Section 163(j) Update

Final regulations implementing new Code section 163(j) could be released by the end of the year.  The Treasury and IRS are working on additional section 163(j) regulations, but they may not be released at the same time. 

Regulations are usually effective for tax years ending after the date the final regulations are published.  With the size and complexity of the section 163(j) guidance, this could pose problems for calendar-year taxpayers.

The new provision limits a taxpayer’s deduction for business interest expense to 30 percent of “adjusted taxable income” (ATI), which is computed by adjusting for qualified patronage allocations, net operating losses, domestic production activities deductions (DPAD), depreciation, interest and other various deductions and income items.  When calculating ATI, regulated investment companies (RICs) and real estate investment trusts (REITs) are allowed to disregard dividends paid to owners.  The National Council of Farmer Cooperatives’ argues that cooperatives should receive similar treatment and should be allowed to add back patronage dividends when making the ATI calculation. (Alternatively, farmer cooperatives may elect to be exempt from the interest limitation in exchange for using a ten-year depreciation system.)

So far we have not seen this new regulation to be overly impactful; but do foresee it becoming an issue in the future when additional provisions kick in.  We will keep you informed and discuss this with you proactively to mitigate any concerns.