IRS issues guidance on new business interest limitation, little for CRE

The IRS has issued Notice 2018-28, which provides guidance on the new business interest expense limitation under Section 163(j).

The Tax Cuts and Jobs Act limited the amount of businesses interest expense a taxpayer may claim to 30 percent of the adjusted taxable income.  The law provides critical exemptions for an “electing real property trade or business” and for small business with less than $25 million of gross receipts.

The 163(j) notice largely focuses on corporate interest issues and leaves unanswered key questions for commercial real estate, such as whether debt at an upper-tier entity can be attributed to the real estate business of a lower-tier entity for purposes of the real estate exception. 

Highlights of Notice 2018-28 – Section 163(j):

• Old suspended § 163(j) interest carries forward.  Future regulations are expected to clarify that pre-2018 carryover disqualified interest will continue to be treated as interest expense in 2018 but then will be subject to the new § 163(j) limitations “in the same manner as any other business interest otherwise paid or accrued in a taxable year beginning after December 31, 2017.”
• Application of § 163(j) to consolidated groups.  The Treasury Department and the IRS intend to issue regulations clarifying that the limitation in section 163(j)(1) on the amount allowed as a deduction for business interest applies at the level of the consolidated group (as defined in § 1.1502-1(h)).  Regulations also will address other issues concerning the application of section 163(j) to consolidated groups, including: the allocation of the section 163(j)(1) limitation among group members; the treatment of disallowed interest deduction carryforwards when a member leaves the group; and the treatment of disallowed interest deduction carryforwards of a member that joins the group (among others).
• The original 1991 § 163(j) proposed regulations will be withdrawn.
• Effect on E&P.  The Treasury Department and the IRS intend to issue regulations clarifying that the disallowance and carryforward of a deduction for a C corporation’s business interest expense will not affect whether or when such business interest expense reduces earnings and profits of the payor C corporation.