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section 163(j) expense”). See
Regulations section 1.163(j)-6(h) for basis
adjustment calculations and ordering rules
for losses under section 704(d).
Excess business interest expense in
tiered partnerships. See 2020
Proposed Regulations section 1.163(j)-6(j)
for treatment of excess business interest
expense in tiered partnerships.
S corporation. The section 163(j)
limitation is applied at the S corporation
level. Disallowed business interest
expense is carried over by the S
corporation and is treated as business
interest expense paid or accrued in the
following year.
For a shareholder subject to the section
163(j) limitation, the shareholder’s current
year section 163(j) limitation computation
will include the following amounts from
each of its S corporations:
•
Current year excess taxable income,
and
•
Current year excess business interest
income.
These amounts will not include items
from an excepted trade or business.
Ownership of pass-through entities
not subject to the section 163(j) limita-
tion. If you are subject to the section
163(j) limitation and are an owner of a
pass-through entity that is not subject to
the section 163(j) limitation, your share of
the pass-through business interest
expense is not subject to the section
163(j) limitation, and your share of
non-excepted trade or business items of
income, gain, loss, and deduction
(including business interest expense and
business interest income) of such
pass-through entity, if net positive, is
included on line 13. You must request the
pass-through entity to separately state, in
sufficient detail, the items necessary to
include on line 13.
In the event a partnership allocates
excess business interest expense to one
or more of its partners, and in a later tax
year the partnership is an exempt entity,
the excess business interest expense
from the prior year is treated as business
interest expense paid or accrued by the
partner in the later year. See Regulations
section 1.163(j)-6(m)(3).
C corporation business interest ex-
pense and income. Solely for section
163(j), all interest paid or accrued (or
treated as paid or accrued) by a C
corporation is business interest expense,
and all interest includible in gross income
by a C corporation is business interest
income, except to the extent such interest
expense or interest income is allocable to
an excepted trade or business.
Any investment interest expense,
investment interest income, or investment
expenses that a partnership pays,
receives, or accrues and allocates to a C
corporation partner as a separately stated
item is treated by the C corporation as
properly allocable to a trade or business of
that partner. Similarly, for purposes of
section 163(j), any other tax items of a
partnership that are neither properly
allocable to a trade or business of the
partnership nor described in section
163(d) and that are allocated to a C
corporation partner as separately stated
items, are treated as properly allocable to
a trade or business of that partner. See
Regulations section 1.163(j)-4(b)(3)(i).
Current year business interest expense
is deducted before disallowed business
interest expense carryforwards, which are
then deducted in the order of the year in
which they were incurred, starting with the
earliest year, subject to certain limitations.
Consolidated group. A consolidated
group has a single section 163(j)
limitation. A consolidated group files one
Form 8990. For members entering or
leaving the group, see Regulations section
1.163(j)-5 for applicable limitations.
Intercompany obligations. All
intercompany obligations, as defined in
Regulations section 1.1502-13(g)(2)(ii),
are disregarded for purposes of
determining a member’s business interest
expense and business interest income
and in figuring the consolidated group’s
ATI.
Tax-exempt corporations with unrela-
ted business income (UBI). The rule for
C corporation interest expense and
income applies to a corporation that is
subject to the unrelated business income
tax under section 511 only with respect to
that corporation’s items of income, gain,
deduction, or loss that are taken into
account in computing the corporation’s
unrelated business taxable income, as
defined in section 512.
Regulated investment companies
(RICs) and real estate investment
trusts (REITs). For special rules for
determining ATI for RICs and REITs, see
Regulations section 1.163(j)-4(b)(4). For a
safe harbor for REITs (and partnerships
controlled by one or more REITs) making
an election to be an electing real property
trade or business, see Regulations section
1.163(j)-9(h).
Trading partnerships. A trading
partnership is a partnership engaged in a
trade or business activity of trading
personal property (including marketable
securities) for the account of owners of
interests in the activity, as described in
Temporary Regulations section
1.469-1T(e)(6). A trading partnership is
required to bifurcate its interest expense
from a trading activity between partners
that materially participate in the trading
activity and partners that do not materially
participate. Only the portion of the interest
expense that is allocable to the materially
participating partners is subject to
limitation under section 163(j) at the
partnership level. In addition, the trading
partnership is required to bifurcate all of its
other items of income, gain, loss, and
deduction from its trading activity allocable
to the partners that do not materially
participate. Such items are not taken into
account at the partnership level as items
from a trade or business for section 163(j),
but instead are treated as items from an
investment activity of the partnership.
Foreign persons with effectively con-
nected income (ECI). A nonresident
alien individual or foreign corporation that
is not a relevant foreign corporation and
that has ECI is also subject to the section
163(j) limitation. As foreign persons are
only taxed on their ECI, ATI, business
interest expense, business interest
income, and floor plan financing interest
expense are modified to limit such
amounts to income which is ECI and
expenses properly allocable to ECI. A
relevant foreign corporation means any
foreign corporation whose classification is
relevant under Regulations section
301.7701-3(d)(1) for a tax year, other than
solely pursuant to sections 881 or 882.
Before applying section 163(j), a
foreign corporation that has ECI must first
determine its business interest expense
allocable to ECI under Regulations section
1.882-5. Business interest expense
allocable to ECI is reported on Schedule I
(Form 1120-F). Disallowed business
interest expense carryforward, as
determined under section 163(j), that was
allocable to ECI in a prior year but
deductible in the current tax year and any
current year ECI business interest
expense that becomes disallowed
business interest expense carryforward,
after applying section 163(j), are also
included on Schedule I (Form 1120-F).
Relevant foreign corporations. Section
163(j) generally applies to determine the
deductibility of a relevant foreign
corporation’s business interest expense
for purposes of computing its taxable
income (determined under Regulations
section 1.952-2 or the rules of section
882) in the same manner as it applies to
determine the deductibility of a domestic C
corporation’s business interest expense
for purposes of computing its taxable
income. An applicable CFC means a
foreign corporation described in section
957, but only if the foreign corporation has
at least one U.S. shareholder that owns
(within the meaning of section 958(a))
stock of the foreign corporation.
CFC group election. In order to make a
CFC group election under Regulations
section 1.163(j)-7(e), each designated
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