Treasury Regulations · 26 CFR
§ 1.163(j)-1. Definitions.
Regulation text, no changes From the eCFR, current as of October 15, 2026. The eCFR is an authoritative but unofficial editorial compilation of the Code of Federal Regulations; the official text is the annual CFR on govinfo. Compare it with this section on ecfr.gov (external site) or the official annual CFR on govinfo (external site).
Regulation under 26 U.S.C. § 163(j)
Cite as 26 CFR § 1.163(j)-1
At a glance
Read from the text and its source citation. Not part of the regulation.
- Status
- In the current eCFR
- Issued
- September 14, 2020 by T.D. 9905
- Last amended
- January 19, 2021 by T.D. 9943
- Issued under
- 26 U.S.C. § 163(j)
- Length
- 16,215 words · about 70 min to read
- Defines
- 54 terms
- Cross-references
- cites 50 Code sections and 31 regulations; cited by 28
§ 1.163(j)-1 Definitions.
¶(a) In general. The definitions provided in this section apply for purposes of the section 163(j) regulations. For purposes of the rules set forth in §§ 1.163(j)-2 through 1.163(j)-11, additional definitions for certain terms are provided in those sections.
¶(b) Definitions—
¶(1) Adjusted taxable income. The term adjusted taxable income (ATI) means the tentative taxable income of the taxpayer for the taxable year, with the adjustments in this paragraph (b)(1).
¶(i) Additions. The amounts of the following items that were included in the computation of the taxpayer's tentative taxable income (if any) are added to tentative taxable income to determine ATI—
¶(A) Any business interest expense, other than disallowed business interest expense carryforwards;
¶(E) Subject to paragraph (b)(1)(iii) of this section, for taxable years beginning before January 1, 2022, any amortization of intangibles (for example, under section 167 or 197) and other amortized expenditures (for example, under section 174(b), 195(b)(1)(B), 248, or 1245(a)(2)(C));
¶(F) Subject to paragraph (b)(1)(iii) of this section, for taxable years beginning before January 1, 2022, any depletion under section 611;
¶(G) Any deduction for a capital loss carryback or carryover; and
¶(H) Any deduction or loss that is not properly allocable to a non-excepted trade or business (for rules governing the allocation of items to an excepted trade or business, see §§ 1.163(j)-1(b)(44) and 1.163(j)-10).
¶(ii) Subtractions. The amounts of the following items (if any) are subtracted from the taxpayer's tentative taxable income to determine ATI —
¶(A) Any business interest income that was included in the computation of the taxpayer's tentative taxable income;
¶(B) Any floor plan financing interest expense for the taxable year that was included in the computation of the taxpayer's tentative taxable income;
¶(C) With respect to the sale or other disposition of property, the greater of the allowed or allowable depreciation, amortization, or depletion of the property, as provided under section 1016(a)(2), for the taxpayer (or, if the taxpayer is a member of a consolidated group, the consolidated group) for the taxable years beginning after December 31, 2017, and before January 1, 2022, with respect to such property;
¶(D) With respect to the sale or other disposition of stock of a member of a consolidated group by another member, the investment adjustments under § 1.1502-32 with respect to such stock that are attributable to deductions described in paragraph (b)(1)(ii)(C) of this section;
¶(E) With respect to the sale or other disposition of an interest in a partnership, the taxpayer's distributive share of deductions described in paragraph (b)(1)(ii)(C) of this section with respect to property held by the partnership at the time of such sale or other disposition to the extent such deductions were allowable under section 704(d);
¶(F) Any income or gain that is not properly allocable to a non-excepted trade or business (for rules governing the allocation of items to an excepted trade or business, see §§ 1.163(j)-1(b)(44) and 1.163(j)-10)) and that was included in the computation of the taxpayer's tentative taxable income; and
¶(G) An amount equal to the sum of any specified deemed inclusions that were included in the computation of the taxpayer's tentative taxable income, reduced by the portion of the deduction allowed under section 250(a) by reason of the specified deemed inclusions. For this purpose, a specified deemed inclusion is the inclusion of an amount by a United States shareholder (as defined in section 951(b)) in gross income under section 78, 951(a), or 951A(a) with respect to an applicable CFC (as defined in § 1.163(j)-1(b)(2)) that is properly allocable to a non-excepted trade or business. Furthermore, a specified deemed inclusion includes any amounts included in a domestic partnership's gross income under section 951(a) or 951A(a) with respect to an applicable CFC to the extent such amounts are attributable to investment income of the partnership and are allocated to a domestic C corporation that is a direct (or indirect partner) and treated as properly allocable to a non-excepted trade or business of the domestic C corporation under §§ 1.163(j)-4(b)(3) and 1.163(j)-10. To determine the amount of a specified deemed inclusion described in this paragraph (b)(1)(ii)(G), the portion of a United States shareholder's inclusion under section 951A(a) treated as being with respect to an applicable CFC is determined under section 951A(f)(2) and § 1.951A-6(b)(2).
¶(iii) Depreciation, amortization, or depletion capitalized under section 263A. For purposes of paragraph (b)(1)(i) of this section, amounts of depreciation, amortization, or depletion that are capitalized under section 263A during the taxable year are deemed to be included in the computation of the taxpayer's tentative taxable income for such taxable year, regardless of the period in which the capitalized amount is recovered. See Example 3 in § 1.163(j)-2(h)(3).
¶(A) Sale or other disposition—
¶(1) In general. For purposes of paragraphs (b)(1)(ii)(C), (D), and (E) and paragraphs (b)(1)(iv)(B) and (E) of this section, except as otherwise provided in this paragraph (b)(1)(iv)(A), the term sale or other disposition does not include a transfer of an asset to an acquiring corporation in a transaction to which section 381(a) applies.
¶(2) Intercompany transactions. For purposes of paragraphs (b)(1)(ii)(C) and (D) and paragraphs (b)(1)(iv)(B) and (b)(1)(iv)(E)(1) and (2) of this section, the term sale or other disposition excludes all intercompany transactions, within the meaning of § 1.1502-13(b)(1)(i), to the extent necessary to achieve single-entity taxation of the consolidated group.
¶(3) Deconsolidations. Notwithstanding any other rule in this paragraph (b)(1)(iv)(A), any transaction in which a member (S) leaves a consolidated group (selling group), including a section 381(a) transaction described in paragraph (b)(1)(iv)(A)(1) of this section, is treated as a taxable disposition of all S stock held by any member of the selling group for purposes of paragraphs (b)(1)(ii)(C) and (D) and paragraphs (b)(1)(iv)(B) and (b)(1)(iv)(E)(1) and (2) of this section, unless the transaction is described in § 1.1502-13(j)(5)(i). Following S's deconsolidation, any subsequent sales or dispositions of S stock by the selling group do not trigger further adjustments under paragraphs (b)(1)(ii)(C) and (D) and paragraphs (b)(1)(iv)(B) and (b)(1)(iv)(E)(1) and (2) of this section. If a transaction is described in § 1.1502-13(j)(5)(i), the transaction is not treated as a sale or other disposition for purposes of paragraphs (b)(1)(ii)(C) and (D) and paragraphs (b)(1)(iv)(B) and (b)(1)(iv)(E)(1) and (2) of this section. See also the successor rules in paragraph (b)(1)(iv)(C) of this section.
¶(4) Nonrecognition transactions. The disposition of property, member stock (other than in a deconsolidation described in paragraph (b)(1)(iv)(A)(3) of this section), or partnership interests in a nonrecognition transaction, other than a section 381(a) transaction described in paragraph (b)(1)(iv)(A)(1) of this section, is treated as a taxable disposition of the property, member stock, or partnership interest disposed of for purposes of paragraph (b)(1)(iv)(E)(1)(i), (b)(1)(iv)(E)(2)(i), and (b)(1)(iv)(E)(3)(i) of this section, respectively. For example, if a taxpayer transfers property to a wholly owned, non-consolidated subsidiary, the transfer of the property is treated as a taxable disposition for purposes of paragraph (b)(1)(iv)(E)(1)(i) of this section notwithstanding the application of section 351.
¶(B) Deductions by members of a consolidated group—
¶(1) In general. If paragraph (b)(1)(ii)(C), (D), or (E) of this section applies to adjust the tentative taxable income of a consolidated group, and if the consolidated group does not use the alternative computation method in paragraph (b)(1)(iv)(E) of this section, the amount of the adjustment under paragraph (b)(1)(ii)(C) of this section equals the greater of the allowed or allowable depreciation, amortization, or depletion of the property, as provided under section 1016(a)(2), for the consolidated group for the taxable years beginning after December 31, 2017, and before January 1, 2022, with respect to such property.
¶(2) Application of the alternative computation method. If paragraph (b)(1)(ii)(C), paragraph (b)(1)(ii)(D), or paragraph (b)(1)(ii)(E) of this section applies to adjust the tentative taxable income of a consolidated group, and if the consolidated group uses the alternative computation method in paragraph (b)(1)(iv)(E) of this section, the amount of the adjustment computed under paragraph (b)(1)(iv)(E)(1)(i), paragraph (b)(1)(iv)(E)(2)(i), or paragraph (b)(1)(iv)(E)(3)(i) of this section must take into account the net gain that would be taken into account by the consolidated group, including from intercompany transactions, determined by treating the sale or other disposition as a taxable transaction (see paragraphs (b)(1)(iv)(A)(3) and (4) of this section regarding deconsolidations and certain nonrecognition transactions, respectively).
¶(C) Successor rules—
¶(1) Successor assets. This paragraph (b)(1)(iv)(C)(1) applies if deductions described in paragraph (b)(1)(ii)(C) of this section are allowed or allowable to a consolidated group member (S) and either the depreciable property or S's stock is subsequently transferred to another member (S1) in an intercompany transaction in which the transferor receives S1 stock. If this paragraph (b)(1)(iv)(C)(1) applies, and if the transferor's basis in the S1 stock received in the intercompany transaction is determined, in whole or in part, by reference to its basis in the depreciable property or the S stock, the S1 stock received in the intercompany transaction is treated as a successor asset for purposes of paragraph (b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this section. Thus, except as otherwise provided in paragraph (b)(1)(iv)(D) of this section, the subsequent disposition of either the S1 stock or the S stock (or both) may require the application of the adjustment rules of paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section.
¶(2) Successor entities. The acquiring corporation in a section 381(a) transaction to which the exception in paragraph (b)(1)(iv)(A)(1) of this section applies is treated as a successor to the distributor or transferor corporation for purposes of paragraphs (b)(1)(ii)(C) through (E) and (b)(1)(iv)(B) and (E) of this section. Therefore, for example, in applying paragraphs (b)(1)(ii)(C) through (E) and (b)(1)(iv)(B) and (E) of this section, the acquiring corporation is treated as succeeding to the allowed or allowable items of the distributor or transferor corporation. Similarly, the surviving group in a transaction described in § 1.1502-13(j)(5)(i) to which the exception in paragraph (b)(1)(iv)(A)(3) of this section applies is treated as a successor to the terminating group for purposes of paragraphs (b)(1)(ii)(C) through (E) and (b)(1)(iv)(B) and (E) of this section.
¶(D) Anti-duplication rule—
¶(1) In general. The aggregate of the subtractions from tentative taxable income of a consolidated group under paragraphs (b)(1)(ii)(C) through (E) or paragraphs (b)(1)(iv)(E)(1) through (3) of this section with respect to an item of property (including with regard to dispositions of successor assets described in paragraph (b)(1)(iv)(C)(1) of this section) cannot exceed the aggregate amount of the consolidated group members' deductions described in paragraph (b)(1)(ii)(C) of this section with respect to such item of property. In addition, once an item of property is no longer held by any member of a consolidated group (whether or not an adjustment to the tentative taxable income of the group is made under paragraph (b)(1)(ii)(C) of this section with respect to the direct or indirect disposition of that property), no further adjustment to the group's tentative taxable income is made under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section in relation to the same property with respect to any subsequent stock disposition.
¶(2) Adjustments following deconsolidation. If a corporation (S) leaves a consolidated group (Group 1) in a transaction that requires an adjustment under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section, no further adjustment is required under paragraph (b)(1)(ii)(C) or (E) or paragraph (b)(1)(iv)(E) of this section in a separate return year (as defined in § 1.1502-1(e)) of S with respect to depreciation, amortization, or depletion deductions allowed or allowable to Group 1. See paragraph (b)(1)(iv)(A) of this section for special rules regarding the meaning of the term “sale or other disposition” for purposes of the adjustments required under paragraphs (b)(1)(ii)(C) through (E) and paragraphs (b)(1)(iv)(B) and (E) of this section. For example, assume that S deconsolidates from Group 1 in a transaction not described in § 1.1502-13(j)(5)(i) after holding property for which depreciation, amortization, or depletion deductions were allowed or allowable in Group 1. On the deconsolidation, S and Group 1 would adjust tentative taxable income with regard to that property. See paragraphs (b)(1)(iv)(A)(3), (b)(1)(ii)(D), and (b)(1)(iv)(E)(2) of this section. If, following the deconsolidation, S sells the property referred to in the previous sentence, no subtraction from tentative taxable income is made under paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1) of this section during S's separate return year with regard to the amounts included in Group 1. See paragraphs (b)(1)(iv)(A)(3), (b)(1)(ii)(D), and (b)(1)(iv)(E)(2) of this section.
¶(E) Alternative computation method. If paragraph (b)(1)(ii)(C), (D), or (E) of this section applies to adjust the tentative taxable income of a taxpayer, the taxpayer may compute the amount of the adjustments required by such paragraph using the formulas in paragraph (b)(1)(iv)(E)(1), (2), and (3) of this section, respectively, provided that the taxpayer applies such formulas to all dispositions for which an adjustment is required under paragraph (b)(1)(ii)(C), (D), or (E) of this section. For special rules regarding the treatment of deconsolidating transactions and nonrecognition transactions, see paragraph (b)(1)(iv)(A)(3) and (4) of this section, respectively. For special rules regarding the application of the formulas in paragraph (b)(1)(iv)(E)(1), (2), and (3) of this section by consolidated groups, see paragraph (b)(1)(iv)(B)(2) of this section.
¶(1) Alternative computation method for property dispositions. With respect to the sale or other disposition of property, the lesser of:
¶(i) Any gain recognized on the sale or other disposition of such property by the taxpayer (or, if the taxpayer is a member of a consolidated group, the consolidated group); and
¶(ii) The greater of the allowed or allowable depreciation, amortization, or depletion of the property, as provided under section 1016(a)(2), for the taxpayer (or, if the taxpayer is a member of a consolidated group, the consolidated group) for the taxable years beginning after December 31, 2017, and before January 1, 2022, with respect to such property.
¶(2) Alternative computation method for dispositions of member stock. With respect to the sale or other disposition by a member of a consolidated group of stock of another member for whom depreciation, amortization, or depletion was allowed or allowable with regard to an item of property (or stock of any successor to that member), the lesser of:
¶(i) Any gain recognized on the sale or other disposition of such stock; and
¶(ii) The investment adjustments under § 1.1502-32 with respect to such stock that are attributable to deductions described in paragraph (b)(1)(ii)(C) of this section. The investment adjustments referred to in this paragraph (b)(1)(iv)(E)(2)(ii) include investment adjustments replicated in stock of members that are successor entities.
¶(3) Alternative computation method for dispositions of partnership interests. With respect to the sale or other disposition of an interest in a partnership, the lesser of:
¶(i) Any gain recognized on the sale or other disposition of such interest; and
¶(ii) The taxpayer's (or, if the taxpayer is a consolidated group, the consolidated group's) distributive share of deductions described in paragraph (b)(1)(ii)(C) of this section with respect to property held by the partnership at the time of such sale or other disposition to the extent such deductions were allowable under section 704(d).
¶(F) Cap on negative adjustments—
¶(1) In general. A subtraction from (or negative adjustment to) tentative taxable income that is required under paragraph (b)(1)(ii)(C), (D), or (E) or paragraph (b)(1)(iv)(B) or (E) of this section is reduced to the extent the taxpayer establishes that the positive adjustments to tentative taxable income under paragraphs (b)(1)(i)(D) through (F) of this section in a prior taxable year did not result in an increase in the amount allowed as a deduction for business interest expense for such year. The extent to which the positive adjustments under paragraphs (b)(1)(i)(D) through (F) of this section resulted in an increase in the amount allowed as a deduction for business interest expense in a prior taxable year (such amount of positive adjustments, the negative adjustment cap) is determined after taking into account all other adjustments to tentative taxable income under paragraph (b)(1)(i) and (ii) of this section for that year, as established through books and records. The amount of the negative adjustment cap for a prior taxable year is reduced in future taxable years to the extent of negative adjustments under paragraphs (b)(1)(ii)(C) through (E) and paragraphs (b)(1)(iv)(B) and (E) of this section with respect to the prior taxable year.
¶(2) Example. A is a calendar-year individual taxpayer engaged in a trade or business that is neither an excepted trade or business nor eligible for the small business exemption. A has no disallowed business interest expense carryforwards. In 2021, A has $100x of business interest expense, no business interest income or floor plan financing interest expense, and $400x of tentative taxable income. After taking into account the adjustments to tentative taxable income under paragraph (b)(1)(i) and (ii) of this section other than positive adjustments under paragraphs (b)(1)(i)(D) through (F) of this section, A has tentative taxable income of $450x. A increases its tentative taxable income by $30x (from $450x to $480x) under paragraph (b)(1)(i)(D) of this section to reflect $30x of depreciation deductions with respect to Asset Y in 2021. Thus, for 2021, A would have a section 163(j) limitation of $135x ($450x × 30 percent) without regard to adjustments under paragraphs (b)(1)(i)(D) through (F) of this section. After the application of paragraph (b)(1)(i)(D) of this section, A has a section 163(j) limitation of $144x ($480x × 30 percent). In 2022, A sells Asset Y at a gain of $50x. Under paragraph (b)(1)(iv)(F)(1) of this section, A is not required to reduce its tentative taxable income in 2022 under paragraph (b)(1)(ii)(C) through (E) or paragraph (b)(1)(iv)(E) of this section. As established by A, the $30x addition to tentative taxable income under paragraph (b)(1)(i)(D) of this section resulted in no increase in the amount allowed as a deduction for business interest expense in 2021.
¶(G) Treatment of depreciation, amortization, or depletion capitalized under section 263A. Paragraphs (b)(1)(ii)(C) through (E) of this section and this paragraph (b)(1)(iv) apply with respect to the sale or other disposition of property to which paragraph (b)(1)(iii) of this section applies. For example, if a taxpayer with depreciable machinery capitalizes the depreciation into inventory under section 263A, paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E) of this section (and, if the taxpayer is a consolidated group, paragraph (b)(1)(iv)(B) of this section) applies upon the disposition of the machinery, subject to the cap in paragraph (b)(1)(iv)(F) of this section. Similarly, the successor asset rules in paragraph (b)(1)(iv)(C)(1) of this section would apply if the depreciable machinery subsequently were transferred to another member (S1) in an intercompany transaction in which the transferor received S1 stock.
¶(v) Other adjustments. ATI is computed with the other adjustments provided in §§ 1.163(j)-2 through 1.163(j)-11.
¶(vi) Additional rules relating to adjusted taxable income in other sections.
¶(A) For rules governing the ATI of C corporations, see §§ 1.163(j)-4(b)(2) and (3) and 1.163(j)-10(a)(2)(ii).
¶(J) For rules governing the ATI of certain beneficiaries of trusts and estates, see § 1.163(j)-2(f).
¶(vii) ATI cannot be less than zero. If the ATI of a taxpayer would be less than zero, the ATI of the taxpayer is zero.
¶(viii) Examples. The examples in this paragraph (b)(1)(viii) illustrate the application of paragraphs (b)(1)(ii), (iii), and (iv) of this section. Unless otherwise indicated, A, B, P, S, and T are calendar-year domestic C corporations; P is the parent of a consolidated group of which S and T are members; the exemption for certain small businesses in § 1.163(j)-2(d) does not apply; no entity is engaged in an excepted trade or business; no entity has business interest income or floor plan financing interest expense; and all amounts of interest expense are deductible except for the potential application of section 163(j).
¶(A) Example 1—
¶(1) Facts. In 2021, A purchases a depreciable asset (Asset X) for $30x and fully depreciates Asset X under section 168(k). For the 2021 taxable year, A establishes that its ATI before adding back depreciation deductions with respect to Asset X under paragraph (b)(1)(i)(D) of this section is $130x, and that its ATI after adding back depreciation deductions with respect to Asset X under paragraph (b)(1)(i)(D) of this section is $160x. A incurs $45x of business interest expense in 2021. In 2024, A sells Asset X to an unrelated third party for $25x.
¶(2) Analysis. A's section 163(j) limitation for 2021 is $48x ($160x × 30 percent). Thus, all $45x of A's business interest expense incurred in 2021 is deductible in that year. Under paragraph (b)(1)(ii)(C) of this section, A must subtract $30x from its tentative taxable income in computing its ATI for its 2024 taxable year. Alternatively, under paragraph (b)(1)(iv)(E)(1) of this section, A must subtract $25x (the lesser of $30x or $25x ($25x−$0x)) from its tentative taxable income in computing its ATI for its 2024 taxable year. However, the negative adjustments under paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)(1) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Under that paragraph, A's negative adjustment under either paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1) of this section is capped at $20x, or $150x (the amount of ATI that A needed in order to deduct all $45x of business interest expense in 2021) minus $130x (the amount of A's tentative taxable income in 2021 before adding back any amounts under paragraph (b)(1)(i)(D) through (F) of this section). As established by A, the additional $10x ($30x−$20x) of depreciation deductions that were added back to tentative taxable income in 2021 under paragraph (b)(1)(i)(D) of this section did not increase A's business interest expense deduction for that year.
¶(3) Transfer of assets in a nonrecognition transaction to which section 381 applies. The facts are the same as in paragraph (b)(1)(viii)(A)(1) of this section, except that, rather than sell Asset X to an unrelated third party in 2024, A merges with and into an unrelated third party in 2024 in a transaction described in section 368(a)(1)(A) in which no gain is recognized. As provided in paragraph (b)(1)(iv)(A)(1) of this section, the merger transaction is not treated as a “sale or other disposition” for purposes of paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1) of this section. Thus, no adjustment to tentative taxable income is required in 2024 under paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1) of this section.
¶(4) Transfer of assets in a nonrecognition transaction to which section 351 applies. The facts are the same as in paragraph (b)(1)(viii)(A)(1) of this section, except that, rather than sell Asset X to an unrelated third party in 2024, A transfers Asset X to B (A's wholly owned subsidiary) in 2024 in a transaction to which section 351 applies. The section 351 transaction is treated as a “sale or other disposition” for purposes of paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)(1) of this section, and it is treated as a taxable disposition for purposes of paragraph (b)(1)(iv)(E)(1) of this section. See paragraph (b)(1)(iv)(A)(1) and (4) of this section. However, the negative adjustments under paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)(1) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Thus, A must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year.
¶(B) Example 2—
¶(1) Facts. In 2021, S purchases a depreciable asset (Asset Y) for $30x and fully depreciates Asset Y under section 168(k). P reduces its basis in its S stock by $30x under § 1.1502-32 to reflect S's depreciation deductions with respect to Asset Y. For the 2021 taxable year, the P group establishes that its ATI before adding back S's depreciation deductions with respect to Asset Y under paragraph (b)(1)(i)(D) of this section is $130x, and that its ATI after adding back S's depreciation deductions with respect to Asset Y under paragraph (b)(1)(i)(D) of this section is $160x. The P group incurs $45x of business interest expense in 2021. In 2024, P sells all of its S stock to an unrelated third party at a gain of $25x.
¶(2) Analysis. The P group's section 163(j) limitation for 2021 is $48x ($160x × 30 percent). Thus, all $45x of the P group's business interest expense incurred in 2021 is deductible in that year. Under paragraph (b)(1)(ii)(D) of this section, the P group must subtract $30x from its tentative taxable income in computing its ATI for its 2024 taxable year. Alternatively, under paragraph (b)(1)(iv)(E)(2) of this section, the P group must subtract $25x (the lesser of $30x or $25x) from its tentative taxable income in computing its ATI for its 2024 taxable year. However, the negative adjustments under paragraphs (b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Under that paragraph, the P group's negative adjustment under either paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section is capped at $20x, or $150x (the amount of ATI the P group needed in order to deduct all $45x of business interest expense in 2021) minus $130x (the amount of the P group's tentative taxable income in 2021 before adding back any amounts under paragraph (b)(1)(i)(D) through (F) of this section). As established by the P group, the additional $10x ($30x−$20x) of depreciation deductions that were added back to tentative taxable income in 2021 under paragraph (b)(1)(i)(D) of this section did not increase the P group's business interest expense deduction for that year.
¶(3) Disposition of less than all member stock. The facts are the same as in paragraph (b)(1)(viii)(B)(1) of this section, except that, in 2024, P sells half of its S stock to an unrelated third party. The results are the same as in paragraph (b)(1)(viii)(B)(2) of this section. See paragraph (b)(1)(iv)(A)(3) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. No further adjustment under paragraphs (b)(1)(ii)(C) and (D) or paragraphs (b)(1)(iv)(E)(1) and (2) of this section is required if P subsequently sells its remaining S stock or if S subsequently disposes of Asset Y. See paragraphs (b)(1)(iv)(A)(3) and (b)(1)(iv)(D) of this section.
¶(4) Intercompany transfer; disposition of successor assets—
¶(i) Adjustments in 2024. The facts are the same as in paragraph (b)(1)(viii)(B)(1) of this section, except that, rather than sell all of its S stock to an unrelated third party in 2024, P transfers all of its S stock to T in 2024 in a transaction to which section 351 applies and, in 2025, P sells all of its T stock to an unrelated third party at a gain of $40x. As provided in paragraph (b)(1)(iv)(A)(2) of this section, P's intercompany transfer of its S stock to T is not a “sale or other disposition” for purposes of paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section. Thus, no adjustment to tentative taxable income is required in 2024 under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section.
¶(ii) Adjustments in 2025. Pursuant to paragraph (b)(1)(iv)(C)(1) of this section, P's stock in T is treated as a successor asset for purposes of paragraph (b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this section. Moreover, P's sale of its T stock causes both T and S to deconsolidate. Thus, under paragraph (b)(1)(iv)(A)(3) of this section, the transaction is treated as a taxable disposition of all of the T stock and all of the S stock held by all members of the P group. Under the anti-duplication rule in paragraph (b)(1)(iv)(D) of this section, the total amount of gain recognized for purposes of paragraph (b)(1)(iv)(E)(2)(i) of this section is $40x, the greater of the gain on the disposition of the T stock ($40x) or on the disposition of the S stock ($25x). However, the negative adjustments under paragraph (b)(1)(iv)(E)(2) of this section are subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2025 taxable year.
¶(5) Alternative computation and non-deconsolidating disposition of member stock. The facts are the same as in paragraph (b)(1)(viii)(B)(1) of this section, except that, in 2024, P sells just ten percent of its S stock to an unrelated third party at a gain of $2.5x. Under paragraph (b)(1)(iv)(E)(2) of this section, the lesser of P's gain recognized on the sale of the S stock ($2.5x) and the investment adjustments under § 1.1502-32 with respect to the S stock P sold ($3x) is $2.5x, an amount less than the $20x limitation under paragraph (b)(1)(iv)(F) of this section. Thus, the P group must subtract $2.5x from its tentative taxable income in computing its ATI for its 2024 taxable year.
¶(6) Non-deconsolidating disposition of member stock followed by asset disposition. The facts are the same as in paragraph (b)(1)(viii)(B)(5) of this section, except that, in 2025, S sells Asset Y to an unrelated third party for a gain of $20x. Under paragraph (b)(1)(iv)(E)(1) of this section, the amount of the adjustment in 2025 is the lesser of two amounts. The first amount is the amount of S's gain recognized on the sale of Asset Y ($20x). See paragraph (b)(1)(iv)(E)(1)(i) of this section. The second amount is the amount of depreciation with respect to Asset Y (see paragraph (b)(1)(iv)(E)(1)(ii) of this section), reduced by the amount of depreciation previously taken into account in the computation under paragraph (b)(1)(iv)(E)(2)(ii) of this section ($30x−$3x, or $27x). See paragraph (b)(1)(iv)(D)(1) of this section. Thus, the amount of the adjustment under paragraphs (b)(1)(iv)(D) and (b)(1)(iv)(E)(1) of this section is $20x. In turn, this amount is subject to the negative adjustment cap under paragraph (b)(1)(iv)(F), which, after accounting for the negative adjustment on the earlier sale of S stock in 2024, is $17.5x ($20x−$2.5x). Accordingly, the P group must subtract $17.5x from its tentative taxable income in computing its ATI for its 2025 taxable year.
¶(2) Analysis. The results are the same as in paragraph (b)(1)(viii)(B)(2) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. P's sale of all of its S stock in 2025 is a “sale or other disposition” for purposes of paragraph (b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this section. However, pursuant to paragraph (b)(1)(iv)(D)(1) of this section, no further adjustment to the P group's tentative taxable income is required in 2025 under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section.
¶(3) Disposition of S stock prior to S's asset disposition. The facts are the same as in paragraph (b)(1)(viii)(C)(1) of this section, except that, in 2024, P sells all of its S stock to an unrelated third party at a gain of $25x and, in 2025, S sells Asset Y to an unrelated third party for $25x. The results are the same as in paragraph (b)(1)(viii)(B)(2) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. Pursuant to paragraph (b)(1)(iv)(D)(2) of this section, no adjustment to the acquiring group's tentative taxable income is required in 2025 under paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1) of this section.
¶(4) Deconsolidation of S in nonrecognition transaction. The facts are the same as in paragraph (b)(1)(viii)(C)(3) of this section, except that, rather than sell all of its S stock to an unrelated third party, P causes S to merge with and into an unrelated third party in a transaction described in section 368(a)(1)(A). As provided in paragraph (b)(1)(iv)(A)(3) of this section, the merger transaction is treated as a taxable disposition of all of P's stock in S for purposes of paragraphs (b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this section because S leaves the P group. Thus, the results are the same as in paragraph (b)(1)(viii)(C)(3) of this section.
¶(D) Example 4—
¶(1) Facts. P wholly owns T, which wholly owns S. In 2021, S purchases a depreciable asset (Asset Z) for $30x and fully depreciates Asset Z under section 168(k). T reduces its basis in its S stock, and P reduces its basis in its T stock, by $30x under § 1.1502-32 to reflect S's depreciation deductions with respect to Asset Z. For the 2021 taxable year, the P group establishes that its ATI before adding back S's depreciation deductions with respect to Asset Z under paragraph (b)(1)(i)(D) of this section is $130x, and that its ATI after adding back S's depreciation deductions with respect to Asset Z under paragraph (b)(1)(i)(D) of this section is $160x. The P group incurs $45x of business interest expense in 2021. In 2024, T sells all of its S stock to an unrelated third party at a gain of $25x. In 2025, P sells all of its T stock to an unrelated third party at a gain of $40x.
¶(2) Analysis. The results are the same as in paragraph (b)(1)(viii)(B)(2) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. Pursuant to paragraph (b)(1)(iv)(D)(1) of this section, no negative adjustment to the P group's tentative taxable income is required in 2025 under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section.
¶(3) Disposition of T stock in 2024. The facts are the same as in paragraph (b)(1)(viii)(D)(1) of this section, except that, in 2024, P sells all of its T stock to another consolidated group at a gain of $40x and, in 2025, T sells all of its S stock to an unrelated party at a gain of $25x. Whereas the transaction described in paragraph (b)(1)(viii)(B)(4) of this section is treated as a taxable disposition of both the T stock and the S stock, only the actual disposition of the T stock in the transaction described in this paragraph (b)(1)(viii)(D)(3) is treated as a taxable disposition for purposes of paragraphs (b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this section. See paragraph (b)(1)(iv)(A)(3) of this section. However, the results are the same as in paragraph (b)(1)(viii)(B)(2) and (b)(1)(viii)(B)(4) of this section because of the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. Pursuant to paragraph (b)(1)(iv)(D) of this section, no negative adjustment to the acquiring group's tentative taxable income is required in 2025 under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section.
¶(E) Example 5—
¶(1) Facts. In 2021, A purchases Assets X and Y for $30x and $80x, respectively, and fully depreciates each asset under section 168(k). For the 2021 taxable year, A establishes that its ATI before adding back depreciation deductions with respect to Assets X and Y under paragraph (b)(1)(i)(D) of this section is $150x, and that its ATI after adding back depreciation deductions with respect to Assets X and Y under paragraph (b)(1)(i)(D) of this section is $260x. A incurs $75x of business interest expense in 2021. In 2024, A sells Assets X and Y to an unrelated third party for $40x and $90x, respectively.
¶(2) Analysis. A's section 163(j) limitation for 2021 is $78x ($260x × 30 percent). Thus, all $75x of A's business interest expense incurred in 2021 is deductible in that year. Under paragraph (b)(1)(ii)(C) of this section, A must subtract $110x ($30x + $80x) from its tentative taxable income in computing its ATI for its 2024 taxable year. Alternatively, under paragraph (b)(1)(iv)(E)(1) of this section, A must subtract $30x with respect to Asset X (the lesser of $30x or $40x ($40x−$0x)), and $80x with respect to Asset Y (the lesser of $80x or $90x ($90x−$0x)), from its tentative taxable income in computing its ATI for its 2024 taxable year. However, the negative adjustments under paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)(1) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Under that paragraph, A's negative adjustment in 2024 under either paragraph (b)(1)(ii)(C) ($110x) or paragraph (b)(1)(iv)(E)(1) (also $110x) of this section is limited to $100x. This amount equals $250x (the amount of ATI that A needed in order to deduct all $75x of business interest expense in 2021) minus $150x (the amount of A's tentative taxable income in 2021 before adding back any amounts under paragraph (b)(1)(i)(D) through (F) of this section). As established by A, the additional $10x ($110x−$100x) of depreciation deductions that were added back to tentative taxable income in 2021 under paragraph (b)(1)(i)(D) of this section did not increase A's business interest expense deduction for that year.
¶(3) Sale of assets in different taxable years. The facts are the same as in paragraph (b)(1)(viii)(E)(1) of this section, except that A sells Asset Y to an unrelated third party for $90x in 2025. Under paragraph (b)(1)(ii)(C) of this section, A must subtract $30x from its tentative taxable income in computing its ATI for its 2024 taxable year. Alternatively, under paragraph (b)(1)(iv)(E)(1) of this section, A must subtract $30x (the lesser of $30x or $40x ($40x−$0x)) from its tentative taxable income in computing its ATI for its 2024 taxable year. Because A's negative adjustment cap for its 2021 taxable year is $100x (see paragraph (b)(1)(viii)(E)(2) of this section), A's negative adjustment in 2024 of $30x is not reduced under paragraph (b)(1)(iv)(F) of this section. In 2025, A must subtract $80x from its tentative taxable income under paragraph (b)(1)(ii)(C) of this section in computing its ATI. Alternatively, under paragraph (b)(1)(iv)(E)(1) of this section, A must subtract $80x (the lesser of $80x or $90x ($90x−$0x)) from its tentative taxable income in computing its ATI for its 2025 taxable year. However, the negative adjustments under paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)(1) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Moreover, A's negative adjustment cap for its 2021 taxable year is reduced from $100x to $70x to reflect A's $30x negative adjustment in 2024. See paragraph (b)(1)(iv)(F) of this section. Thus, A's negative adjustment for 2025 under either paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1) of this section is reduced from $80x to $70x. As established by A, the additional $10x ($110x−$100x) of depreciation deductions that were added back to tentative taxable income in 2021 under paragraph (b)(1)(i)(D) of this section did not increase A's business interest expense deduction for that year.
¶(3) Business interest expense—
¶(i) In general. The term business interest expense means interest expense that is properly allocable to a non-excepted trade or business or that is floor plan financing interest expense. Business interest expense also includes disallowed business interest expense carryforwards (as defined in paragraph (b)(11) of this section). However, business interest expense does not include amounts of interest expense carried forward to the taxable year from a prior taxable year due to the application of section 465 or section 469, which apply after the application of section 163(j). For the treatment of investment interest, see section 163(d); and for the treatment of personal interest, see section 163(h).
¶(ii) Special rules. For special rules for defining business interest expense in certain circumstances, see §§ 1.163(j)-3(b)(2) (regarding disallowed interest expense), 1.163(j)-4(b) (regarding C corporations) and 1.163(j)-4(d)(2)(iii) (regarding consolidated groups), 1.163(j)-1(b)(9) (regarding current-year business interest expense), and 1.163(j)-6(c) (regarding partnerships and S corporations).
¶(4) Business interest income—
¶(ii) Special rules. For special rules defining business interest income in certain circumstances, see §§ 1.163(j)-4(b) (regarding C corporations), 1.163(j)-4(d)(2)(iii) (regarding consolidated groups), and 1.163(j)-6(c) (regarding partnerships and S corporations).
¶(6) Cleared swap. The term cleared swap means a swap that is cleared by a derivatives clearing organization, as such term is defined in section 1a of the Commodity Exchange Act (7 U.S.C. 1a), or by a clearing agency, as such term is defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c), that is registered as a derivatives clearing organization under the Commodity Exchange Act or as a clearing agency under the Securities Exchange Act of 1934, respectively, if the derivatives clearing organization or clearing agency requires the parties to the swap to post and collect margin or collateral.
¶(8) Consolidated return year. The term consolidated return year has the meaning provided in § 1.1502-1(d).
¶(9) Current-year business interest expense. The term current-year business interest expense means business interest expense that would be deductible in the current taxable year without regard to section 163(j) and that is not a disallowed business interest expense carryforward from a prior taxable year.
¶(10) Disallowed business interest expense. The term disallowed business interest expense means the amount of business interest expense for a taxable year in excess of the amount allowed as a deduction for the taxable year under section 163(j)(1) and § 1.163(j)-2(b). For purposes of section 163(j) and the regulations in this part under section 163(j) of the Internal Revenue Code (Code) disallowed business interest expense is treated as “paid or accrued” in the taxable year in which the expense is deductible for Federal income tax purposes (without regard to section 163(j)) or in the taxable year in which a deduction for the business interest expense is permitted under section 163(j), as the context may require.
¶(11) Disallowed business interest expense carryforward. The term disallowed business interest expense carryforward means any business interest expense described in § 1.163(j)-2(c).
¶(12) Disallowed disqualified interest. The term disallowed disqualified interest means interest expense, including carryforwards, for which a deduction was disallowed under old section 163(j) (as defined in paragraph (b)(27) of this section) in the taxpayer's last taxable year beginning before January 1, 2018, and that was carried forward pursuant to old section 163(j).
¶(13) Electing farming business. The term electing farming business means a trade or business that makes an election as provided in § 1.163(j)-9 or other published guidance and that is—
¶(ii) Any trade or business of a specified agricultural or horticultural cooperative, as defined in section 199A(g)(4); or
¶(14) Electing real property trade or business. The term electing real property trade or business means a trade or business that makes an election as provided in § 1.163(j)-9 or other published guidance and that is—
¶(15) Excepted regulated utility trade or business—
¶(i) In general. The term excepted regulated utility trade or business means:
¶(A) Automatically excepted regulated utility trades or businesses. A trade or business—
¶(1) That furnishes or sells—
¶(i) Electrical energy, water, or sewage disposal services;
¶(ii) Gas or steam through a local distribution system; or
¶(iii) Transportation of gas or steam by pipeline; but only
¶(2) To the extent that the rates for the furnishing or sale of the items in paragraph (b)(15)(i)(A)(1) of this section—
¶(i) Have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof and are determined on a cost of service and rate of return basis; or
¶(ii) Have been established or approved by the governing or ratemaking body of an electric cooperative; or
¶(B) Electing regulated utility trades or businesses. A trade or business that makes a valid election under paragraph (b)(15)(iii) of this section; or
¶(C) Designated excepted regulated utility trades or businesses. A trade or business that is specifically designated by the Secretary in guidance published in the Federal Register or the Internal Revenue Bulletin as an excepted regulated utility trade or business (see § 601.601(d) of this chapter) for section 163(j) purposes.
¶(ii) Depreciation and excepted and non-excepted utility trades or businesses.
¶(A) Depreciation. Taxpayers engaged in an excepted trade or business described in paragraph (b)(15)(i) of this section cannot claim the additional first-year depreciation deduction under section 168(k) for any property that is primarily used in the excepted regulated utility trade or business.
¶(B) Allocation of items. If a taxpayer is engaged in one or more excepted trades or businesses, as described in paragraph (b)(15)(i) of this section, and one or more non-excepted trades or businesses, the taxpayer must allocate items between the excepted and non-excepted utility trades or businesses. See §§ 1.163(j)-1(b)(44) and 1.163(j)-10(c)(3)(iii)(C). Some trades or businesses with de minimis furnishing or sales of items described in paragraph (b)(15)(i)(A)(1) of this section that are not sold pursuant to rates that are determined on a cost of service and rate of return basis or established or approved by the governing or ratemaking body of an electric cooperative, and are not subject to an election in paragraph (b)(15)(iii), are treated as excepted trades or businesses. See § 1.163(j)-10(c)(3)(iii)(C)(3). For look-through rules applicable to certain CFCs that furnish or sell items described in paragraph (b)(15)(i)(A)(1) of this section that are not sold pursuant to rates that are determined on a cost of service and rate of return basis or established or approved by the governing or ratemaking body of an electric cooperative as described in paragraph (b)(15)(i)(A)(2) of this section, see § 1.163(j)-10(c)(5)(ii)(C).
¶(iii) Election to be an excepted regulated utility trade or business.
¶(A) In general. A trade or business that is not an excepted regulated utility trade or business described in paragraph (b)(15)(i)(A) or (C) of this section and that furnishes or sells items described in paragraph (b)(15)(i)(A)(1) of this section is eligible to make an election to be an excepted regulated utility trade or business to the extent that the rates for furnishing or selling the items described in paragraph (b)(15)(i)(A)(1) of this section have been established or approved by a regulatory body described in paragraph (b)(15)(i)(A)(2)(i) of this section.
¶(B) Scope and effect of election—
¶(1) In general. An election under paragraph (b)(15)(iii) of this section is made with respect to each eligible trade or business of the taxpayer and applies only to the trade or business for which the election is made. An election under paragraph (b)(15)(iii) of this section applies to the taxable year in which the election is made and to all subsequent taxable years.
¶(C) Time and manner of making election—
¶(1) In general. Subject to paragraph (b)(15)(iii)(C)(5) of this section, a taxpayer makes an election under paragraph (b)(15)(iii) by attaching an election statement to the taxpayer's timely filed original Federal income tax return, including extensions. A taxpayer may make elections for multiple trades or businesses on a single election statement.
¶(2) Election statement contents. The election statement should be titled “Section 1.163(j)-1(b)(15)(iii) Election” and must contain the following information for each trade or business:
¶(i) The taxpayer's name;
¶(ii) The taxpayer's address;
¶(iii) The taxpayer's social security number (SSN) or employer identification number (EIN);
¶(iv) A description of the taxpayer's electing trade or business sufficient to demonstrate qualification for an election under this section, including the principal business activity code; and
¶(v) A statement that the taxpayer is making an election under section 1.163(j)-1(b)(15)(iii).
¶(3) Consolidated group's or partnership's trade or business. The rules in § 1.163(j)-9(d)(3) and (4) apply with respect to an election under paragraph (b)(15)(iii) of this section for a consolidated group's or partnership's trade or business.
¶(4) Termination of election. The rules in § 1.163(j)-9(e) apply to determine when an election under paragraph (b)(15)(iii) of this section terminates.
¶(5) Additional guidance. The rules and procedures regarding the time and manner of making an election under paragraph (b)(15)(iii) of this section and the election statement contents in paragraph (b)(15)(iii)(C)(2) of this section may be modified through other guidance (see §§ 601.601(d) and 601.602 of this chapter). Additional situations in which an election may terminate under paragraph (b)(15)(iii)(C)(4) of this section may be provided through guidance published in the Federal Register or in the Internal Revenue Bulletin (see § 601.601(d) of this chapter).
¶(16) Excess business interest expense. For any partnership, the term excess business interest expense means the amount of disallowed business interest expense of the partnership for a taxable year under section § 1.163(j)-2(b). With respect to a partner, see § 1.163(j)-6(g) and (h).
¶(17) Excess taxable income. With respect to any partnership or S corporation, the term excess taxable income means the amount which bears the same ratio to the partnership's ATI as—
¶(i) The excess (if any) of—
¶(B) The amount (if any) by which the business interest expense of the partnership, reduced by the floor plan financing interest expense, exceeds the business interest income of the partnership or S corporation; bears to
¶(18) Floor plan financing indebtedness. The term floor plan financing indebtedness means indebtedness—
¶(i) Used to finance the acquisition of motor vehicles held for sale or lease; and
¶(ii) Secured by the motor vehicles so acquired.
¶(19) Floor plan financing interest expense. The term floor plan financing interest expense means interest paid or accrued on floor plan financing indebtedness. For purposes of the section 163(j) regulations, all floor plan financing interest expense is treated as business interest expense. See paragraph (b)(3) of this section.
¶(21) Intercompany transaction. The term intercompany transaction has the meaning provided in § 1.1502-13(b)(1)(i).
¶(22) Interest. The term interest means any amount described in paragraph (b)(22)(i), (ii), (iii), or (iv) of this section.
¶(i) In general. Interest is an amount paid, received, or accrued as compensation for the use or forbearance of money under the terms of an instrument or contractual arrangement, including a series of transactions, that is treated as a debt instrument for purposes of section 1275(a) and § 1.1275-1(d), and not treated as stock under § 1.385-3, or an amount that is treated as interest under other provisions of the Code or the Income Tax Regulations. Thus, interest includes, but is not limited to, the following:
¶(A) Original issue discount (OID), as adjusted by the holder for any acquisition premium or amortizable bond premium;
¶(B) Qualified stated interest, as adjusted by the holder for any amortizable bond premium or by the issuer for any bond issuance premium;
¶(C) Acquisition discount;
¶(F) OID includible in income by a holder that has made an election under § 1.1272-3 to treat all interest on a debt instrument as OID;
¶(H) Repurchase premium to the extent deductible by the issuer under § 1.163-7(c) (determined without regard to section 163(j));
¶(M) De minimis OID taken into account by the issuer;
¶(N) Amounts paid or received in connection with a sale-repurchase agreement treated as indebtedness under Federal tax principles; however, in the case of a sale-repurchase agreement relating to tax-exempt bonds, the amount is not tax-exempt interest;
¶(P) Amounts treated as interest under section 636.
¶(ii) Swaps with significant nonperiodic payments—
¶(A) In general. Except as provided in paragraphs (b)(22)(ii)(B) and (C) of this section, a swap with significant nonperiodic payments is treated as two separate transactions consisting of an on-market, level payment swap and a loan. The loan must be accounted for by the parties to the contract independently of the swap. The time value component associated with the loan, determined in accordance with § 1.446-3(f)(2)(iii)(A), is recognized as interest expense to the payor and interest income to the recipient.
¶(B) Exception for cleared swaps. Paragraph (b)(22)(ii)(A) of this section does not apply to a cleared swap (as defined in paragraph (b)(6) of this section).
¶(C) Exception for non-cleared swaps subject to margin or collateral requirements. Paragraph (b)(22)(ii)(A) of this section does not apply to a non-cleared swap that requires the parties to meet the margin or collateral requirements of a federal regulator or that provides for margin or collateral requirements that are substantially similar to a cleared swap or a non-cleared swap subject to the margin or collateral requirements of a federal regulator. For purposes of this paragraph (b)(22)(ii)(C), the term federal regulator means the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), or a prudential regulator, as defined in section 1a(39) of the Commodity Exchange Act (7 U.S.C. 1a), as amended by section 721 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Public Law 111-203, 124 Stat. 1376, Title VII.
¶(iii) Other amounts treated as interest—
¶(A) Treatment of premium—
¶(1) Issuer. If a debt instrument is issued at a premium within the meaning of § 1.163-13, any ordinary income under § 1.163-13(d)(4) is treated as interest income of the issuer.
¶(2) Holder. If a taxable debt instrument is acquired at a premium within the meaning of § 1.171-1 and the holder elects to amortize the premium, any amount deductible as a bond premium deduction under section 171(a)(1) and § 1.171-2(a)(4)(i)(A) or (C) is treated as interest expense of the holder.
¶(B) Treatment of ordinary income or loss on certain debt instruments. If an issuer of a contingent payment debt instrument subject to § 1.1275-4(b), a nonfunctional currency contingent payment debt instrument subject to § 1.988-6, or an inflation-indexed debt instrument subject to § 1.1275-7 recognizes ordinary income on the debt instrument in accordance with the rules in § 1.1275-4(b), § 1.988-6(b)(2), or § 1.1275-7(f), whichever is applicable, the ordinary income is treated as interest income of the issuer. If a holder of a contingent payment debt instrument subject to § 1.1275-4(b), a nonfunctional currency contingent payment debt instrument subject to § 1.988-6, or an inflation-indexed debt instrument subject to § 1.1275-7 recognizes an ordinary loss on the debt instrument in accordance with the rules in § 1.1275-4(b), § 1.988-6(b)(2), or § 1.1275-7(f), whichever is applicable, the ordinary loss is treated as interest expense of the holder.
¶(C) Substitute interest payments. A substitute interest payment described in § 1.861-2(a)(7) is treated as interest expense to the payor only if the payment relates to a sale-repurchase agreement or a securities lending transaction that is not entered into by the payor in the ordinary course of the payor's business. A substitute interest payment described in § 1.861-2(a)(7) is treated as interest income to the recipient only if the payment relates to a sale-repurchase agreement or a securities lending transaction that is not entered into by the recipient in the ordinary course of the recipient's business; however, in the case of a sale-repurchase agreement or a securities lending transaction relating to tax-exempt bonds, the recipient of a substitute payment does not receive tax-exempt interest income. This paragraph (b)(22)(iii)(C) does not apply to an amount described in paragraph (b)(22)(i)(N) of this section.
¶(E) Factoring income. The excess of the amount that a taxpayer collects on a factored receivable (or realizes upon the sale or other disposition of the factored receivable) over the amount paid for the factored receivable by the taxpayer is treated as interest income. For purposes of this paragraph (b)(22)(iii)(E), the term factored receivable includes any account receivable or other evidence of indebtedness, whether or not issued at a discount and whether or not bearing stated interest, arising out of the disposition of property or the performance of services by any person, if such account receivable or evidence of indebtedness is acquired by a person other than the person who disposed of the property or provided the services that gave rise to the account receivable or evidence of indebtedness. This paragraph (b)(22)(iii)(E) does not apply to an amount described in paragraph (b)(22)(i)(C) or (E) of this section.
¶(2) Limitation on amount treated as interest income. A shareholder may not treat any part of a section 163(j) interest dividend as interest income to the extent the amount of the section 163(j) interest dividend exceeds the excess of the amount of the entire dividend that includes the section 163(j) interest dividend over the sum of the conduit amounts other than interest-related dividends under section 871(k)(1)(C) and section 163(j) interest dividends that affect the shareholder's treatment of that dividend.
¶(3) Conduit amounts. For purposes of paragraph (b)(22)(iii)(F)(2) of this section, the term conduit amounts means, with respect to any category of income (including tax-exempt interest) earned by a RIC for a taxable year, the amounts identified by the RIC (generally in a designation or written report) in connection with dividends of the RIC for that taxable year that are subject to a limit determined by reference to that category of income. For example, a RIC's conduit amount with respect to its net capital gain is the amount of the RIC's capital gain dividends under section 852(b)(3)(C).
¶(4) Holding period. Except as provided in paragraph (b)(22)(iii)(F)(5) of this section, no dividend is treated as interest income under paragraph (b)(22)(iii)(F)(1) of this section if the dividend is received with respect to a share of RIC stock—
¶(ii) To the extent that the shareholder is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.
¶(5) Exception to holding period requirement for money market funds and certain regularly declared dividends. Paragraph (b)(22)(iii)(F)(4)(i) of this section does not apply to dividends distributed by any RIC regulated as a money market fund under 17 CFR 270.2a-7 (Rule 2a-7 under the 1940 Act) or to regular dividends paid by a RIC that declares section 163(j) interest dividends on a daily basis in an amount equal to at least 90 percent of its excess section 163(j) interest income, as defined in paragraph (b)(35)(iv)(E) of this section, and distributes such dividends on a monthly or more frequent basis.
¶(iv) Anti-avoidance rules—
¶(A) Principal purpose to reduce interest expense—
¶(1) Treatment as interest expense. Any expense or loss economically equivalent to interest is treated as interest expense if a principal purpose of structuring the transaction(s) is to reduce an amount incurred by the taxpayer that otherwise would have been described in paragraph (b)(22)(i), (ii), or (iii) of this section. For this purpose, the fact that the taxpayer has a business purpose for obtaining the use of funds does not affect the determination of whether the manner in which the taxpayer structures the transaction(s) is with a principal purpose of reducing the taxpayer's interest expense. In addition, the fact that the taxpayer has obtained funds at a lower pre-tax cost based on the structure of the transaction(s) does not affect the determination of whether the manner in which the taxpayer structures the transaction(s) is with a principal purpose of reducing the taxpayer's interest expense. For purposes of this paragraph (b)(22)(iv)(A)(1), any expense or loss is economically equivalent to interest to the extent that the expense or loss is—
¶(i) Deductible by the taxpayer;
¶(ii) Incurred by the taxpayer in a transaction or series of integrated or related transactions in which the taxpayer secures the use of funds for a period of time;
¶(iii) Substantially incurred in consideration of the time value of money; and
¶(iv) Not described in paragraph (b)(22)(i), (ii), or (iii) of this section.
¶(2) Corresponding treatment of amounts as interest income. If a taxpayer knows that an expense or loss is treated by the payor as interest expense under paragraph (b)(22)(iv)(A)(1) of this section, the taxpayer provides the use of funds for a period of time in the transaction(s) subject to paragraph (b)(22)(iv)(A)(1) of this section, the taxpayer earns income or gain with respect to the transaction(s), and such income or gain is substantially earned in consideration of the time value of money provided by the taxpayer, such income or gain is treated as interest income to the extent of the expense or loss treated by the payor as interest expense under paragraph (b)(22)(iv)(A)(1) of this section.
¶(B) Interest income artificially increased. Notwithstanding paragraphs (b)(22)(i) through (iii) of this section, any income realized by a taxpayer in a transaction or series of integrated or related transactions is not treated as interest income of the taxpayer if and to the extent that a principal purpose for structuring the transaction(s) is to artificially increase the taxpayer's business interest income. For this purpose, the fact that the taxpayer has a business purpose for holding interest generating assets does not affect the determination of whether the manner in which the taxpayer structures the transaction(s) is with a principal purpose of artificially increasing the taxpayer's business interest income.
¶(C) Principal purpose. Whether a transaction or a series of integrated or related transactions is entered into with a principal purpose described in paragraph (b)(22)(iv)(A) or (B) of this section depends on all the facts and circumstances related to the transaction(s), except for those facts described in paragraph (b)(22)(iv)(A) or (B) of this section. A purpose may be a principal purpose even though it is outweighed by other purposes (taken together or separately). Factors to be taken into account in determining whether one of the taxpayer's principal purposes for entering into the transaction(s) include the taxpayer's normal borrowing rate in the taxpayer's functional currency, whether the taxpayer would enter into the transaction(s) in the ordinary course of the taxpayer's trade or business, whether the parties to the transaction(s) are related persons (within the meaning of section 267(b) or section 707(b)), whether there is a significant and bona fide business purpose for the structure of the transaction(s), whether the transactions are transitory, for example, due to a circular flow of cash or other property, and the substance of the transaction(s).
¶(D) Coordination with anti-avoidance rule in § 1.163(j)-2(j). The anti-avoidance rules in paragraphs (b)(22)(iv)(A) through (C) of this section, rather than the anti-avoidance rules in § 1.163(j)-2(j), apply to determine whether an item is treated as interest expense or interest income.
¶(v) Examples. The examples in this paragraph (b)(22)(v) illustrate the application of paragraph (b)(22)(iv) of this section. Unless otherwise indicated, A, B, C, D, and Bank are domestic C corporations that are publicly traded; the exemption for certain small businesses in § 1.163(j)-2(d) does not apply; A is not engaged in an excepted trade or business; and all amounts of interest expense are deductible except for the potential application of section 163(j).
¶(A) Example 1—
¶(1) Facts. A is engaged in a manufacturing business and uses the calendar year as its annual accounting period. A's functional currency is the U.S. dollar and A conducts virtually all of its business in the U.S. dollar. A has no connection to Japan or the Japanese yen in the ordinary course of business. A projects that it will have business interest expense of $100x on an existing loan obligation with a stated principal amount of $2,000x (Loan 1) and no business interest income in its taxable year ending December 31, 2021. In early 2021, A enters into the following transactions, which A would not have entered into in the ordinary course of A's trade or business:
¶(i) A enters into a loan obligation in which A borrows Japanese yen from Bank in an amount equivalent to $2,000x with an interest rate of 1 percent (Loan 2) (at the time of the loan, the U.S. dollar equivalent interest rate on a loan of $2,000x is 5 percent);
¶(ii) A enters into a foreign currency swap transaction (FX Swap) with Bank with a notional principal amount of $2,000x under which A receives Japanese yen at 1 percent multiplied by the amount of Japanese yen borrowed from Bank (which for 2021 equals $20x) and pays U.S. dollars at 5 percent multiplied by a notional amount of $2,000x ($100x per year);
¶(iv) A enters into a spot transaction with Bank to convert the proceeds of Loan 2 into $2,000x U.S. dollars and A uses the U.S. dollars to repay Loan 1.
¶(2) Analysis. A principal purpose of A entering into the transactions with Bank was to try to reduce the amount incurred by A that otherwise would be interest expense; in effect, A sought to alter A's cost of borrowing by converting a substantial portion of its interest expense deductions on Loan 1 into section 165 deductions on the FX Swap ($100x interest expense related to Loan 1 compared to $20x interest expense related to Loan 2 and $80x section 165 deduction). A's functional currency is the U.S. dollar and A conducts virtually all of its business in the U.S. dollar. A has no connection to Japan or the Japanese yen and would not have entered into the transactions in the ordinary course of A's trade or business. The section 165 deductions related to the FX Swap were incurred by A in a series of transactions in which A secured the use of funds for a period of time and were substantially incurred in consideration of the time value of money. As a result, under paragraph (b)(22)(iv)(A)(1) of this section, for purposes of section 163(j), the $80x paid by A to Bank on the FX Swap is treated by A as interest expense.
¶(B) Example 2—
¶(1) Facts. A is engaged in a manufacturing business and uses the calendar year as its annual accounting period. A does not use gold in its manufacturing business. In 2021, A expects to borrow $1,000x for six months. In January 2021, A borrows from B two ounces of gold at a time when the spot price for gold is $500x per ounce. A agrees to return the two ounces of gold in six months. A sells the two ounces of gold to C for $1,000x. A then enters into a contract with D to purchase two ounces of gold six months in the future for $1,013x. In exchange for the use of $1,000x in cash for six months, A has sustained a loss of $13x in connection with these related transactions. A would not have entered into the gold transactions in the ordinary course of A's trade or business.
¶(2) Analysis. In a series of related transactions, A has obtained the use of $1,000x for six months and created a loss of $13x substantially incurred in consideration of the time value of money. A would not have entered into the gold transactions in the ordinary course of A's trade or business. A entered into the transactions with a principal purpose of structuring the transactions to reduce its interest expense (in effect, A sought to convert what otherwise would be interest expense into a loss through the transactions). As a result, under paragraph (b)(22)(iv)(A)(1) of this section, for purposes of section 163(j), the loss of $13x is treated by A as interest expense.
¶(C) Example 3—
¶(1) Facts. A is engaged in a manufacturing business and uses the calendar year as its annual accounting period. A's functional currency is the U.S. dollar and A conducts virtually all of its business in the U.S. dollar. A has no connection to Argentina or the Argentine peso as part of its ordinary course of business. As of January 1, 2021, A expects to have adjusted taxable income (as defined in paragraph (b)(1) of this section) of $200x in the taxable year ending December 31, 2021. A also projects that it will have business interest expense of $70x on an existing loan in 2021. A has cash equivalents of $100x on which A expects to earn $5x of business interest income. In early 2021, A enters into the following transactions, which A would not have entered into in the ordinary course of A's trade or business:
¶(i) A enters into a spot transaction with Bank to convert the $100x of cash equivalents into an amount in Argentine pesos equivalent to $100x and A uses the Argentine pesos to purchase an Argentine peso note (Note) issued by a subsidiary of Bank for the Argentine peso equivalent of $100x; the Note pays interest at a 10 percent rate; and
¶(ii) A enters into a foreign currency swap transaction (FX Swap) with Bank with a notional principal amount of $100x under which A pays Argentine pesos at 10 percent multiplied by the amount of Argentine peso principal amount on the Note (which for 2021 equals $10x) and receives U.S. dollars at 5 percent multiplied by a notional amount of $100x ($5x per year).
¶(2) Analysis. A principal purpose of A entering into the transactions was to increase the amount of business interest income received by A; in effect, A increased its business interest income by separately accounting for its net deduction of $5x per year on the FX Swap. A's functional currency is the U.S. dollar and A conducts virtually all of its business in the U.S. dollar. A has no connection to Argentina or the Argentine peso and would not have entered into the transactions in the ordinary course of A's trade or business. The FX Swap was incurred by A as a part of a transaction that A entered into with a principal purpose of artificially increasing its business interest income. As a result, under paragraph (b)(22)(iv)(B) of this section, for purposes of section 163(j), the $10x business interest income earned on the Note by A is reduced by $5x (the net $5x paid by A on the FX Swap).
¶(D) Example 4—
¶(1) Facts. A is wholly owned by FC, a foreign corporation organized in foreign country X. A uses the calendar year for its annual accounting period. FC has a better credit rating than A. A needs to borrow $2,000x in the taxable year ending December 31, 2021, to fund its business operations. A also projects that, if it borrows $2,000x on January 1, 2021, and pays a market rate of interest, it will have business interest expense of $100x in its taxable year ending December 31, 2021. In early 2021, A enters into the following transactions:
¶(i) A enters into a loan obligation in which A borrows $2,000x from Bank with an interest rate of 3 percent (Loan 1);
¶(ii) FC and Bank enter into a guarantee arrangement (Guarantee) under which FC agrees to guarantee Bank that Bank will be timely paid all of the amounts due on Loan 1; and
¶(iii) A enters into a guarantee fee agreement with FC (Guarantee Fee Agreement) under which A agrees to pay FC $40x in return for FC entering into the Guarantee, which was not an agreement that A would have entered into in the ordinary course of A's trade or business.
¶(2) Analysis. A principal purpose of A entering into the transactions was to reduce the amount incurred by A that otherwise would be interest expense; in effect, A sought to convert a substantial portion of its interest expense deductions on Loan 1 into section 162 deductions on the Guarantee Fee Agreement ($100x interest expense had A borrowed without the Guarantee compared to $60x interest expense related to Loan 1 and $40x section 162 deduction). A would not have entered into the Guarantee Fee Agreement in the ordinary course of A's trade or business. The $40x section 162 deductions related to the Guarantee Fee Agreement were incurred by A in a series of transactions in which A secured the use of funds for a period of time and were substantially incurred in consideration of the time value of money. As a result, under paragraph (b)(22)(iv)(A)(1) of this section, for purposes of section 163(j), the $40x paid by A to FC on the Guarantee Fee Agreement is treated by A as interest expense.
¶(E) Example 5—
¶(1) Facts. A, B, and C are equal partners in ABC partnership. ABC is considering acquiring an additional loan from a third-party lender to expand its business operations. However, ABC already has significant debt and interest expense. For the purpose of reducing the amount of additional interest expense ABC would have otherwise incurred by borrowing, A agrees to make an additional contribution to ABC for use in its business operations in exchange for a guaranteed payment for the use of capital under section 707(c).
¶(2) Analysis. The guaranteed payment is deductible by ABC, incurred by ABC in a transaction in which ABC secures the use of funds for a period of time, substantially incurred in consideration of the time value of money, and not described in paragraph (b)(22)(i), (ii), or (iii) of this section. As a result, the guaranteed payment to A is economically equivalent to the interest that ABC would have incurred on an additional loan from a third-party lender. A principal purpose of A making a contribution in exchange for a guaranteed payment for the use of capital was to reduce the amount incurred by ABC that otherwise would be interest expense. As a result, under paragraph (b)(22)(iv)(A)(1) of this section, for purposes of section 163(j), such guaranteed payment is treated as interest expense of ABC for purposes of section 163(j). In addition, under paragraph (b)(22)(iv)(A)(2) of this section, if A knows that the guaranteed payment is treated as interest expense of ABC, because A provides the use of funds for a period of time in a transaction subject to paragraph (b)(22)(iv)(A)(1) of this section, A earns income or gain with respect to the transaction, and such income or gain is substantially earned in consideration of the time value of money provided by A, the guaranteed payment is treated as interest income of A for purposes of section 163(j).
¶(23) Interest expense. The term interest expense means interest that is paid or accrued, or treated as paid or accrued, for the taxable year.
¶(24) Interest income. The term interest income means interest that is included in gross income for the taxable year.
¶(26) Motor vehicle. The term motor vehicle means a motor vehicle as defined in section 163(j)(9)(C).
¶(30) Real estate investment trust. The term real estate investment trust (REIT) has the meaning provided in section 856.
¶(31) Real property. The term real property includes—
¶(ii) Any direct or indirect right, including a license or other contractual right, to share in the appreciation in value of, or the gross or net proceeds or profits generated by, an interest in real property, including net proceeds or profits associated with tolls, rents or other similar fees.
¶(32) Regulated investment company. The term regulated investment company (RIC) has the meaning provided in section 851.
¶(33) Relevant foreign corporation. The term relevant foreign corporation means any foreign corporation whose classification is relevant under § 301.7701-3(d)(1) for a taxable year, other than solely pursuant to section 881 or 882.
¶(35) Section 163(j) interest dividend. The term section 163(j) interest dividend means a dividend paid by a RIC for a taxable year for which section 852(b) applies to the RIC, to the extent described in paragraph (b)(35)(i) or (ii) of this section, as applicable.
¶(i) In general. Except as provided in paragraph (b)(35)(ii) of this section, a section 163(j) interest dividend is any dividend, or part of a dividend, that is reported by the RIC as a section 163(j) interest dividend in written statements furnished to its shareholders.
¶(iii) Allocation of excess reported amount—
¶(A) In general. Except as provided in paragraph (b)(35)(iii)(B) of this section, the excess reported amount, if any, that is allocable to the reported section 163(j) interest dividend amount is that portion of the excess reported amount that bears the same ratio to the excess reported amount as the reported section 163(j) interest dividend amount bears to the aggregate reported amount.
¶(B) Special rule for noncalendar year RICs. In the case of any taxable year that does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for that taxable year, paragraph (b)(35)(iii)(A) of this section is applied by substituting “post-December reported amount” for “aggregate reported amount,” and no excess reported amount is allocated to any dividend paid on or before December 31 of such taxable year.
¶(iv) Definitions. The following definitions apply for purposes of this paragraph (b)(35):
¶(A) Reported section 163(j) interest dividend amount. The term reported section 163(j) interest dividend amount means the amount of a dividend distribution reported to the RIC's shareholders under paragraph (b)(35)(i) of this section as a section 163(j) interest dividend.
¶(C) Aggregate reported amount. The term aggregate reported amount means the aggregate amount of dividends reported by the RIC under paragraph (b)(35)(i) of this section as section 163(j) interest dividends for the taxable year (including section 163(j) interest dividends paid after the close of the taxable year described in section 855).
¶(D) Post-December reported amount. The term post-December reported amount means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year.
¶(E) Excess section 163(j) interest income. The term excess section 163(j) interest income means, with respect to a taxable year of a RIC, the excess of the RIC's business interest income for the taxable year over the sum of the RIC's business interest expense for the taxable year and the RIC's other deductions for the taxable year that are properly allocable to the RIC's business interest income.
¶(v) Example—
¶(A) Facts. X is a domestic C corporation that has elected to be a RIC. For its taxable year ending December 31, 2021, X has $100x of business interest income (all of which is qualified interest income for purposes of section 871(k)(1)(E)) and $10x of dividend income (all of which is qualified dividend income within the meaning of section 1(h)(11) and would be eligible for the dividends received deduction under section 243, determined as described in section 854(b)(3)). X has $10x of business interest expense and $20x of other deductions. X has no other items for the taxable year. On December 31, 2021, X pays a dividend of $80x to its shareholders, and reports, in written statements to its shareholders, $71.82x as a section 163(j) interest dividend; $10x as dividends that may be treated as qualified dividend income or as dividends eligible for the dividends received deduction; and $72.73x as interest-related dividends under section 871(k)(1)(C). Shareholder A, a domestic C corporation, meets the holding period requirements in paragraph (b)(22)(iii)(F)(4) of this section with respect to the stock of X, and receives a dividend of $8x from X on December 31, 2021.
¶(B) Analysis. X determines that $18.18x of other deductions are properly allocable to X's business interest income. X's excess section 163(j) interest income under paragraph (b)(35)(iv)(E) of this section is $71.82x ($100x business interest income—($10x business interest expense + $18.18x other deductions allocated) = $71.82x). Thus, X may report up to $71.82x of its dividends paid on December 31, 2021, as section 163(j) interest dividends to its shareholders. X may also report up to $10x of its dividends paid on December 31, 2021, as dividends that may be treated as qualified dividend income or as dividends that are eligible for the dividends received deduction. X determines that $9.09x of interest expense and $18.18x of other deductions are properly allocable to X's qualified interest income. Therefore, X may report up to $72.73x of its dividends paid on December 31, 2021, as interest-related dividends under section 871(k)(1)(C) ($100x qualified interest income—$27.27x deductions allocated = $72.73x). A treats $1x of its $8x dividend as a dividend eligible for the dividends received deduction and no part of the dividend as an interest-related dividend under section 871(k)(1)(C). Therefore, under paragraph (b)(22)(iii)(F)(2) of this section, A may treat $7x of the section 163(j) interest dividend as interest income for purposes of section 163(j) ($8x dividend—$1x conduit amount = $7x limitation).
¶(36) Section 163(j) limitation. The term section 163(j) limitation means the limit on the amount of business interest expense that a taxpayer may deduct in a taxable year under section 163(j) and § 1.163(j)-2(b).
¶(37) Section 163(j) regulations. The term section 163(j) regulations means this section and §§ 1.163(j)-2 through 1.163(j)-11.
¶(38) Separate return limitation year. The term separate return limitation year (SRLY) has the meaning provided in § 1.1502-1(f).
¶(39) Separate return year. The term separate return year has the meaning provided in § 1.1502-1(e).
¶(40) Separate tentative taxable income. The term separate tentative taxable income with respect to a taxpayer and a taxable year has the meaning provided in § 1.1502-12, but for this purpose computed without regard to the application of the section 163(j) limitation and with the addition of the adjustments made in paragraph (b)(43)(ii) of this section and § 1.163(j)-4(d)(2)(iv).
¶(41) Tax-exempt corporation. The term tax-exempt corporation means any tax-exempt organization that is organized as a corporation.
¶(42) Tax-exempt organization. The term tax-exempt organization means any entity subject to tax under section 511.
¶(43) Tentative taxable income—
¶(i) In general. The term tentative taxable income, with respect to a taxpayer and a taxable year, generally is determined in the same manner as taxable income under section 63 but for this purpose computed without regard to the application of the section 163(j) limitation. Tentative taxable income is computed without regard to any disallowed business interest expense carryforwards.
¶(ii) [Reserved]
¶(iii) Special rules for defining tentative taxable income.
¶(A) For special rules defining the tentative taxable income of a RIC or REIT, see § 1.163(j)-4(b)(4)(ii).
¶(B) For special rules defining the tentative taxable income of consolidated groups, see § 1.163(j)-4(d)(2)(iv).
¶(C) For special rules defining the tentative taxable income of a partnership, see § 1.163(j)-6(d)(1).
¶(D) For special rules defining the tentative taxable income of an S corporation, see § 1.163(j)-6(l)(3).
¶(E) For special rules clarifying that tentative taxable income takes sections 461(l), 465, and 469 into account, see § 1.163(j)-3(b)(4).
¶(F) For special rules clarifying that tentative taxable income takes sections 461(l), 465, and 469 into account, see § 1.163(j)-3(b)(4).
¶(G) For special rules clarifying that tentative taxable income takes sections 461(l), 465, and 469 into account, see § 1.163(j)-3(b)(4).
¶(44) Trade or business—
¶(i) In general. The term trade or business means a trade or business within the meaning of section 162.
¶(ii) Excepted trade or business. The term excepted trade or business means the trade or business of performing services as an employee, an electing real property trade or business, an electing farming business, or an excepted regulated utility trade or business. For additional rules related to excepted trades or businesses, including elections made under section 163(j)(7)(B) and (C), see § 1.163(j)-9.
¶(iii) Non-excepted trade or business. The term non-excepted trade or business means any trade or business that is not an excepted trade or business.
¶(45) Unadjusted basis. The term unadjusted basis means the basis as determined under section 1012 or other applicable sections of chapter 1 of subtitle A of the Code, including subchapters O (relating to gain or loss on dispositions of property), C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses) of the Code. Unadjusted basis is determined without regard to any adjustments described in section 1016(a)(2) or (3), any adjustments for tax credits claimed by the taxpayer (for example, under section 50(c)), or any adjustments for any portion of the basis that the taxpayer has elected to treat as an expense (for example, under section 179, 179B, or 179C).
¶(c) Applicability date—
¶(1) In general. Except as provided in paragraphs (c)(2), (3), and (4) of this section, this section applies to taxable years beginning on or after November 13, 2020. However, taxpayers and their related parties, within the meaning of sections 267(b) and 707(b)(1), may choose to apply the rules of this section to a taxable year beginning after December 31, 2017, and before November 13, 2020 so long as the taxpayers and their related parties consistently apply the rules of the section 163(j) regulations, and, if applicable, §§ 1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-1, 1.382-2, 1.382-5, 1.382-6, 1.383-0, 1.383-1, 1.469-9, 1.469-11, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-36, 1.1502-79, 1.1502-91 through 1.1502-99 (to the extent they effectuate the rules of §§ 1.382-2, 1.382-5, 1.382-6, and 1.383-1), and 1.1504-4, to that taxable year. Additionally, taxpayers and their related parties within the meaning of sections 267(b) and 707(b)(1), otherwise relying on the notice of proposed rulemaking that was published on December 28, 2018, in the Federal Register (83 FR 67490) in its entirety under § 1.163(j)-1(c), may alternatively choose to follow § 1.163(j)-1(b)(1)(iii), rather than proposed § 1.163(j)-1(b)(1)(iii).
¶(2) Anti-avoidance rules. The anti-avoidance rules in paragraph (b)(22)(iv) of this section apply to transactions entered into on or after September 14, 2020.
¶(3) Swaps with significant nonperiodic payments—
¶(i) In general. Except as provided in paragraph (c)(3)(ii) of this section, the rules provided in paragraph (b)(22)(ii) of this section apply to notional principal contracts entered into on or after September 14, 2021. However, taxpayers may choose to apply the rules provided in paragraph (b)(22)(ii) of this section to notional principal contracts entered into before September 14, 2021.
¶(ii) Anti-avoidance rule. The anti-avoidance rules in paragraph (b)(22)(iv) of this section (applied without regard to the references to paragraph (b)(22)(ii) of this section) apply to a notional principal contract entered into on or after September 14, 2020.
¶(4) Paragraphs (b)(1)(iv)(A)(2) through (4), (B) through (G), (b)(22)(iii)(F), and (b)(35). Paragraphs (b)(1)(iv)(A)(2) through (4), (b)(1)(iv)(B) through (G), (b)(22)(iii)(F), and (b)(35) of this section apply to taxable years beginning on or after March 22, 2021. Taxpayers and their related parties, within the meaning of sections 267(b) (determined without regard to section 267(c)(3)) and 707(b)(1), may choose to apply the rules in paragraphs (b)(1)(iv)(A)(2) through (4), (b)(1)(iv) (B) through (G), (b)(22)(iii)(F), and (b)(35) of this section to a taxable year beginning after December 31, 2017, and before March 22, 2021, provided that those taxpayers and their related parties consistently apply all of the rules in the section 163(j) regulations contained in T.D. 9905 (§§ 1.163(j)-0 through 1.163(j)-11, effective November 13, 2020) as modified by T.D. 9943 (effective January 13, 2021), and, if applicable, §§ 1.263A-9, 1.263A-15, 1.381(c)(20)-1, 1.382-1, 1.382-2, 1.382-5, 1.382-6, 1.382-7, 1.383-0, 1.383-1, 1.469-9, 1.469-11, 1.704-1, 1.882-5, 1.1362-3, 1.1368-1, 1.1377-1, 1.1502-13, 1.1502-21, 1.1502-36, 1.1502-79, 1.1502-91 through 1.1502-99 (to the extent they effectuate the rules of §§ 1.382-2, 1.382-5, 1.382-6, and 1.383-1), and 1.1504-4 contained in T.D. 9905, as modified by T.D. 9943, to that taxable year and all subsequent taxable years.
[T.D. 9905, 85 FR 56760, Sept. 14, 2020, as amended by T.D. 9943, 86 FR 5523, Jan. 19, 2021]
Terms defined here
Where the text says “the term … means”. Select a term to jump to its definition.
- adjusted taxable income § 1.163(j)-1(b)(1)
- aggregate reported amount § 1.163(j)-1(b)(35)(iv)(C)
- applicable CFC § 1.163(j)-1(b)(2)(E)(3)
- business interest expense § 1.163(j)-1(b)(3)(i)
- business interest income § 1.163(j)-1(b)(4)(i)
- C corporation § 1.163(j)-1(b)(5)
- cleared swap § 1.163(j)-1(b)(6)
- conduit amounts § 1.163(j)-1(b)(22)(iii)(F)(3)
- consolidated group § 1.163(j)-1(b)(7)
- consolidated return year § 1.163(j)-1(b)(8)
- current-year business interest expense § 1.163(j)-1(b)(9)
- disallowed business interest expense § 1.163(j)-1(b)(10)
- disallowed business interest expense carryforward § 1.163(j)-1(b)(11)
- disallowed disqualified interest § 1.163(j)-1(b)(12)
- electing farming business § 1.163(j)-1(b)(13)
- electing real property trade or business § 1.163(j)-1(b)(14)
- excepted regulated utility trade or business § 1.163(j)-1(b)(15)(i)
- excepted trade or business § 1.163(j)-1(b)(44)(ii)
- excess business interest expense § 1.163(j)-1(b)(16)
- excess reported amount § 1.163(j)-1(b)(35)(iv)(B)
- excess section 163(j) interest income § 1.163(j)-1(b)(35)(iv)(E)
- excess taxable income § 1.163(j)-1(b)(17)
- factored receivable § 1.163(j)-1(b)(22)(iii)(E)
- federal regulator § 1.163(j)-1(b)(22)(ii)(C)
- floor plan financing interest expense § 1.163(j)-1(b)(19)
- group § 1.163(j)-1(b)(20)
- intercompany transaction § 1.163(j)-1(b)(21)
- interest § 1.163(j)-1(b)(22)
- interest expense § 1.163(j)-1(b)(23)
- interest income § 1.163(j)-1(b)(24)
- member § 1.163(j)-1(b)(25)
- motor vehicle § 1.163(j)-1(b)(26)
- non-excepted trade or business § 1.163(j)-1(b)(44)(iii)
- old section 163(j) § 1.163(j)-1(b)(27)
- ownership change § 1.163(j)-1(b)(28)
- ownership date § 1.163(j)-1(b)(29)
- post-December reported amount § 1.163(j)-1(b)(35)(iv)(D)
- real estate investment trust § 1.163(j)-1(b)(30)
- real property § 1.163(j)-1(b)(31)
- regulated investment company § 1.163(j)-1(b)(32)
- relevant foreign corporation § 1.163(j)-1(b)(33)
- reported section 163(j) interest dividend amount § 1.163(j)-1(b)(35)(iv)(A)
- S corporation § 1.163(j)-1(b)(34)
- sale or other disposition § 1.163(j)-1(b)(1)(iv)(A)(1)
- section 163(j) interest dividend § 1.163(j)-1(b)(35)
- section 163(j) limitation § 1.163(j)-1(b)(36)
- section 163(j) regulations § 1.163(j)-1(b)(37)
- separate return limitation year § 1.163(j)-1(b)(38)
- separate return year § 1.163(j)-1(b)(39)
- tax-exempt corporation § 1.163(j)-1(b)(41)
- tax-exempt organization § 1.163(j)-1(b)(42)
- trade or business § 1.163(j)-1(b)(44)(i)
- unadjusted basis § 1.163(j)-1(b)(45)
- United States shareholder § 1.163(j)-1(b)(46)
Cross-references
Computed from the citations in the text of 26 CFR.
Code sections it cites
- § 163 Interest
- § 172 Net operating loss deduction
- § 199A Qualified business income
- § 167 Depreciation
- § 168 Accelerated cost recovery system
- § 174 Amortization of research and experimental expenditures
- § 611 Allowance of deduction for depletion
- § 1016 Adjustments to basis
- § 704 Partner’s distributive share
- § 250 Foreign-derived deduction eligible income and net CFC tested income
- § 951 Amounts included in gross income of United States shareholders
- § 78 Gross up for deemed paid foreign tax credit
- § 951A Net CFC tested income included in gross income of United States shareholders
- § 263 Capital expenditures
- § 263A Capitalization and inclusion in inventory costs of certain expenses
- § 381 Carryovers in certain corporate acquisitions
- § 368 Definitions relating to corporate reorganizations
- § 351 Transfer to corporation controlled by transferor
- § 957 Controlled foreign corporations; United States persons
- § 958 Rules for determining stock ownership
- § 465 Deductions limited to amount at risk
- § 469 Passive activity losses and credits limited
- § 1361 S corporation defined
- § 1 Tax imposed
Show 26 more
- § 1275 Other definitions and special rules
- § 1286 Tax treatment of stripped bonds
- § 1276 Disposition gain representing accrued market discount treated as ordinary income
- § 483 Interest on certain deferred payments
- § 467 Certain payments for the use of property or services
- § 988 Treatment of certain foreign currency transactions
- § 7872 Treatment of loans with below-market interest rates
- § 171 Amortizable bond premium
- § 1258 Recharacterization of gain from certain financial transactions
- § 871 Tax on nonresident alien individuals
- § 852 Taxation of regulated investment companies and their shareholders
- § 246 Rules applying to deductions for dividends received
- § 267 Losses, expenses, and interest with respect to transactions between related taxpayers
- § 707 Transactions between partner and partnership
- § 165 Losses
- § 162 Trade or business expenses
- § 382 Limitation on net operating loss carryforwards and certain built-in losses following ownership change
- § 881 Tax on income of foreign corporations not connected with United States business
- § 855 Dividends paid by regulated investment company after close of taxable year
- § 243 Dividends received by corporations
- § 854 Limitations applicable to dividends received from regulated investment company
- § 63 Taxable income defined
- § 461 General rule for taxable year of deduction
- § 1012 Basis of property—cost
- § 50 Other special rules
- § 179 Election to expense certain depreciable business assets
Regulations it cites
- § 1.163(j)-2 Deduction for business interest expense limited.
- § 1.1502-32 Investment adjustments.
- § 1.163(j)-4 General rules applicable to C corporations (including REITs, RICs, and members of consolidated groups) and tax-exempt corporations.
- § 1.951A-6 Adjustments related to tested losses.
- § 1.1502-13 Intercompany transactions.
- § 1.1502-1 Definitions.
- § 1.163(j)-6 Application of the section 163(j) limitation to partnerships and subchapter S corporations.
- § 1.163(j)-3 Relationship of the section 163(j) limitation to other provisions affecting interest.
- § 1.163(j)-9 Elections for excepted trades or businesses; safe harbor for certain REITs.
- § 1.263A-4 Rules for property produced in a farming business.
- § 1.469-9 Rules for certain rental real estate activities.
- § 1.163(j)-10 Allocation of interest expense, interest income, and other items of expense and gross income to an excepted trade or business.
- § 1.1275-1 Definitions.
- § 1.385-3 Certain distributions of debt instruments and similar transactions.
- § 1.1272-3 Election by a holder to treat all interest on a debt instrument as OID.
- § 1.1275-6 Integration of qualifying debt instruments.
- § 1.163-7 Deduction for OID on certain debt instruments.
- § 1.446-3 Notional principal contracts.
- § 1.163-13 Treatment of bond issuance premium.
- § 1.171-1 Bond premium.
- § 1.171-2 Amortization of bond premium.
- § 1.1275-4 Contingent payment debt instruments.
- § 1.988-6 Nonfunctional currency contingent payment debt instruments.
- § 1.1275-7 Inflation-indexed debt instruments.
Show 7 more
Cited by 28 other regulations
- § 1.59A-1 Base erosion and anti-abuse tax.
- § 1.163(j)-0 Table of contents.
- § 1.163(j)-2 Deduction for business interest expense limited.
- § 1.163(j)-3 Relationship of the section 163(j) limitation to other provisions affecting interest.
- § 1.163(j)-4 General rules applicable to C corporations (including REITs, RICs, and members of consolidated groups) and tax-exempt corporations.
- § 1.163(j)-6 Application of the section 163(j) limitation to partnerships and subchapter S corporations.
- § 1.163(j)-7 Application of the section 163(j) limitation to foreign corporations and United States shareholders.
- § 1.163(j)-9 Elections for excepted trades or businesses; safe harbor for certain REITs.
- § 1.163(j)-10 Allocation of interest expense, interest income, and other items of expense and gross income to an excepted trade or business.
- § 1.163(j)-11 Transition rules.
- § 1.168(k)-2 Additional first year depreciation deduction for property acquired and placed in service after September 27, 2017.
- § 1.263A-15 Effective dates, transitional rules, and anti-abuse rule.
- § 1.381(c)(20)-1 Carryforward of disallowed business interest.
- § 1.382-2 General rules for ownership change.
- § 1.382-5 Section 382 limitation.
- § 1.382-6 Allocation of income and loss to periods before and after the change date for purposes of section 382.
- § 1.383-1 Special limitations on certain capital losses and excess credits.
- § 1.446-3 Notional principal contracts.
- § 1.861-10 Special allocations of interest expense.
- § 1.1362-3 Treatment of S termination year.
- § 1.1368-1 Distributions by S corporations.
- § 1.1377-1 Pro rata share.
- § 1.1502-36 Unified loss rule.
- § 1.1502-59A Application of section 59A to consolidated groups.
Amendment history
From the source citation at the end of the section, newest first. T.D. is a Treasury decision; FR is the Federal Register.
- Amended by T.D. 9943 (86 FR 5523)
- Issued by T.D. 9905 (85 FR 56760)
Where it sits in 26 CFR
- Subchapter A Income tax
- Part 1 Income taxes
- Itemized Deductions for Individuals and Corporations
Nearby sections
- § 1.163-15 Debt proceeds distributed from any taxpayer account or from cash.
- § 1.163-16 xxx
- § 1.163(d)-1 Time and manner for making elections under the Omnibus Budget Reconciliation Act of 1993 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.
- § 1.163(j)-0 Table of contents.
- § 1.163(j)-1 Definitions.
- § 1.163(j)-2 Deduction for business interest expense limited.
- § 1.163(j)-3 Relationship of the section 163(j) limitation to other provisions affecting interest.
- § 1.163(j)-4 General rules applicable to C corporations (including REITs, RICs, and members of consolidated groups) and tax-exempt corporations.
- § 1.163(j)-5 General rules governing disallowed business interest expense carryforwards for C corporations.