Article written by:
Ashley Neel, CPA
In a previously published article we discussed an overview of Code Section 163(j) as modified by the Tax Cuts and Jobs Act of 2017 and how business interest limitations could affect different entity types and individuals (New Business Interest Limitations Under Code Section 163(j): How Will You Be Affected?). This current article takes a deeper look into what all is considered interest for purposes of the Code Section 163(j) limitation.
The new rules of Section 163(j) define business interest expense as any interest that is paid, received, or accrued as compensation for the use or forbearance of money. The definition of business interest subject to 163(j) does not include investment interest. This may seem straightforward, however, the proposed regulations provide for many other forms considered business interest subject to these limitations. For instance, the definition applies to interest found under other tax codes and regulations including original issued discounts and accrued market discounts.
The definition includes any interest associated with transactions that are indebtedness in substance, but not in form. Any amounts that are closely related to interest and affect the economic yield or cost of funds of a transaction or series of transactions involving interest are also included in the definition. This is true even if the amounts are not compensation for the use or forbearance of money. This would include (among other items) debt issuance costs, loan commitment fees and substitute interest payments.
The proposed regulations also include anti-avoidance rules in an effort to prevent certain financing transactions from avoiding the limitations under Section 163(j). An expense or loss would be considered subject to 163(j) if such expense or loss was incurred predominately for the consideration of the time value of money in a transaction (or series of related transactions), in which a taxpayer secures the use of funds for a period of time.
The limitation on the deductibility of interest contained in Code Section 163(j) is complicated and nuanced. Taxpayers need to have a thorough understanding of the definitions of interest in order to navigate this limitation. Please consult your GBQ tax advisor in order to maximize the tax benefits of your interest expense.