A Brief Discussion of the New Business Interest Expense Limitation Rules
By Anthony Diosdi Internal Revenue Code Section 163(j) operates to prevent U.S. and foreign owned companies from eroding the U.S. income tax base through deductible interest payments to tax exempt related parties. The rule used to applied when a debtor’s debt-to-equity ratio exceeded 1.5 to 1 and its total “net interest expense” exceeded 50 percent of its “adjusted taxable income.” In this case, it would result in the disallowance of the portion of its “related party tax-exempt interest.” However, disallowed interest could potentially be carried forward.The 2017 Tax Cuts and Jobs Act modified Section 163(j) interest expense provisions in several significant ways, most notably eliminating the 1.5 to 1 ratio requirement. The new interest limitation rules under Section 163(j) provides that the deduction allowed for business interest expense in any…