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US Treasury and the IRS, on July 28, released final regulations and proposed regulations (the 2020 proposed regulations) on the Section 163(j) interest expense limitation rules. Treasury also released Notice 2020-59, which proposes a revenue procedure applicable to taxpayers engaged in certain ‘electing real property trades or businesses,’ and frequently asked questions (FAQs) that provide guidance on Section 448(c)(2) aggregation for small businesses. The final regulations generally finalize proposed regulations published in November 2018 (2018 proposed regulations).

Section 163(j), which was amended by the Tax Cuts and Jobs Act and the CARES Act, generally limits US business interest expense deductions to the sum of business interest income, 30% (or 50%, as applicable) of adjusted taxable income (ATI), and floor plan financing interest for the tax year.

The final regulations generally apply to tax years beginning on or after the date that is 60 days after the regulations are published in the Federal Register, although taxpayers (and related parties) may apply the final regulations in their entirety to tax years beginning after December 31, 2017. Alternatively, taxpayers and related parties may apply the 2018 proposed regulations for tax years prior to when the final regulations become effective. Finally, the 2020 proposed regulations are proposed to apply 60 days after they are published as final regulations in the Federal Register, but generally may be applied by taxpayers and related parties in tax years beginning after 2017 and before final regulations are published.

This Insight describes the most significant changes from the 2018 proposed regulations in more detail.