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06 November 2018 US Treasury and IRS release draft Form 8990, Limitation on Business Interest Expense Under Section 163(j) The United States (US) Treasury and the Internal Revenue Service (IRS) released a draft of Form 8990, Limitation on Business Interest Expense Under Section 163(j). Comments may be submitted on the draft form. The three-page form consists of three parts and two schedules. Part I of the draft Form 8990 must be completed by all taxpayers subject to Section 163(j) and requires taxpayers to calculate their business interest expense, adjusted taxable income, business interest income and Internal Revenue Code1 Section 163(j) limitation. If a taxpayer is a partner or shareholder of a pass-through entity subject to Section 163(j), the taxpayer must complete Schedule A or B before completing Part I. Part II is only completed by partnerships subject to Section 163(j) and requires those partnerships to calculate their excess business interest expense, excess taxable income and excess business interest income. Those partnership items are allocated to the partners and are not carried forward by the partnership. Part III is for S corporations subject to Section 163(j) and requires those S corporations to calculate their excess taxable income and excess business interest income. Those S corporation items are allocated to shareholders. The draft Form 8990 provides some guidance regarding the Government’s current thinking on the application of Section 163(j) to partnerships and their partners. First, when the partnership itself is not engaged in a trade or business (i.e., is an “investor partnership”) (or to the extent of the partnership’s activities that do not constitute a trade or business), it seems clear that a partner does not include the investor partnership’s non-interest items of income and deduction in computing the partner’s Section 163(j) limitation. Less clear, however, is whether the partner includes the investor partnership’s interest income and expense in the partner’s Section 163(j) computation. Additionally, the draft Form 8990 provides guidance on how a partnership’s excess business interest expense is taken into account by the partners: the excess flows up to the extent there is excess taxable income at the partnership level on a one-for-one basis. Any excess business interest expense that flows up from the partnership is deductible by the partner in the same manner as the partner’s other business interest expense (i.e., a deduction for the excess business interest expense from a partnership that flows up to the partner is subject to the partner’s Section 163(j) limitation). The draft form appears to follow the statute in providing that excess taxable income from a partnership does not include excess business interest income of the partnership. Such excess business interest income flows up directly to the partner to be used in the partner’s Section 163(j) computation but does not “unlock” any excess business interest expense from that partnership. Finally, on 25 October 2018, the Office of Information and Regulatory Affairs (OIRA) received proposed regulations for implementing Section 163(j). Under a memorandum of agreement with Treasury, OIRA has 45 days to review tax regulations generally, or 10 days from the date of receipt to review proposed regulations that: (1) are related to the Tax Cuts and Jobs Act; and (2) designated for expedited review. It is thus expected that the proposed Section 163(j) regulations will be issued imminently. 1. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder. Ernst & Young LLP, International Tax Services
Ernst & Young LLP, Partnership and Joint Ventures, Washington, DC
Document ID: 2018-6291 |
