On July 28, 2020 the US Department of the Treasury and the IRS issued final and new proposed regulations for computing the business interest deduction limitation. These proposed regulations substantially revise a previous set of proposed regulations issued in 2018, including the interest capitalization rules for controlled foreign corporations (CFCs).
Taxpayers subject to the interest expense limitation should consider how the changes in these regulations could alter their chosen tax positions related to other areas of the Internal Revenue Code. An overview of key changes in the proposed regulations, as well as considerations for businesses, follows.
The proposed regulations accomplish the following:
The interest-expense limitation could result in a significant increase in taxable income when compared to financial net income. Taxpayers that lost money in previous years could potentially pay additional tax simply due to excess interest expenses paid on loans.
Taxpayers can benefit from modeling the modifications made by these regulations—especially with respect to CFCs—and evaluating whether elections such as the CFC group election or GILTI high tax exclusion could result in a lower tax burden.
These are the key changes within the proposed regulations that specifically impact a taxpayer’s CFC group election:
The proposed regulations make the following modifications to the method of calculating a US shareholder’s ATI:
The proposed regulations apply to tax years beginning on or after 60 days after the date the regulations are published as final. They may also be retroactively applied for tax years beginning after December 31, 2017, as long as a taxpayer applies both the 2020 final regulations and Proposed Regulation Section 1.163(j)-8.
The 2018 proposed regulations may still be applied for tax years beginning after December 31, 2017.
Although the 2020 proposed regulations may be applied retroactively, the new CFC group election and annual safe-harbor election must be made no later than the original due date of the return, including extensions.
Clarification is still needed on how to make these elections for tax years in which a US shareholder’s tax-return due date has already passed.
For help navigating the proposed regulations, contact your Moss Adams professional.