Limitation On Business Interest Expense Under Section 163(j)

1. Adding the gross receipts for the 3prior tax years, and2. Dividing the total by 3.For purposes of the section 163(j)limitation, the gross receipts test applies toall taxpayers. In the case of any taxpayerwhich is not a corporation or a partnership,and except as provided below, the grossreceipts test is applied in the samemanner as if such taxpayer were acorporation or a partnership.Gross receipts for any tax year must bereduced by returns and allowances madeduring the year. For individuals, grossreceipts do not include inherently personalamounts such as disability benefits, SocialSecurity benefits, and wages received asan employee and reported on Form W-2.For purposes of section 163(j), ataxpayer with an ownership interest in apartnership or S corporation, must includea share of the partnership’s or Scorporation’s gross receipts, in proportionto the partner’s distributive share or Scorporation’s pro rata share of grossincome, unless the partner andpartnership, or S corporation shareholderand S corporation, are treated as a singleperson.The gross receipts of an organizationsubject to tax under section 511 onlyincludes gross receipts taken into accountin determining its unrelated businesstaxable income.Note. Gross receipts must meet thedefinition under section 448(c) andTemporary Regulations section1.448-1T(f)(2)(iv).Any reference to your business’ grossreceipts also includes a reference to thegross receipts of any predecessor of yourbusiness. If your business was not inexistence for the entire 3-year period,base your average annual gross receiptson the period your business existed. Also,if your business had a tax year of less than12 months, your gross receipts must beannualized by multiplying the grossreceipts for the short period by 12 anddividing the result by the number ofmonths in the short period.The prior period gross receipts must beannualized for any short period beforedividing by 3.For assistance in preparing theaverage annual gross receipts, see theAverage Annual Gross ReceiptsWorksheet Per Section 448(c).Gross receipts aggregation formembers of controlled group,businesses under common control, ormembers of affiliated group. Forpurposes of section 163(j), gross receiptsmay include the receipts of more than onetaxpayer. For this purpose, all members ofa controlled group of corporations (asdefined in section 52(a)), and all membersof a group of businesses under commoncontrol (as defined in section 52(b)), aretreated as a single person; and allmembers of an affiliated service group (asdefined in sections 414(m) and (o)) shallbe treated as a single person. If you and apartnership or S corporation in which youhold an interest are treated as a singleperson for purposes of the gross receiptstest, aggregate the partnership’s or Scorporation’s gross receipts with yourgross receipts. Do not duplicate amountsby also including a share of partnership orS corporation gross receipts as your owngross receipts.For more information, see AverageAnnual Gross Receipts Worksheet PerSection 448(c), later.Excepted trade or business. A trade orbusiness does not include: Performing services as an employee. An electing real property trade orbusiness, An electing farming business, or Certain utility business.How to make an election and the effectof being an excepted trade or businessare discussed under Special Rules, later.Electing real property trade or business. A real property trade or business(as defined in section 469(c)(7)) may electout of the section 163(j) limitation. Realproperty trade or business means any realproperty development, redevelopment,construction, reconstruction, acquisition,conversion, rental, operation,management, leasing, or brokerage tradeor business.Electing farming business. Farmingbusinesses (as defined in section 263A(e)(4)) and specified agricultural andhorticultural cooperatives (as defined insection 199A(g)(4)) may elect out of thesection 163(j) limitation. A farmingbusiness includes livestock, dairy, poultry,fish, fruit, nuts, and truck farms. It alsoincludes plantations, ranches, ranges, andorchards. A fish farm is an area where fishand other marine animals are grown orraised and artificially fed, protected, etc.,but it does not include an area where theyare merely caught or harvested. A plantnursery is a farm for purposes ofdeducting soil and water conservationexpenses.A specified agricultural or horticulturalcooperative is a cooperative to which PartI of subchapter T of the Internal RevenueCode applies that manufactures,produces, grows, or extracts anyagricultural or horticultural product, or hasmarketed agricultural or horticulturalproducts.Certain utility business. Certain utilitytrades or businesses are not subject to the-2-section 163(j) limitation. No election isrequired for this type of trade or business.The limitation does not apply to autility’s trade or business of furnishing orsale of: Electrical energy, water, or sewagedisposal services; Gas or steam through a localdistribution system; or Transportation of gas or steam bypipeline.The rates for furnishing or sale must beestablished or approved by a state orpolitical subdivision thereof, by anyagency or instrumentality of the UnitedStates, by a public service or public utilitycommission or other similar body of anystate or political subdivision thereof, or bythe governing or rate-making body of anelectric cooperative.Interest. In general, interest is anyamount that is paid, received, or accruedas compensation for the use orforbearance of money or that is treated asinterest under the Internal Revenue Codeor the regulations thereunder. Forpurposes of section 163(j), interest alsoincludes certain amounts that are closelyrelated to interest and that affect theeconomic yield or cost of funds of atransaction involving interest, such asincome, deduction, gain, or loss from atransaction used to hedge an interestbearing asset or liability, substitute interestpayments, commitment fees, and debtissuance costs. Proposed Regulationssection 1.163(j)-1(b)(20) providesadditional information on what constitutesinterest under section 163(j).Business interest income. Businessinterest income means the amount ofinterest includible in the taxpayer’s grossincome for the tax year which is properlyallocable to a trade or business. Businessinterest income does not includeinvestment income.See C corporation business interestexpense and income, later.Interest income that is allocable to anexcepted trade or business is not treatedas business interest income.Business interest expense. Businessinterest expense means any interest paidor accrued that is properly allocable to atrade or business. Business interestexpense does not include investmentinterest. See C corporation businessinterest expense and income, later.Interest expense that is allocable to anexcepted trade or business is not treatedas business interest expense.Adjusted taxable income. Adjustedtaxable income means taxable income ofthe taxpayer computed without regard to:

Any item of income, gain, deduction, orloss which is not properly allocable to atrade or business; Any business interest income orbusiness interest expense; The amount of any net operating lossdeduction under section 172; The amount of any qualified businessincome deduction allowed under section199A; For tax years beginning before 2022,any deduction for depreciation,amortization, or depletion attributable to atrade or business; and Adjustments described in publishedguidance.For purposes of determining adjustedtaxable income, taxable income iscomputed after applying other sectionslimiting the deductibility of interest, suchas sections 263A and 267, as well asbasis, at-risk and passive activity losslimitations.Any additions or subtractions fromtaxable income in arriving atCAUTION adjusted taxable income arelimited to the amount by which the itemaffects taxable income.!Floor plan financing interest expense.Floor plan financing interest expense isnot subject to the section 163(j) limitation.Floor plan financing interest expense isinterest on debt used to finance theacquisition of motor vehicles held for saleor lease where the debt is secured by theacquired inventory.Excess taxable income. In general,excess taxable income is the amount of apartnership’s or S corporation’s adjustedtaxable income that is in excess of theamount of adjusted taxable incomerequired to support the partnership’s or Scorporation’s business interest expensededuction. This amount is computed by apartnership or an S corporation and isallocated to the partner or shareholder.This amount is used by the partner orshareholder in determining their currentyear adjusted taxable income.In some cases, a taxpayer (or a CFC asdiscussed in Proposed Regulationssection 1.163(j)-7(c)) may also haveexcess taxable income as a shareholderof an applicable CFC. See ProposedRegulations section 1.163(j)-7(d)(2).Excess business interest income.Excess business interest income is thecurrent year business interest income thatexceeds current year business interestexpense (excluding floor plan financing).This amount is computed by a partnershipor an S corporation and is allocated to thepartner or shareholder. This amount isused by the partner or shareholder indetermining their current year businessinterest income.Special RulesElections. A taxpayer engaged in a realproperty trade or business or a farmingbusiness may elect not to limit businessinterest expense under section 163(j) forsuch trade or business. This is anirrevocable election.If you make this election, you arerequired to use the alternativedepreciation system (ADS) for certainproperty. See Pub. 946, How toDepreciate Property. Also, you are notentitled to the special depreciationallowance for that property. For a taxpayerwith more than one qualifying business,the election is made with respect to eachtrade or business.Electing real property trade or business. An electing real property trade orbusiness must use the alternativedepreciation system (ADS) for anynonresidential real property, residentialrental property, and qualified improvementproperty used in its trade or business.Electing farming business. An electingfarming business must use the alternativedepreciation system (ADS) for any farmingproperty the taxpayer owns with arecovery period of 10 years or more.Safe harbor for Real Estate InvestmentTrust (REIT). Under certaincircumstances, a REIT is eligible to makean election to be an electing real propertytrade or business. See ProposedRegulations section 1.163(j)-9.How to make the election. To make anelection for a real property trade orbusiness or a farming business, attach anelection statement to a timely filed originaltax return (including extensions). Once theelection is made, it is irrevocable.The statement must be titled “Section1.163(j)-9 Election” and must contain thefollowing information for each electingtrade or business: The taxpayer’s name; The taxpayer’s address; The taxpayer’s social security number(SSN) or employer identification number(EIN); A description of the taxpayer’s electingtrade or business, including the principalbusiness activity code; and A statement that the taxpayer is makingan election pursuant to section 163(j)(7)(B) (as an electing real property trade orbusiness) or (C) (as an electing farmingbusiness), as applicable.Consolidated group’s trade or business. Only the name and taxpayeridentification number (TIN) of the agent forthe group, as defined in section1.1502-77, must be provided on theelection statement.-3-Partnership’s trade or business. Anelection for a partnership must be madeon the partnership’s return with respect toany trade or business that the partnershipconducts. An election by a partnershipdoes not apply to a trade or businessconducted by a partner outside thepartnership.Taxpayers with both excepted andnon-excepted trades or businesses.Taxpayers must allocate and apportiontheir interest expense, interest income,and other tax items between excepted andnon-excepted trades or businesses,applying the rules under ProposedRegulations section 1.163(j)-10. An assetbasis approach generally is used forpurposes of allocating interest expenseand interest income. In making anallocation under Proposed Regulationssection 1.163(j)-10(c), the taxpayer mustattach a statement to its timely filed taxreturn, providing information related to theasset basis and allocation determinationas provided in Proposed Regulationssection 1.163(j)-10(c)(6)(iii).Partnerships. If a partnership is subjectto the section 163(j) limitation, the section163(j) limitation is applied at thepartnership level. If a partnership hasdeductible business interest expense,such deductible business interest expenseis not subject to any further limitationunder section 163(j) at the partner levelbecause it is taken into account indetermining the nonseparately statedtaxable income or loss of the partnership.For all other purposes of the Code,however, deductible business interestexpense retains its character as businessinterest expense at the partner level.If the partnership has a limitation onbusiness interest expense, the disallowedbusiness interest expense (excessbusiness interest expense) is not carriedover by the partnership, but is allocated tothe partners.After completing Form 8990, thepartnership must determine how thedeductible business interest expense,excess business interest expense, excesstaxable income, and excess businessinterest income are allocated among thepartners. The Worksheets A andB—Determination of Each Partner’sRelevant Section 163(j) Items can be usedto determine the amount of each itemallocable to each partner. See ProposedRegulations section 1.163(j)-6(f)(2) foradditional information on the allocation.Partner. A partner’s excess businessinterest expense is treated as paid oraccrued by the partner in subsequentyears to the extent the partner is allocatedcurrent year excess taxable income orexcess business interest income from thesame partnership.

If a partner not subject to the section163(j) limitation has excess businessinterest expense and is allocated excesstaxable income or excess businessinterest income in a subsequent year, thepartner would file Form 8990 and theamount of excess business interestexpense treated as paid or accrued in thecurrent year would not be subject tofurther limitation under section 163(j).A partner subject to the section 163(j)limitation will include the amount of excessbusiness interest expense treated as paidor accrued in figuring its current yearbusiness interest expense limitation.If both a partnership and a partner aresubject to the section 163(j) limitation, thepartner’s current year business interestexpense limitation computation willinclude the following amounts from eachof its partnerships. Current year excess taxable income, Excess business interest expensetreated as paid or accrued, and Current year excess business interestincome.These amounts will not include itemsfrom an excepted trade or business.If a partner is subject to the section163(j) limitation and the partnership is not,see Ownership of pass-through entitiesnot subject to the section 163(j) limitation,later.In the event a partner sells apartnership interest and the partnership inwhich the interest is being sold owns onlynon-excepted trade or business assets,the gain or loss on the sale of thepartnership interest is included in thepartner’s adjusted taxable income. If thepartnership interest consists of bothexcepted and non-excepted assets, thepartner may use the method set forth inProposed Regulations section1.163(j)-10(c) in order to determine theamount properly allocable to anon-excepted trade or business, andtherefore, properly includible in thepartner’s adjusted taxable income.S corporation. The section 163(j)limitation is applied at the S corporationlevel. Disallowed business interestexpense is carried over by the Scorporation and is treated as businessinterest expense paid or accrued in thefollowing year.For a shareholder subject to the section163(j) limitation, the shareholder’s currentyear section 163(j) limitation computationwill include the following amounts fromeach of its S corporations: Current year excess taxable income,and Current year excess business interestincome.These amounts will not include itemsfrom an excepted trade or business.Ownership of pass-through entitiesnot subject to the section 163(j) limitation. If you are subject to the section163(j) limitation and are an owner of apass-through entity that is not subject tothe section 163(j) limitation, you mustinclude your share of the pass-throughbusiness interest expense, adjustedtaxable income, and business interestincome on lines 1, 13, and 23,respectively. You must request thepass-through entity to separately state, insufficient detail, the items necessary tofigure these amounts.In the event a partnership allocatesexcess business interest expense to oneor more of its partners, and in a later taxyear the partnership is no longer subject tothe section 163(j) limitation, the excessbusiness interest expense from the prioryear is treated as business interestexpense paid or accrued by the partner inthe later year.C corporation business interest expense and income. Solely for purposesof section 163(j), all interest paid oraccrued (or treated as paid or accrued) bya C corporation is business interestexpense, and all interest includible ingross income by a C corporation isbusiness interest income, except to theextent such interest expense or interestincome is allocable to an excepted tradeor business.Any investment interest expense,investment interest income, or investmentexpenses that a partnership pays,receives, or accrues and allocates to a Ccorporation partner is treated by the Ccorporation as properly allocable to atrade or business of that partner.Current year business interest expenseis deducted before disallowed businessinterest expense carryforwards, which arethen deducted in the order of the year inwhich they were incurred, starting with theearliest year, subject to certain limitations.Consolidated group. A consolidatedgroup has a single section 163(j)limitation. For members entering orleaving the group, see ProposedRegulations section 1.163(j)-5 forapplicable limitations.Intercompany obligations. Allintercompany obligations as defined inRegulations section 1.1502-13(g)(2)(ii) aredisregarded for purposes of determining amember’s business interest expense andbusiness interest income and in figuringthe consolidated group’s adjusted taxableincome.Tax-exempt corporations with unrelated business income (UBI). The rule forC corporation interest expense andincome applies to a corporation that issubject to the unrelated business income-4-tax under section 511 only with respect tothat corporation’s items of income, gain,deduction, or loss that are taken intoaccount in computing the corporation’sunrelated business taxable income, asdefined in section 512.Regulated Investment Companies(RICs) and Real Estate InvestmentTrusts (REITs). For special rules fordetermining adjusted taxable income forRICs and REITs, see ProposedRegulations section 1.163(j)-4(b)(4). For asafe harbor for REITs making an electionto be an electing real property trade orbusiness, see Proposed Regulationssection 1.163(j)-9.Foreign persons with effectively connected income (ECI). A nonresidentalien individual or foreign corporation thatis not an applicable CFC that haseffectively connected income (ECI) issubject to the section 163(j) limitation. Asforeign persons are only taxed on theirECI, adjusted taxable income, businessinterest expense, business interestincome, and floor plan financing interestexpense are modified to limit suchamounts to income which is ECI andexpenses properly allocable to ECI.A foreign corporation that has ECI mustfirst determine its business interestexpense allocable to ECI underRegulations section 1.882-5 beforeapplying section 163(j).Controlled foreign corporations.Section 163(j) generally applies todetermine the deductibility of anapplicable CFC’s business interestexpense deduction for purposes ofcomputing its taxable income (determinedunder Regulations section 1.952-2 or therules of section 882) in the same manneras a domestic C corporation. Alternatively,a U.S. shareholder of a CFC may make agroup election to compute the deductionfor business interest expense. SeeProposed Regulations section1.163(j)-7(b) and (c). An applicable CFCmeans a foreign corporation described insection 957, but only if the foreigncorporation has at least one U.S.shareholder that owns (within the meaningof section 958(a)) stock of the foreigncorporation.U. S. shareholder of an applicableCFC. A U.S. shareholder will need tomodify its adjusted taxable income forincome inclusions under sections 78,951(a) or 951A(a) and deductionsallowable under section 250 that areproperly allocable to a non-excepted tradeor business. Additionally, if a CFC groupelection has been made, a U.S.shareholder will increase its adjustedtaxable income by any excess taxableincome of the CFC group. See ProposedRegulations section 1.163(j)-7(d).

Change in adjusted taxable incomecomputation. After 2021, adjustedtaxable income is computed withdeductions for depreciation, amortization,depletion, and any other deductionprescribed in published guidance.Specific InstructionsPart I—Computation ofAllowable BusinessInterest ExpenseComplete Part I to determine yourallowable business interest expensededuction.If you are a taxpayer that owns aninterest in a partnership subject to thesection 163(j) limitation, see instructions toSchedule A before completing Part I.If you are a taxpayer that is ashareholder in an S corporation orapplicable CFC subject to the section163(j) limitation, see instructions toSchedule B before completing Part I.Section I—BusinessInterest Expense (Lines 1Through 5)Line 1. Current year business interestexpense. Enter the business interestexpense (not including floor plan financinginterest expense or disallowed businessinterest expense carryforwards from prioryears) that would have been deductible inthe current year without the application ofsection 163(j).Interest expense from an exceptedtrade or business should not be included.See Ownership of pass-through entitiesnot subject to the section 163(j) limitation,earlier.If a CFC group election has beenmade, enter the amount of the CFC’sallocable share of business interestexpense as provided in ProposedRegulations section 1.163(j)-7(b)(3).Line 2. Disallowed business interestexpense carryovers from prior years.Enter the prior year disallowed interestexpense under prior section 163(j)(1)(A)for the last tax year beginning before2018, to the extent the amounts otherwisequalify as business interest expense of thetaxpayer. See Proposed Regulationssection 1.163(j)-11(b) for moreinformation.!Line 2 does not apply topartnerships.CAUTIONLine 4. Floor plan financing interestexpense. Enter the current year floor planfinancing interest expense.Section II—AdjustedTaxable Income (Lines 6Through 22)Enter all numbers as positive amountsunless otherwise indicated.Taxable IncomeLine 6. Taxable income. Enter taxableincome computed as though all of thebusiness interest expense is otherwiseallowable business interest expense. Infiguring taxable income, consider all otherapplicable limitations such as sections163(f), 267, basis (sections 704 and1366), at-risk (section 465) and passiveactivity loss (section 469), and excessbusiness loss (section 461(l)) limitationsprior to inputting the taxable incomeamount.The taxable income of a partnership orS corporation shall include both separatelyand non-separately stated items. For apartnership, this generally will be theamount on Form 1065, Analysis of NetIncome (Loss), line 1, Net income (loss).For an S corporation, this generally will bethe amount on Form 1120S, Schedule K,line 18, Income/loss reconciliation.For purposes of computing apartnership’s and partner’s ad

1. Business interest income, 2. 30% of the adjusted taxable income, and 3. Floor plan financing interest expense. Carryforward of disallowed business interest. The amount of any business interest expense that is not allowed as a deduction under section 163(j) for the tax year is carried forward to the fol