposes, this limit is applied at the entity level rather than at the owner level. Any disallowed business interest deduction can be carried forward indefinitely (with certain restrictions for partnerships).

The new limitation is generally effective for tax years beginning after December 31, 2017. It applies to all taxpayers, with the exception of taxpayers whose gross receipts don’t exceed $25 million and certain trades or businesses, such as:
  • A trade or business performing services as an employee
  • Electing real property trade or business, such as real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business
  • An electing farm business
  • Electrical energy, water or sewer disposal service
  • Gas or steam through a local distribution system
  • Transportation of gas or steam by pipeline

Notice 2018-28[3] states that the Treasury and the IRS intend to issue proposed regulations under Section 163(j) and that taxpayers may rely on the rules provided within the Notice until such regulations are issued. The Notice provides clarification with respect to consolidated groups. The limitation on the amount allowed as a deduction for business interest expense applies at the level of a consolidated group and the group’s taxable income for purposes of calculating the limitation will be its consolidated taxable income. In addition, the Notice states that intercompany obligations will be disregarded when calculating the limitation.

According to the Notice, proposed regulations will be issued as follows:

  • Taxpayers with disallowed disqualified interest from the last tax year beginning before January 1, 2018, may carry such interest forward as business interest to the taxpayer’s first taxable year beginning after December 31, 2017. Disqualified interest included interest paid to or, in certain circumstances, guaranteed by related parties. Deductions for such interest expense were disallowed, but could be carried forward, under prior law to the extent the interest expense exceeded 50% of the taxpayer’s adjusted taxable income. Interest carried forward under the new rules will be subject to the limitations under the amended Section 163(j).
  • For purposes of Section 163(j), all interest paid or accrued by a C corporation on indebtedness of such C corporation is business interest and all interest on indebtedness held by the C corporation that is includible in gross income is business interest income.
  • The disallowance and carryforward of a C corporation’s business interest expense under Section 163(j) will not affect whether or when such business interest expense reduces the C corporation’s earnings and profits.
  • For purposes of calculating a partner’s (or S corporation shareholder’s) annual business interest expense deduction under Section 163(j), a partner cannot include the partner’s share of the partnership’s business interest income except to the extent of the partner’s share of the excess of the partnership’s business interest income over the partnership’s business interest expense. This rule is intended to prevent double counting of business interest income that was already applied in determining the partnership’s own business interest expense deduction.

Feel free to call any member of our team at 610-828-1900 with questions. You can also contact either Jackie Himes, CPA, tax manager, at or myself . We are always happy to help. 
Martin C. McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company, PC

Disclaimer This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).