The IRS has proposed regulations on the limitation on the business interest expense deduction as amended by the Tax Cuts and Jobs Act (TCJA). The IRS also has issued a safe harbor that allows taxpayers to treat certain infrastructure trades or businesses as real property trades or businesses solely for purposes of qualifying as an electing real property trade or business.
Business Interest Limitation
For tax years beginning after 2017, the deduction of interest paid or incurred on debt properly allocable to a trade or business is limited to the sum of:
- 30 percent of the taxpayer’s adjusted taxable income (but not less than zero);
- the taxpayer’s business interest income (not including investment income); and
- the taxpayer’s floor plan financing interest.
The proposed regulations provide general rules and definitions related to the limitation, as well as rules for calculating the limitation in consolidated group, partnership, and international contexts. The regulations affect taxpayers that have deductible business interest expense, other than certain small businesses, electing real property trades or businesses, electing farming businesses, and certain utility businesses. The IRS is also withdrawing a prior notice of proposed rulemaking on the disallowance of a deduction for certain interest paid or accrued by a corporation.
The proposed regulations will generally be effective for tax years ending after the date the Treasury Decision adopting them as final is published in the Federal Register. However, taxpayers can apply certain provisions to tax years beginning after December 31, 2017, so long as the rules are consistently applied.
A safe harbor is provided allowing taxpayers to treat certain infrastructure trades or businesses as electing real property trades or businesses not subject to the business interest deduction limit. These include trades or businesses that are conducted in connection with the designing, building, managing, operating, or maintaining of certain core infrastructure projects for purposes of private activity bond financing proposals. If a taxpayer makes this election, the taxpayer must use the alternative depreciation system (ADS) to depreciate property. Taxpayers may apply the safe harbor to tax years beginning after December 31, 2017.
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