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Pair of Rules for Debt Interest Deduction Are Nearing Release

Feb. 10, 2020, 6:32 PM

Long-awaited final rules for the 2017 tax law’s cap on business interest payment deductions are slated for release with a package of additional proposed rules, which could reference the final rules and are expected to touch on partnership issues, debt-financed distributions, and cancellation-of-debt income.

The new proposed rules arrived at the White House’s regulatory review office Feb. 7, according to an update of the office’s website. The site says the Office of Management and Budget sent the final rules back to the Treasury Department Jan. 31, after having reviewed them since mid-December. Officials have said on multiple occasions that the two sets of rules will be released simultaneously.

The law amended tax code Section 163(j) to restrict deductions of interest payments to an amount equal to 30% of adjusted taxable income.

The IRS may be holding off on releasing the final rules until the review of the proposed package is finished. It is common for the agency to use a simultaneous release to propose the withdrawal of and significant revisions to provisions in related final rules, as the IRS did for final rules for the 2017 law’s full expensing provision last fall, said David Zimmerman, a member of Miller & Chevalier Chartered in Washington.

“The question is whether they are going to get these out in time,” he said Monday, noting that a March 16 deadline is fast approaching for partnerships and S corporations that operate on a calendar-year schedule to file or request a six-month extension.

The proposals are expected to include language on how the restriction affects tiered partnerships, and how it interacts with tax code Section 108, which defines income that stems from the cancellation of debt, Andrea Mouw, a partner at Eide Bailly in Minneapolis, told Bloomberg Tax last week, shortly after the final rules left the regulatory review office. Officials may want to release them simultaneously because the proposals could potentially withdraw and revise parts of the final rules, or they may simply cross-reference each other, she said.

IRS spokespeople didn’t respond to multiple requests for comment on why the rules would need to be released at the same time, or to confirm whether any additional guidance may be issued with the rule packages.

At a May 2019 conference in Washington, Treasury attorney-adviser Bryan Rimmke said the upcoming batch of proposals wouldn’t be as long or comprehensive as the first round (REG-106089-18), which was released at the end of 2018. The additional proposed rules will include tax treatment of debt-financed distributions, among other issues, Rimmke added.

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; Kathy Larsen at klarsen@bloombergtax.com

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