Daily Tax Report ®

Manufacturers, Refiners Await Final Interest Write-Off Rules (1)

Feb. 5, 2020, 4:29 PMUpdated: Feb. 5, 2020, 8:27 PM

Any changes in the final version of rules for the 2017 tax law’s cap on companies’ interest payment write-offs could impact the manufacturing, oil refining, and assisted living sectors.

The rules could also have big implications for private equity firms, with their habit of loading up on debt to take over flailing companies. The White House regulatory review office completed its analysis of the rules on Jan. 31, an action that the office posted retroactively on its website. Officials are also planning to release a set of proposed rules alongside the final package.

The law restricted deductions of debt interest payments to an amount equal to 30% of earnings before interest, taxes, depreciation and amortization, under tax code Section 163(j). Starting in 2022, the cap shrinks, as the latter two expenses—based on costs of the business’s property—are no longer added back into the income calculation from which the 30% is derived.

Treasury Hears Concerns

The IRS’s 2018 proposed rules (REG-106089-18) wouldn’t allow certain expenses on inventory items to be added back into the income equation. For the manufacturing, oil refining, and retail industries, which spend a lot on their inventories, the smaller limit might as well already be in effect under the proposed rules.

Treasury Assistant Secretary for Tax Policy David Kautter has previously suggested that the final rules will address the issue.

It’s possible officials could partially roll back this part of the rules—allowing expenses on inventory sold, but not the cost of inventory left over at the end of the year, to be added back into the income figure—said Andrea Mouw, a partner at Eide Bailly LLP in Minneapolis.

Still, she said, “I would think it would be a full-scale removal,” as sought by numerous groups and companies that sent public comment letters on the issue.

White House officials met on Jan. 23 with a senior tax counsel and lobbyists from Cheniere Energy Inc., whose director of tax wrote a letter to the Treasury Department entirely dedicated to requesting a rollback of the provision. A couple of weeks earlier, officials met with representatives of the Organization for International Investment. OFII placed the inventory issue at the top of a letter to Treasury.

Assisted Living, Tax Shelters

The skilled nursing and assisted living facilities industry has also flooded the IRS with letters.

The law allowed “real property trades or businesses” to opt out of the interest write-off restriction, but lots of assisted living businesses use a structure in which one entity owns a building and leases it to a separate entity that handles the business’s operations.

The proposed regulations included an anti-abuse rule that would bar companies with entities that lease 80% of their property to another entity with the same owner from getting that opt-out election.

“Hopefully they’ll take into account that that is a normal business operating procedure,” Mouw said, referring to the IRS. The agency will have to balance that with actually preventing abuse, however, as “you could cram everything into one of your businesses and leave the other one debt-free,” she added.

—With assistance from Allyson Versprille.

(Adds comments from Andrea Mouw in sixth, seventh, 12th paragraphs.)

To contact the reporter on this story: Lydia O'Neal in Washington at loneal@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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