IRS Notice 2018-28: Section 163(j)
The IRS issued Notice 2018-28 (the “Notice”) stating that the IRS will issue regulations providing additional guidance related to the amended section 163(j). Before the issuance of the regulations, taxpayer may rely on the rules described in the Notice.
The amended 163(j) disallows a deduction for net business interest expense of any taxpayer in excess of 30% of a business’s adjusted taxable income. There is an exception to this limitation that applies to taxpayers with average annual gross receipts for the three taxable year period ending with the prior tax year that do not exceed $25 million. In applying the rule in practice, there were many areas requiring additional clarifications and guidance, and the following are some of the issues addressed in the Notice:
Section 5 of the Notice clarifies that the limitation under section 163(j) is intended to be applied at the level of the consolidated group. In other words, a consolidated group’s taxable income for purposes of calculation adjusted taxable income will be its consolidated taxable income, and intercompany obligations will be disregarded for purposes of determining the limitation in section 163(j)(1).
Section 6 of the Notice clarifies that the limitation under section 163(j) will not affect whether or when such business interest expense reduces earnings and profits of the payor C corporation.
Section 3 of the Notice clarifies that taxpayers with disqualified interest disallowed under prior section 163(j)(1)(A) for the last taxable 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.
Please click on the link below to view the Notice 2018-28.