On July 28, the Internal Revenue Service finally released its guidance on the deductibility of business interest. We expected this release in March. However, the pandemic put the IRS on hold and then Congress made changes to the law in the Coronavirus Aid, Relief and Economic Security (“CARES”) Act.
The new guidance includes: (1) the final regulations on the limitation on deduction for business interest expense under the Tax Cuts and Jobs Act; (2) detailed guidance on related amendments included in the CARES Act as well as topics not included in the original proposed regulations; and (3) the Notice 2020-59 pertaining to owners and operators of residential living facilities, which is of a narrower interest.
Specifically, the Final Regulations cover:
- Calculating the limitation;
- Defining interest for the purposes of the limitation;
- Identifying the taxpayers, trades and businesses subject to the limitation; and
- How the limitation applies in various contexts (including those involving consolidated groups, partnerships, international concerns and more).
The Proposed Regulations clarify the impact of the CARES Act on calculating business interest expense, particularly in relation to the debt proceeds of partnerships and S corporations. In addition, the proposed regulations cover, among other subjects:
- Self-charged interest for loans between a partner and a partnership;
- Tiered partnership structures; and
- How the regulations apply to United States shareholders of controlled foreign corporations and to foreign persons with effectively connected income in the United States.
Notice 2020-59 outlines the procedure for establishing a safe harbor for a residential living facility to be treated as a real property trade or business in order to qualify for the Real Property Trade or Business Election. This notice permits full deduction of interest expense without limitation.
We will be reviewing the nearly 900 pages of new guidance in detail over the next few days. Look for a Tax Alert later this week with our analysis. In the meantime, contact your Friedman advisor with any questions on how you can expect the regulations to impact you or your business.