IRS Issues Final Guidance Addressing Business Interest Expense Deduction Limitations

The Internal Revenue Service today released a long-awaited package of final regulations addressing restrictions on deducting net interest expense, pursuant to the 2017 tax reform law. The regulations generally apply to taxpayers with defined levels of gross receipts and restrict the deductibility of net interest expense to an amount that does not exceed a certain percentage of a taxpayer’s adjusted taxable income. Since the restriction applies to net business interest expense, and banks have net business interest income, the regulations should not apply to banks as taxpayers — but they will affect certain bank customers.

The IRS also released proposed regulations that provide additional guidance on various business interest expense deduction limitation issues that were not addressed in the final regulations. It also issued a notice providing a safe harbor and a set of FAQs on aggregation rules that apply for purposes of the gross receipts test and that apply to determine whether a taxpayer is a small business that is exempt from the business interest expense deduction limitation.

The American Bankers Association is currently in the process of reviewing this nearly 900-page regulatory package and will provide additional information to members as needed.