*the 2020 final regulations and the 2020 proposed regulations … · the 2020 final regulations are...

Copyright © 2020 Deloitte Development LLC. All rights reserved. 2

Topic Page

Effective Dates 3

General Provisions 5

Corporate Provisions 17

Passthroughs Provisions 27

International Provisions 44

Real Estate Provisions 61

Transition Rules 74

Table of Contents*

*The 2020 Final Regulations and the 2020 Proposed Regulations are not official until published in the Federal Register.As of July 30, 2020, they have not yet been published.

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Effective Dates


Effective Dates

Regulation Package Effective Date Citation

2020 Final Regulations

The 2020 Final Regulations are generally effective and applicable to taxable years beginning on or after 60 days after publication in the Federal Register (the “Effective Date”).

Generally, taxpayers and their related parties, within the meaning of sections 267(b) and 707(b)(1), may apply the rules in the 2020 Final Regulations, in their entirety, to taxable years beginning after December 31, 2017, and before the Effective Date, so long as the taxpayers and their related partners consistently apply these rules.

Treas. Reg. §§ 1.163(j)-1(c), -2(k), -3(d),-4(g), -5(h), -6(p), -7(m), 9(k), -10(f), -11(d), and -11(a).

2020 Proposed Regulations

The 2020 Proposed Regulations are generally proposed to apply to taxable years beginning on or after 60 days after the date the Treasury Decision adopting these proposed regulations as final is published in the Federal Register.

Generally, taxpayers and their related parties, within the meaning of sections 267(b) and 707(b)(1), may apply the rules in the 2020 Proposed Regulations to any taxable year beginning after December 31, 2017, so long as the taxpayers and their related partners consistently apply the rules during the taxable year, and for certain rules, each subsequent taxable year.

Prop. Treas. Reg. §§ 1.163-14(h), -15(b)

Prop. Treas. Reg. §§ 1.163(j)-1(c)(4), -2(k)(2), -7(m), -8(j), -10(f)(2)

Prop. Treas. Reg. §§ 1.469-11(a)(1), (4)

Prop. Treas. Reg. § 1.1256(e)-2(d)


General Provisions


Issue 2018 Proposed Regulations 2020 Final Regulations Citation

General category of interest items

Original issue discount, qualified stated interest, market discount, repurchase premium, and other listed items generally treated as interest under the Code and regulations.

Same as proposed with minor change. Treas. Reg. § 1.163(j)-1(b)(22)(i)

Swaps with significant nonperiodic payments

The time value component associated with the loan portion of a non-cleared swap with significant nonperiodic payments is interest expense to the payor and interest income to the recipient.

Reserved on cleared swaps.

The time value component associated with the loan portion of a swap with significant nonperiodic payments is interest expense to the payor and interest income to the recipient.

Exception for cleared swaps and non-cleared swaps subject to margin or collateral requirements.

Treas. Reg. § 1.163(j)-1(b)(22)(ii)

Items Included within the Definition of Interest for Purposes of Section 163(j)Definition of “Interest”



Substitute interest payments described in Treas. Reg. § 1.861-2(a)(7)

A substitute interest payment is treated as interest expense to the payor or interest income to the recipient.

A substitute interest payment is treated as interest expense to the payor only if the payment relates to a repo or securities lending transaction that is not entered into in the ordinary course of the payor’s business.

A substitute interest payment is treated as interest income to the recipient only if the payment relates to a repo or a securities lending transaction that is not entered into by the recipient in the ordinary course of the recipient’s business.

Treas. Reg. § 1.163(j)-1(b)(22)(iii)(C)

Treatment of guaranteed payments for the use of capital

Any guaranteed payments for the use of capital (“GPUCs”) from a partnership under section 707(c) are treated as interest.

GPUCs are not explicitly included in the definition of interest. However, there is an example in the anti-avoidance rule of a situation in which a GPUC is treated as interest.

Treas. Reg. § 1.163(j)-1(b)(22)(v)(E), Example 5




Anti-avoidance rule Any expense or loss, to the extent deductible, incurred by a 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 is treated as interest expense of the taxpayer if such expense or loss is predominantly incurred in consideration of the time value of money.

If a transaction is entered into with a principal purpose of reducing an amount incurred by the taxpayer that would otherwise have been considered an item of interest, any expense or loss economically equivalent to interest is treated as interest.

If a transaction is entered into with a principal purpose of artificially increasing the taxpayer’s interest income, such income is not treated as interest income of the taxpayer.

Treas. Reg. § 1.163(j)-1(b)(22)(iv)(A)(1)

Treas. Reg. § 1.163(j)-1(b)(22)(iv)(A)(2)




Hedging gain or loss Income, deduction, gain, or loss from a derivative that alters a taxpayer's effective cost of borrowing with respect to a liability, and income, deduction, gain, or loss from a swap, is treated as an adjustment to interest expense.

Income, deduction, gain, or loss from a derivative that alters a taxpayer's effective yield with respect to a debt instrument is treated as an adjustment to interest income.

Removed in 2020 Final Regulations. N/A




Commitment fees Any fees in respect of a lender commitment to provide financing are treated as interest if any portion of such financing is actually provided.


Debt issuance costs Any debt issuance costs subject to Treas. Reg. § 1.446-5 are treated as interest expense of the issuer.





Tentative taxable income The term “taxable income” has the meaning provided in section 63, but for purposes of section 163(j), is computed without regard to the application of section 163(j) and the section 163(j) regulations.

“Tentative taxable income” is generally determined in the same manner as taxable income under section 63, but is computed without regard to the application of the section 163(j) limitation, and without regard to any disallowed business interest expense (“BIE”) carryforwards.

Treas. Reg. § 1.163(j)-1(b)(43)

Treatment of depreciation, amortization, or depletion expense capitalized to inventory

Depreciation, amortization, or depletion expense capitalized to inventory is not depreciation, amortization, or depletion expense for purposes computing adjusted taxable income (“ATI”). Thus, such expenses are not an add-back that increased ATI in taxable years beginning before January, 1, 2022.

Depreciation, amortization, or depletion expense capitalized to inventory under section 263A are an addback to computing ATI for taxable years beginning before January 1, 2022. Costs are taken into account when capitalized rather than when recovered as cost of goods sold.

Taxpayers and related parties otherwise relying upon 2018 Proposed Regulations may choose to follow either the 2018 Proposed Regulations or the 2020 Final Regulations for these costs.

Treas. Reg. §§ 1.163(j)-1(b)(1)(iii), -1(c)

Definitions General Rules



Reduction to ATI for disposition of certain assets, consolidated group member stock, and partnership interests

Reduction of taxable income to arrive at ATI upon certain dispositions of property, stock of a consolidated group member, or partnership interests, in order to eliminate perceived “double benefit” where (i) property (directly or indirectly) increased ATI from taxable income due to adjustments for depreciation, deduction, and amortization for tax years beginning before January 1, 2022, and (ii) with such reductions to tax basis otherwise resulting in an increase in taxable income and, thus, ATI upon a disposition.

The 2020 Final Regulations retain but modify the rules that reduce tentative taxable income to arrive at ATI upon certain dispositions of property, stock of a consolidated group member, or partnership interests, with an alternative computation method provided in the 2020 Proposed Regulations.

Treas. Reg. §§ 1.163(j)-1(b)(ii)(C), (D), (E), -1(b)(iv)

Calculation of ATIGeneral Rules



Aggregation rules for small business exemption

Any taxpayer that is not a corporation or a partnership applies the gross receipts test and aggregation rules of section 448(c) and the regulations thereunder in the same manner as if such taxpayer were a corporation or partnership.

References to the aggregation rules have been removed. IRS also published “FAQs Regarding the Aggregation Rules Under Section 448(c)(2) that Apply to the Section 163(j) Small Business Exemption.”

See “FAQs Regarding the Aggregation Rules Under Section 448(c)(2) that Apply to the Section 163(j) Small Business Exemption”

Relationship of section 163(j) limitation to other provisions affecting interest

Section 163(j) applies before the operation of the loss limitation rules in sections 465 and 469, and before the application of section 461(l), and after other provisions that defer, capitalize, or disallow interest expense (e.g., sections 263A and 263(g)).

The ordering and operating rules apply only in determining the amount of interest expense that could be deducted without regard to the section 163(j) limitation, and not for other purposes, such as the calculation of ATI.

Requested comments on the interaction between section 163(j) and section 108.

Adopt same approach to ordering and operating rules.

Clarify whether and how sections 461(l), 465, and 469 are applied in determining tentative taxable income and ATI.

Preamble notes that the interaction between section 163(j) and section 108 required further consideration, which may be the subject of future guidance.

Treas. Reg. § 1.163(j)-3

Deduction for Business Interest Expense LimitedGeneral Rules


Issue 2020 Proposed Regulations Citation

Certain dividends of regulated investment companies treated as interest income

A regulated investment company (“RIC”) that earns business interest income (“BII”) may pay “section 163(j) interest dividends” and shareholders may treat such dividends as interest income solely for purposes of section 163(j), subject to holding period requirements and other limitations. A section 163(j) interest dividend is treated as BII if it is properly allocable to a non-excepted trade or business of the shareholder.

The total amount of a RIC’s section 163(j) interest dividends for a taxable year is limited to the excess of the RIC’s BII 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 BII. Other limitations apply at the shareholder level on the amount of a RIC dividend that may be treated as interest income for section 163(j).

Prop. Treas. Reg. §§ 1.163(j)-1(b)(22)(iii)(F), -1(b)(35)



Corporate Provisions



Interaction with section 250 deduction

If a taxpayer is allowed a deduction under section 250(a)(1) that is properly allocable to a non-excepted trade or business, the taxpayer takes that deduction into account when computing taxable income for purposes of section 163(j), but would do so without regard to the taxable income limitation in section 250(a)(2).

The 2020 Final Regulations do not contain this rule.

Until additional guidance is effective, the preamble provides that taxpayers may choose any reasonable approach (which could include an ordering rule or the use of simultaneous equations, with the ordering rule from the 2018 Proposed Regulations treated as a reasonable approach) for coordinating taxable income-based provisions as long as such approach is applied consistently for all relevant taxable years.

2020 Final Regulations Preamble

GeneralCorporate Provisions



Earnings & profits The disallowance and carryforward of a deduction for a C corporation’s business interest expense (“BIE”) does not affect its calculation of earnings and profits (“E&P”). Special rule for RICs and REITs.

If a corporate partner is allocated excess business interest expense (“EBIE”) and if all or a portion of the EBIE has not yet been treated as BIE at the time of a disposition of a partnership interest, the partner must increase E&P by an amount equal to the basis adjustment required under section 163(j)(4)(B)(iii)(II).

Example included to show that E&P rule for EBIE applies to negative section 163(j) expense.

Treas. Reg. § 1.163(j)-4(c)

Treatment of items not properly allocable to a trade or business of the partnership

A partnership’s items of investment interest, investment income, and investment expense allocated to a C corporation partner treated as properly allocable to a trade or business and included in that C corporation's section 163(j) calculation.

Expands the rule to include a partnership’s other separately stated tax items that are subject to neither section 163(j) nor section 163(d) (e.g., tax items allocable to rental activities that do not rise to the level of a section 162 trade or business).

Treas. Reg. § 1.163(j)-4(b)(3)(iii)




Sections 382 and 383 The 2018 Proposed Regulations provide that: (i) the section 382 limitation applies to current-year disallowed BIE allocable to the pre-change period, similar to the rules applicable to net operating loss (“NOL”) carryovers, and (ii) the section 382 limitation applies to and is reduced by disallowed BIE carryforwards before NOL carryovers.

The 2018 Proposed Regulations would allocate current-year disallowed BIE between pre- and post-change years on a pro rata basis (regardless of a closing-of-the-books election under Treas. Reg. § 1.382-6(b)).

With one exception, the 2020 Final Regulations generally adopt the proposed changes to sections 382 and 383.

In a departure from the 2018 Proposed Regulations, the 2020 Final Regulations would allow for a closing-of-the-books election to allocate current-year disallowed BIE to the pre-change period.

Finalize a proposed regulation under section 382(h) providing that section 382 disallowed business interest carryforwards (as defined in Treas. Reg. § 1.382-2(a)(7)) are not treated as recognized built-in losses.

Treas. Reg. §§ 1.382-2(a)(7), -7(d)(5)




Single section 163(j) limitation

The section 163(j) limitation is applicable at the level of the consolidated group, with the consolidated group having a single section 163(j) limitation.

In general, in determining adjusted taxable income (“ATI”), taxable income begins with consolidated taxable income (determined under Treas. Reg. § 1.1502-11).

The single entity approach was not extended to partnerships wholly-owned by consolidated group members or members of an affiliated, non-consolidated group.

The 2020 Final Regulations retain the general approach of the 2018 Proposed Regulations for consolidated groups.

Preamble notes that future guidance may address considerations associated with the application of section 163(j) limitation in the context of a life-nonlife consolidated group.

Treas. Reg. § 1.163(j)-4(d)(2)

Consolidated Group ProvisionsCorporate Provisions



Intercompany transactions and intercompany obligations

Items from an intercompany transaction are not taken into account for purposes of determining the group’s ATI, to the extent they offset in amount.

Intercompany obligations are not taken into account in determining business interest income (“BII”), BIE, or for determining consolidated ATI.

The 2020 Final Regulations retain same general approach to intercompany transactions and intercompany obligations.

One exception provided for transactions in which an obligation becomes an intercompany obligation. In that instance, repurchase premium on the deemed satisfaction of the obligation under Treas. Reg. § 1.1502-13(g)(5) treated as interest that is subject to the section 163(j) limitation.

Treas. Reg. §§ 1.163(j)-4(d)(2)(iv), (v)




Unified loss rule Disallowed BIE treated as a deferred deduction for purposes of Treas. Reg. §1.1502-36 (the Unified Loss Rule).

Same treatment for disallowed BIE.

2020 Final Regulations provide that (i) EBIE is treated as basis (a Category D attribute) and not a deferred deduction (a Category C attribute) for purposes of Treas. Reg. § 1.1502-36(d), and therefore is not eligible for reattribution on account of an election under Treas. Reg. § 1.1502-36(d)(6), and (ii) EBIE is taken into account in determining the net inside attribute amount for purposes of Treas. Reg. § 1.1502-36(c) and (d).

Treas. Reg. § 1.1502-36(f)(2); Treas. Reg. § 1.163(j)-4(e)(4)




SRLY limitations Apply separate return limitation year (“SRLY”) limitation to disallowed BIE carryforwards of a member from a SRLY, generally based on separately-determined section 163(j) limitation for the consolidated group year by reference to items of that SRLY member.

Incorporate SRLY subgroup principles by reference to those applicable to NOLs under Treas. Reg. § 1.1502-21(c)(2)(i).

Continue SRLY limitation for disallowed BIE carryforwards, but those rules are modified to be more consistent with the treatment of NOLs with changes: (i) now apply a cumulative register approach (i.e., based on member’s cumulative contribution to the group’s section 163(j) limitation (rather than based on annual, single-year contribution)), and (ii) take into account items from intercompany transactions (other than BIE and BII from intercompany obligations).

Treas. Reg. § 1.163(j)-5(d)




Transfers of partnership interests in intercompany transactions

Intercompany transfer of a partnership interest that does not result in the termination of the partnership is treated as a disposition for purposes of section 163(j)(4)(iii)(II).

The 2020 Final Regulations remove the rules addressing intercompany transfers of partnership interests and reserve on those issues.

Treasury and the IRS are continuing to study the proper treatment of intercompany transfers of partnership interests that do not result in the termination of the partnership, intercompany partnership interest transfers in nonrecognition transactions, and intercompany transfers that do result in the termination of the partnership.

Treas. Reg. § 1.163(j)-4(b)(3)(iii)

Partnerships Owned by Consolidated Group Members Corporate Provisions


Passthroughs Provisions



Effect of partnership basis adjustments and remedial items

Section 734(b) adjustments are taken into account in determining adjusted taxable income (“ATI”) at the partnership level.

Partner basis items (i.e., section 743(b) and section 704(c)(1)(C) adjustments) and remedial items are taken into account in determining ATI at the partner level.

No substantive change.

Comments requesting that remedial items be taken into account in partnership ATI and the 11-step calculation were not adopted.

Additional rules provided in the 2020 Proposed Regulations with respect to publicly traded partnerships.

Treas. Reg. §§ 1.163(j)-6(d)(2), (e)(2)

Modifications to Definition of Adjusted Taxable IncomeApplication to Partnerships and S Corporations



Allocation of partnership items to partners

Partnerships must use an 11-step calculation to allocate deductible business interest expense (“BIE”), excess business interest expense (“EBIE”), excess taxable income (“ETI”), and excess business interest income (“EBII”) to partners.

No substantive change.

An exception allows partnerships that allocate all items pro-rata in step 2 to bypass steps 3 through 11.

Comments requesting other reasonable methods were not adopted.

The 2020 Proposed Regulations also provide special rules for purposes of determining an upper-tier partner’s allocable ATI and allocable business interest income (“BII”) for step 2.

Treas. Reg. § 1.163(j)-6(f); Prop. Treas. Reg. § 1.163(j)-6(j)(9)

11-Step Calculation Application to Partnerships and S Corporations



Basis adjustment for EBIE upon the disposition of a partnership interest

If a partner disposes of all or substantially all of its partnership interest, the partner’s adjusted basis in its interest is increased immediately before the disposition by any EBIE not previously treated as paid or accrued.

“Substantially all” not defined.

“Disposition” includes all taxable and nontaxable dispositions.

In response to comments, adopt a “proportionate approach.”

If a partner disposes of all or a portion of its partnership interest, the partner’s adjusted basis in the portion of the interest being sold is increased immediately before the disposition by a proportionate amount(based on fair market value) of EBIE not previously treated as paid or accrued.

“Disposition” still generally includes all taxable and nontaxable dispositions, but a partnership distribution is only considered a “disposition” if it is in complete liquidation of the partner’s interest.

Additional rules provided in the 2020 Proposed Regulations.

Treas. Reg. § 1.163(j)-6(h)(3)

Basis Increase RuleApplication to Partnerships and S Corporations



Treatment of EBIE in partnership mergers and divisions

Preamble requested comments on the treatment of EBIE in partnership mergers and divisions.

No rules addressing partnership mergers and divisions.

The preamble notes that Treasury and the IRS have determined that a partnership merger or division can be appropriately analyzed under the existing rules. Treasury and the IRS continue to study the area.

N/A

Partnership Mergers and Divisions Application to Partnerships and S Corporations



Application of the small business exemption to partnerships and S corporations

BIE of a partnership or S corporation that falls within the small business exemption (“SBE”) is subject to the section 163(j) limitation at the partner or shareholder level.

Items of income, gain, loss, and deduction from a partnership or S corporation that falls within the SBE are taken into account in calculating the ATI and BII of its partners or shareholders.

BIE of a partnership or S corporation that falls within the SBE is not subject to the section 163(j) limitation at the partner or shareholder level.

Items of income, gain, loss, and deduction from a partnership or S corporation that falls within the SBE (including BIE and BII) are taken into account in calculating the ATI of its partners or shareholders. However, this rule does not apply if a partnership or S corporation allocates a net loss to a partner or shareholder.

Treas. Reg. § 1.163(j)-6(m)(1)

Small Business ExemptionApplication to Partnerships and S Corporations



Treatment of EBIE when a partnership is no longer subject to section 163(j)

If a partnership allocates EBIE to its partners and later becomes “not subject to section 163(j),” the EBIE is treated as paid or accrued by the partner in that succeeding taxable year.

The “paid or accrued” amount is then subject to the partner’s section 163(j) limitation.

Confirms that the special rule applies only if a partnership is “not subject to section 163(j)” by reason of the SBE (as opposed to one or more excepted trades or businesses).

Although current BIE of a partnership that falls within the SBE is not subject to section 163(j) at the partner level, the amount of prior year EBIE that is “paid or accrued” under this special rule is still subject to the partner’s section 163(j) limitation.

Treas. Reg. § 1.163(j)-6(m)(3)

Small Business ExemptionApplication to Partnerships and S Corporations



Treatment of disallowed BIE carryforwards when an S corporation is no longer subject to section 163(j)

If an S corporation has disallowed BIE and later becomes “not subject to section 163(j),” the disallowed carryforward is deductible by the S corporation in that succeeding taxable year.

Unlike current BIE of an S corporation that falls within the SBE, the deducted carryforward amount is not subject to section 163(j) at the shareholder level.

Confirms that the special rule applies only if an S corporation is “not subject to section 163(j)” by reason of the SBE (as opposed to one or more excepted trades or businesses).

Treas. Reg. § 1.163(j)-6(m)(4)

Carryforwards Application to Partnerships and S Corporations


Issue 2018 Proposed Regulations 2020 Final Regulations

Debt-financed distributions Distributed debt proceeds are allocated (i) to the partnership’s available expenditures (i.e., expenditures made in the same taxable year but only to the extent debt proceeds are not otherwise allocated to those expenditures) then (ii) to the distributions to the partners (i.e., debt financed distribution).

Each partner’s allocable interest expense falls in one of the following three categories: (i) debt-financed distribution expense, (ii) expenditure interest expense, or (iii) excess interest expense.

Special rules apply on the transfer of an interest in the partnership.

Prop. Treas. Reg. § 1.163-14(d)

Debt-financed acquisitions Interest expense associated with a partnership interest acquired by purchase or contribution is determined by allocating the debt proceeds among the partnership’s assets pro rata based on the adjusted basis of the assets (either relative adjusted tax basis reduced by debt allocated to such assets or in accordance with Treas. Reg. § 1.163(j)-10(c)(5)(i) reduced by debt allocated to such assets).

The partnership must consistently apply this method in all subsequent years.

Prop. Treas. Reg. § 1.163-14(f)

30-day rule Taxpayers may treat any expenditures made from an account within 30 days before or after the debt proceeds are deposited as made from the debt proceeds.

Prop. Treas. Reg. § 1.163-15

Characterization of Debt Proceeds and Associated Interest Expense Allocation of Interest Expense – Partnerships



Adjustments to ATI for depreciation, amortization, and depletion that had been added back in a prior year

Include a “lesser of” computation for dispositions of property, member stock, and partnership interests. ATI is reduced by the lesser of (i) any gain recognized on the sale or other disposition or (ii) the distributive share of deductions attributable to depreciation, amortization, and depletion in taxable years beginning after December 31, 2017, and before January 1, 2022, with respect to the property held by the partnership at the time of such sale (to the extent allowable under section 704(d)).

Prop. Treas. Reg. § 1.163(j)-1(b)(1)(ii)(E)(3)

Syndicate losses To determine whether an entity has a loss under sections 163(j) and 1256(e)(3) and Temp. Treas. Reg. § 1.448-1T(b)(3), losses actually allocated to limited partners or limited entrepreneurs are determined without regard to section 163(j).

Prop. Treas. Reg. § 1.163(j)-2(d)(3);Prop. Treas. Reg. § 1.1256(e)-2(a), (b)

Application to Partnerships and S Corporations General Rules



Trader partnerships (e.g., partnerships engaged in the trade or business of trading securities)

Departs from approach provided in the preamble to the 2018 Proposed Regulations by bifurcating interest expense and all other items.

Partnership only includes items that are allocable to materially participating partners in its determination of BIE, BII, and ATI.

Interest expense allocated to non-materially participating partners is not subject to section 163(j).

Prop. Treas. Reg. §§ 1.163(j)-6(c)(1), (c)(2), (d)(4)

Application of section 163(j) to publicly traded partnerships

Instead of applying the 11-step calculation, a publicly traded partnership (“PTP”) allocates section 163(j) excess items by section 704(b) percentages.

For purposes of determining remedial items under section 163(j), a PTP either allocates gain or loss that would otherwise be allocated under section 704(c) to a specific partner or to all partners based on each partner’s section 704(b) sharing ratio, or for purpose of determining cost recovery deductions under section 704(c), determines each partner’s remedial items based on an allocation of the partnership’s inside basis items among its partners in proportion to their share of corresponding section 704(b) items, rather than applying the traditional method.

A PTP treats any amount of any section 743(b) adjustment of a purchaser of a partnership unit that relates to a remedial item that the purchaser inherits from the seller as an offset to the related section 704(c) remedial item.

Prop. Treas. Reg. §§ 1.163(j)-6(d)(3), (e)(5), (f)(1)(iii)

Application to Partnerships and S Corporations Trader Partnerships and Publicly Traded Partnerships



CARES Act – special partner deduction in 2020

If a partner disposes of its interest in the partnership’s 2019 or 2020 taxable year, the 50% of 2019 EBIE is deductible by the partner in 2020 and does not result in a basis increase under Treas. Reg. § 1.163(j)-6(h)(3) unless the partner elects out.

Prop. Treas. Reg. § 1.163(j)-6(g); Prop. Treas. Reg. §1.163(j)-6(o)(36), Example 36

Definition of “disposition” For purposes of increasing the basis of a partnership interest upon a disposition for EBIE, a disposition is defined to include a distribution of money or other property by the partnership to a partner in complete liquidation of the partner’s interest in the partnership.

A current distribution of money or other property is not a disposition. Treasury and the IRS request comments on whether a current distribution should result in an addback under the basis increase rule.

Prop. Treas. Reg. § 1.163(j)-6(h)(4)

Basis adjustment for EBIE upon the disposition of a partnership interest

Tax basis of partnership property is adjusted by the same amount as the disposing partner’s interest.

The basis adjustment is allocated to capital gain property in the same manner as a section 734(b) adjustment but is not depreciable or amortizable by the partnership.

Prop. Treas. Reg. § 1.163(j)-6(h)(5)

Basis Increase on Disposition Application to Partnerships and S Corporations



Treatment of EBIE allocated by a lower-tier partnership to an upper-tier partnership

If a lower-tier partnership (“LTP”) allocates EBIE to an upper-tier partnership (“UTP”), UTP reduces its basis in its LTP interest by the EBIE, but the UTP partners do not reduce their bases in their UTP interests until UTP treats the LTP EBIE as paid or accrued nor is EBIE information with respect to LTP reported to UTP partners. UTP partners do, however, adjust their section 704(b) capital accounts by the distributive share of interest expense whether characterized as deductible BIE or EBIE by LTP (a “specified partner”).

The EBIE carried forward by UTP (“UTP EBIE”) has a basis component and a carryforward component.

Basis Component: UTP EBIE is treated as a nondepreciable capital asset with a fair market value of zero and an adjusted basis equal to the amount by which UTP reduced its basis in LTP for the allocation of LTP EBIE (i.e., built-in loss property). The basis component can be affected by negative basis adjustments under section 734(b) and section 743(b).

Carryforward Component: The amount of EBIE allowed from LTP to UTP that is carried forward and reduces the basis in the LTP interest under Treas. Reg. § 1.163(j)-6(h)(2). Unlike the basis component, negative section 734(b) adjustments allocated to UTP EBIE should not reduce the carryforward component of the UTP EBIE.

Prop. Treas. Reg. §§ 1.163(j)-6(j)(1)-(8)

Tiered Partnership RulesApplication to Partnerships and S Corporations



Treatment of EBIE allocated by a lower-tier partnership to an upper-tier partnership

Conversion Events. The UTP EBIE is subject to special rules upon conversion events: (1) the treatment of the UTP EBIE as paid or accrued through an allocation of ETI or EBII or (2) the basis addback that occurs upon the disposition by UTP of its LTP interest.

Anti-Loss Trafficking Rules. There are special anti-loss trafficking rules that address treatment of a transferee of a specified partner’s interest and situations in which UTP EBIE no longer has a specified partner as a result of a distribution in liquidation of that specified partner’s interest.

Prop. Treas. Reg. §§ 1.163(j)-6(j)(1)-(8)

Tiered Partnership Rules Application to Partnerships and S Corporations



Treatment of a borrowing partnership and a lending partner

A lending partner is allocated EBIE from a borrowing partnership and has interest income. The lending partner treats the interest income as an allocation of EBII from the borrowing partnership to the extent of the EBIE allocated in that taxable year. The interest income recharacterized as EBII is included in the lending partner’s own section 163(j) calculation.

Any excess interest income continues to be characterized as investment interest income to a lending partner other than a C corporation or a lending partner engaged in the trade or business of lending.

These rules do not apply to loans between an S corporation and its shareholder. Comments are requested on whether a similar rule should be adopted for S corporations.

Prop. Treas. Reg. § 1.163-6(n)

Self-Charged Lending Application to Partnerships and S Corporations


International Provisions


International Provisions

Regulation Package Effective Date Citation


Taxpayers may choose to follow 2018 Prop. Treas. Reg. § 1.163(j)-7 for taxable years beginning before the 2020 Final Regulations take effect if they apply the 2018 Proposed Regulations consistently.

2020 Final Regulations Preamble

Effective Dates



General application of section 163(j) to controlled foreign corporations

Confirms that section 163(j) applies to controlled foreign corporations (“CFCs”) in calculating their taxable income.

2018 Proposed Regulations apply to CFCs with at least one section 958(a) shareholder (“Applicable CFCs”).

If Applicable CFC is a partner in a partnership, section 163(j) applies to partnership in same manner as if Applicable CFC were a domestic C corporation.

Unless CFC group election is made, limitation and calculations applied on a CFC-by-CFC basis. See below.

Section 163(j) applies to CFCs and other foreign corporations whose taxable income is relevant.

2020 Final Regulations apply to CFCs with at least one section 958(a) shareholder (i.e., Applicable CFCs).

2020 Final Regulations contain no specific rules for partnerships, which are covered by Treas. Reg. § 1.163(j)-6.

Unless CFC group election is made, limitation and calculations applied on a CFC-by-CFC basis. See below.

2018 Prop. Treas. Reg. § 1.163(j)-7(b)(2); Treas. Reg. § 1.163(j)-1(b)(2), -7(b)

International ProvisionsRules for CFCs and U.S. shareholders



U.S. shareholder adjusted taxable income

Gross income inclusions under sections 78, 951(a), and 951A (reduced by the section 250 deduction, without regard to the section 250(a)(2) taxable income limitation) are excluded from U.S. shareholder’s adjusted taxable income (“ATI”).

2020 Final Regulations provide that gross income inclusions under sections 78, 951(a), and 951A are excluded from U.S. shareholder’s ATI.

Ordering rules for interaction of section 250 and section 163(j) reserved, can use any reasonable method.

See rules with respect to CFC group under 2018 Proposed Regulations and 2020 Proposed Regulations, discussed below.

2018 Prop. Treas. Reg. § 1.163(j)-7(d)(1)-(2); Treas. Reg. § 1.163(j)-1(b)(1)(ii)(G); 2020 Final Regulations Preamble




Effect of section 163(j) on E&P

As with domestic corporations, a CFC’s disallowed business interest expense (“BIE”) still reduces its E&P currently (e.g., for section 952(c) limitation)

Still provide that disallowed BIE reduces CFC’s E&P currently.

Clarifies that disallowed BIE does not affect E&P of PFIC with QEF election.

2018 Prop. Treas. Reg. § 1.163(j)-7(e); Treas. Reg. § 1.163(j)-4(c)(1); 2020 Proposed Regulations Preamble

Determination of foreign corporation taxable income

Determined under principles of Treas. Reg. § 1.952-2.

Dividends from related persons (within meaning of section 954(d)(3)) are excluded from taxable income in determining CFC ATI.

Determined under principles of Treas. Reg. § 1.952-2 or section 882 rules.

Dividends from related persons (within meaning of section 954(d)(3)) are excluded from tentative taxable income in determining ATI.

2018 Prop. Treas. Reg. § 1.163(j)-7(c)(1)-(2);Treas. Reg. § 1.163(j)-7(g)



Issue 2018 Proposed Regulations 2020 Proposed Regulations Citation

Definition of CFC Group Defined as two or more Applicable CFCs if 80% or more of total value of all classes of stock of each Applicable CFC owned (section 958(a) ownership) by one or more related U.S. shareholders (within meaning of section 267(b) or section 707(b)(1)).

Stock of each Applicable CFC must be owned in same proportion by each related U.S. shareholder.

Consolidated group treated as a single shareholder.

Does not include entities with effectively connected income (“ECI”) (except to determine if another entity is CFC group member).

Special rules if there is a financial services subgroup with respect to the CFC group.

A single CFC appears to not be eligible for CFC group election and related alternative approach.

One or more chains of Applicable CFCs, headed by a specified group parent (a qualified U.S. person or applicable CFC), where 80% or more of total value of the stock of each applicable CFC is owned by another applicable CFC or the specified group parent.

No proportionate ownership requirement for entity to be an applicable CFC.

Consolidated group treated as single shareholder.

Includes non-ECI attributes of entities with ECI.

Eliminate financial services subgroup rules; such entities treated as applicable CFCs.

For purposes of determining specified group, indirect ownership only takes into account stock owned through partnerships. See also discussion of partnership rules, below.

2018 Prop. Treas. Reg. §§ 1.163(j)-7(f)(6), (8)-(9); 2020 Prop. Treas. Reg. § 1.163(j)-7(d)(2); 2020 Proposed Regulations Preamble




Groupwide CFC group computation

If CFC group election in place, alternative method to calculate BIE deduction.

A CFC group member’s BIE subject to limitation is such CFC’s allocable share of the CFC group’s “applicable net business interest expense” (i.e., the sum of BIE of each CFC group member over the sum of BII of each CFC group member).

If CFC group election in place, single section 163(j) limitation is computed for the CFC group.

BIE, BII, and ATI are first determined on separate-company basis and then aggregated.

The group’s section 163(j) limitation is allocated to members using consolidated group principles. If section 163(j)-limited, group member’s BIE not in excess of its BII is deductible and remaining limitation is utilized proportionately.

2018 Prop. Treas. Reg. § 1.163(j)-7(b)(3); 2020 Prop. Treas. Reg. § 1.163(j)-7(c)




Partnerships Partnership is treated as CFC group member if one or more CFC group members of same CFC group own more than 80% of the capital or profits interests of the partnership.

Generally does not apply to partnerships that have ECI. But, a partnership is still considered a CFC group member solely for purposes of determining if another entity is a CFC group member.

Partnership does not have “CFC ETI,” instead, the rules under Treas. Reg. § 1.163(j)-6 apply to determine excess ATI tier-up.

Partnerships not treated as CFC group members.

Rules under Treas. Reg. § 1.163(j)-6 apply to partnerships.

See anti-abuse rule, discussed below.

2018 Prop. Treas. Reg. §§ 1.163(j)-7(b)(4), -7(c)(3)(ii);2020 Prop. Treas. Reg. §§ 1.163(j)-7(d)(2), -7(e)(2)




Local tax deduction Do not specifically address whether deduction for foreign taxes is included in CFC’s ATI.

Clarify that ATI of a CFC is determined by taking into account a deduction for foreign taxes, consistent with Treas. Reg. § 1.952-2.

Requests comments regarding whether, and the extent to which, the ATI of a relevant foreign corporation should be determined by adding to tentative taxable income any deductions for foreign income taxes.

2020 Proposed Regulations Preamble;2020 Prop. Treas. Reg. § 1.163(j)-7(g)(3)

Tiering of CFC excess taxable income

If CFC group election in place, for purposes of calculating ATI of an upper-tier CFC, the upper-tier CFC’s share (based on percentage value of stock owned in lower-tier CFC) of a lower-tier CFC’s CFC excess taxable income (“CFC ETI”) is included in the upper-tier CFC’s taxable income.

The calculation begins at the lowest-tier CFC group member and tiers up.

No rules allowing CFC ETI to tier down or be shared among “brother-sister” CFCs.

No tiering of CFC ETI.

See rules allowing U.S. shareholders to directly include CFC ETI.

2018 Prop. Treas. Reg. §§ 1.163(j)-7(c)(2), (c)(3), -7(j)




CFC group election mechanics

The election is irrevocable.

No forms or statements required; election is made by applying CFC group rules.

The election must be made for all members of the CFC group.

The election can be revoked or re-elected if no election/revocation has been made for prior 60 months.

Each designated U.S. person must file an election statement.

Election/revocation applies to all CFC group members.

Request comments regarding whether a specified group that does not make a CFC group election when it first comes into existence should be prohibited from making the CFC group election for any specified period beginning during the 60-month period following that specified period.

2018 Prop. Treas. Reg. § 1.163(j)-7(b)(5); 2020 Prop. Treas. Reg. § 1.163(j)-7(e)(5);2020 Proposed Regulations Preamble




U.S. shareholder ATI If CFC group election made, U.S. shareholders can increase their ATI by “eligible CFC group ETI” of highest-tier CFC group members, capped at the “CFC Group Inclusions” of the U.S. shareholder.

2020 Proposed Regulations allow a U.S. shareholder to include in ATI a portion of its specified deemed inclusions attributable to either a stand-alone applicable CFC or a CFC group member, but not amounts attributable to section 78 “gross-up” inclusions.

Does not apply when safe harbor election is made, or when no CFC group election in place.

Calculated as specified deemed inclusions multiplied by the ratio of the CFC’s excess taxable income over its ATI.

ETI of a CFC group member equals its pro-rata share (based on ATI) of the CFC group’s ETI.

No tiering; calculated for each CFC group member.

2018 Prop. Treas. Reg. § 1.163(j)-7(d)(1)-(2); Treas. Reg. § 1.163(j)-1(b)(2)(ii)(G); 2020 Prop. Treas. Reg. § 1.163(j)-7(j)




Anti-abuse rule None Disregards certain transactions intended to reduce ATI if there is no CFC group election or the borrower is an applicable partnership.

2020 Prop. Treas. Reg. § 1.163(j)-7(g)(4)

SRLY limitation Appeared that CFC’s disallowed BIE could be carried forward under general rules.

Consolidated SRLY sub-group principles apply to disallowed BIE carryforwards of joining member.

2018 Prop. Treas. Reg. § 1.163(j)-2(c)(1); 2020 Prop. Treas. Reg. § 1.163(j)-7(c)(3)(iv)




Safe harbor election No ability to avoid application of section 163(j) limitation at CFC level (unless excepted trade or business).

If safe harbor election is made, no portion of applicable CFC’s BIE is disallowed under section 163(j).

Available to CFC group only if group’s BIE is less than or equal to 30% of the lesser of sum of either: (i) tentative taxable income or (ii) eligible amounts (generally, GILTI net of section 250 deduction and subpart F inclusions)

Not available if any group member has a pre-group disallowed BIE carryforward.

Annual election made by each designated US person with respect to all CFC group members.

2020 Prop. Treas. Reg. § 1.163(j)-7(h)




General application Section 163(j) and the section 163(j) regulations apply to foreign persons with ECI, with certain modifications: (i) ATI generally only includes ECI items; (ii) limitation only applies to BIE allocable ECI (under Treas. Reg. § 1.882-5 for corporations); and (iii) BII must be ECI.

2020 Prop. Treas. Reg. § 1.163(j)-8 replaces 2018 regulations in entirety and maintains general principles applying to foreign persons with ECI.

ATI includes only ECI items but new rules define application of BIE within and without the partnership and separate pools of ECI BIE and non-ECI BIE for use in the section 163(j) limitations.

ATI ratio rules for situations where ECI distributive share is positive ECI, negative ECI and where all ATI ECI and non-ECI is negative.

Interest defined in Treas. Reg. § 1.163(j)-1(b)(23) allocable to ECI determines allocation under section 861 before section 163(j) is applied.

2020 Prop. Treas. Reg. §§ 1.163(j)-8(c)(1)(ii), (d)(3);2020 Proposed Regulations Preamble

International ProvisionsRules for Foreign Persons with ECI



Coordination with Treas. Reg. § 1.882-5

Treas. Reg. § 1.882-5 applies first; expanded definition of interest generally does not apply.

Disallowed BIE under section 163(j) cannot be carried forward for purposes of Treas. Reg. § 1.882-5.

Scaling ratio applies to all interest if U.S. booked liabilities are greater than U.S. connected liabilities.

Treas. Reg. § 1.882-5 applies first without modification and without regard to section 163(j) limitations and non-carryforward of disallowed BIE rule is retained.

New coordination rule for Treas. Reg. § 1.882-5 with section 163(j) with attribution to non-ECI.

Scaling ratio rule is removed and applies indirectly through limitation of Treas. Reg. § 1.882-5 allocation.

2020 Prop. Treas. Reg. § 1.163(j)-8(f)

Rules for partnerships Certain modifications to rules generally applicable to partnerships.

A foreign partner’s allocable share of ETI, EBIE, and EBII generally limited to amounts attributable to ECI.

Coordination rules harmonize Treas. Reg. §1.882-5 allocation amount with attribution to partnerships and direct ECI on basis of relative U.S. assets.

Attribution of Treas. Reg. § 1.882-5 applies first to partnership’s BIE on U.S. booked liabilities.

Treas. Reg. § 1.882-5 remainder applies to excess interest.

2020 Prop. Treas. Reg. §§ 1.163(j)-8(f)(ii), (iii)




Treas. Reg. § 1.882-5 coordination for partnerships with ECI

Partner’s BIE does not include partnership’s U.S. booked liabilities.

Foreign corporate partner’s disallowed BIE is sum of: (i) amount based on foreign corporation’s items; and (ii) its share of partnership’s excess BIE allocable to ECI.

Rules do not provide whether partnership’s interest expense is allocable to ECI.

Treas. Reg. § 1.882-5 excess interest is limited separately in partnership by reference to partnership hypothetical deductible non-ECI BIE

Rules do not ultimately determine whether partnership’s interest is allocable to ECI, but provide separate identification of: (i) hypothetical deductible BIE that is ECI and non-ECI and (ii) hypothetical deductible BIE that is non-ECI may be in Treas. Reg. § 1.882-5 amount of excess interest attributable to partnership, but not in U.S. book liability portion of Treas. Reg. § 1.882-5 amount.

2020 Prop. Treas. Reg. § 1.163(j)-8(f)(1)(iii)(C)




Rules for CFCs with ECI First apply section 163(j) based CFC’s entire ATI.

A portion of disallowed interest reduces allocable interest expense under Treas. Reg. § 1.882-5 based on fraction of ATI that is effectively connected.

If a CFC group member has ECI, then its ECI attributes are treated as attributes of a separate applicable CFC (an “ECI deemed corporation”).

2020 Prop. Treas. Reg. § 1.163(j)-7(f)

Coordination with branch profits tax

Section 163(j) limitation affects neither calculation of effectively connected E&P nor calculation of U.S. net equity.

Section 163(j) limitation does not affect calculation of U.S. net equity.

Reference to effectively connected E&P is removed as general rule regrading section 163(j) effect on E&P in Treas. Reg. § 1.163(j)-4(c)(1) applies to effectively connected E&P.

2020 Prop. Treas. Reg. § 1.163(j)-8(f)(2)



Real Estate and Interest Allocation Provisions



Real property trade or business election & small business exemption

A taxpayer that qualifies for the small business exemption (“SBE”) is not eligible to make a real property trade or business (“RPTOB”) election.

A RPTOB election is available regardless of whether the taxpayer qualifies for the SBE.

Treas. Reg. § 1.163(j)-9(b)(2)(i)

Activities that constitute a RPTOB

Include definitions of real property operations and real property management; preamble indicated a direct nexus or relationship to rental real estate is necessary for an RPTOB.

Definitions of real property operation and real property management clarified to confirm when incidental personal services will not disqualify an activity as an RPTOB.

Preamble provides that only real property operation and real property management require a direct nexus or relationship to real estate to qualify as an RPTOB. However, Treasury and the IRS expect that the end products or final objectives of the other nine types of RPTOBs should at least have the potential to be used as rental real estate or as integral components in rental real estate activities.

Treas. Reg. §§ 1.469-9(b)(2)(ii)(H), (I)

General RulesReal Property Trade or Business



REIT safe harbor election If a REIT holds real property (as defined in Treas. Reg. § 1.856-10), interests in partnerships holding real property, or shares of other REITs holding real property, the REIT is eligible to make a RPTOB Election on a portion of its assets.

The safe harbor is only available to a REIT, not any partnership in which the REIT owns an interest.

Clarified that a REIT could own only one partnership or REIT that directly or indirectly (through other partnerships or REITs) holds real property and qualify for the REIT safe harbor election.

The REIT safe harbor election expanded to include a partnership if one or more REITs own, directly or indirectly, at least 50% of the partnership’s capital and profits and the partnership satisfies the requirements of the REIT safe harbor and would pass the REIT gross income and assets tests if the partnership were a REIT.

Treas. Reg. §§ 1.163(j)-9(h)(1), (7)

REIT-Specific Provisions Real Property Trade or Business



“PropCo-OpCo” anti-abuse rule

RPTOB election unavailable if 80% or more of the business’s real property is leased to a trade or business under common control.

Added a de minimis exception that allows taxpayers to make a RPTOB election if 90% or more of the real property is leased to unrelated partners and/or related parties that use the real property in an electing RPTOB, electing farming business, or excepted regulated utility trade or business.

Added a look-through exception that allows taxpayers to make a RPTOB election for a certain portion of their trade or business that is equivalent to the portion of the real property that is ultimately leased to unrelated parties and/or related parties that use the real property in an electing RPTOB, electing farming business, or excepted regulated utility trade or business.

Treas. Reg. § 1.163(j)-9(j)

“PropCo-OpCo” anti-abuse rule - REITs

Exception to the anti-abuse rule allows a REIT that leases qualified lodging facilities or qualified healthcare properties to make an RPTOB election.

Exception expanded to apply to partnerships making the REIT safe harbor election that lease qualified lodging facilities or qualified health care properties.

Treas. Reg. § 1.163(j)-9(j)(2)(iv)

Anti-Abuse RuleReal Property Trade or Business



Measurement Specific rules provided to calculate the taxpayer’s adjusted basis in assets.

The taxpayer must determine the adjusted basis in its assets on a quarterly basis and average those amounts to determine the relative amounts of asset basis for its excepted and non-excepted trades or businesses for that year.

Substantially the same, however, a new “annual determination method” is allowed if the taxpayer falls under a 20% de minimis threshold. The annual determination method averages the taxpayer’s adjusted asset basis at the beginning of the year and the end of the year.

Treas. Reg. §§ 1.163(j)-10(c)(5)(i), -(c)(6)

Direct allocations Interest expense on qualified nonrecourse indebtedness directly traced to trade or business in which the secured property is used.

100% of the adjusted basis of the assets to which interest expense is directly allocated is not taken into account in determining the relative amount of assets used in excepted or non-excepted trades or businesses.

Only the amount of qualified nonrecourse indebtedness secured by the assets (up to the adjusted basis of the assets) is removed when determining the relative amount of assets used in an excepted or non-excepted trade or business.

Treas. Reg. § 1.163(j)-10(d)

General RulesAllocations of Items Among Excepted and Non-Excepted Trades or Businesses



Look-through rules A taxpayer may not look through a partnership, non-consolidated C corporation, or S corporation that is eligible for the SBE.

Non-consolidated C corporations: Mandatory if shareholder owns 80% or more of the voting power and value of the stock. Otherwise, looking through is not permitted.

A taxpayer may not look through a partnership, non-consolidated C corporation, or S corporation that is eligible for the SBE unless the entity makes an election to be an electing RPTOB or an electing farming business.

Mandatory rule kept for non-consolidated C corporations, however, new optional look-through rule available if the shareholder’s direct and interest is greater than or equal to 80% of the value of the stock. Both mandatory and optional rules apply only if dividends paid on the stock would be treated as investment income.

Treas. Reg. §§ 1.163(j)-10(c)(5)(ii)(D), (c)(5)(ii)(A)(2)(i), (c)(5)(ii)(B)(2)(i), (c)(5)(ii)(B)(3)(ii)

Look-Through RulesAllocations of Items Among Excepted and Non-Excepted Trades or Businesses



Application of look-through rules

Generally, the taxpayer allocates its adjusted basis in its partnership interest or stock based on the ratio of the excepted and non-excepted trade or business assets owned by the entity being looked through.

The taxpayer must apply rules for all lower-tier entities if mandatory based on indirect ownership, beginning with the lowest-tier entity.

A partner of a partnership can look through a corporation owned by a partnership only if the partner directly or indirectly owns 80% or more of the vote and value of the corporation.

New rule added for direct shareholders of a non-consolidated C corporation that meet the mandatory or optional look-through requirements that allows the shareholder to include its pro rata share of the C corporation’s basis in its assets (i.e., the inside basis) rather than apportion its adjusted basis in the stock of the corporation.

Treas. Reg. §§ 1.163(j)-10(c)(5)(ii)(A)(2)(i), 10(c)(5)(ii)(B)(2)(i), 10(c)(5)(ii)(B)(3)(ii), (c)(5)(ii)(E), 10(c)(5)(ii)(B)(2)(iv), (e)(3) Example 3




De minimis exceptions for income when looking through

Dividend income that is not investment income: If 90% or more of the C corporation payor’s adjusted basis in its assets is allocable to excepted or non-excepted trades or businesses, then all of the shareholder’s dividend from the payor corporation for the year is treated as allocable to that trades or businesses.

No change to rules for dividend income.

New rules added for gain or loss from the disposition of a partnership, stock in an S corporation, and stock in a non-consolidated C corporation that is not property held for investment that is analogous to the rule for dividend income that is not investment income.

Treas. Reg. §§ 1.163(j)-10(b)(3), (b)(4)(i)(A), (b)(4)(ii)(B)

De minimis exceptions for income when looking through

Dividend income that is not investment income: If 90% or more of the C corporation payor’s adjusted basis in its assets is allocable to excepted or non-excepted trades or businesses, then all of the shareholder’s dividend from the payor corporation for the year is treated as allocable to that trades or businesses.

No change to rules for dividend income.

New rules added for gain or loss from the disposition of a partnership, stock in an S corporation, and stock in a non-consolidated C corporation that is not property held for investment that is analogous to the rule for dividend income that is not investment income.

Treas. Reg. §§ 1.163(j)-10(b)(3), (b)(4)(i)(A), (b)(4)(ii)(B)




Activities that constitute a RPTOB

Define two types of RPTOBs: real property development and real property redevelopment. Prop. Treas. Reg. §§ 1.469-9(b)(2)(ii)(A), (B)

General RulesReal Property Trade or Business



Limitation on application of look-through rule to C corporations

Prohibits an 80%-shareholder of a non-consolidated C corporation from applying the look-through rule for interest allocation purposes to the direct and indirect subsidiaries of that C corporation.

Prop. Treas. Reg. § 1.163(j)-10(c)(5)(ii)(D)(2)

Safe Harbor for a Trade or Business Allocations of Items Among Excepted and Non-Excepted Trades or Businesses


Issue Notice 2020-59 Citation

RPTOB elections with respect to senior living facilities

Proposed safe harbor allows a taxpayer engaged in a trade or business of managing or operating a “qualified residential living facility” to make a RPTOB election even though supplemental assistive, nursing, or routine medical services are provided to customers or patients. To qualify for the proposed safe harbor, the average period of customer or patient use of dwelling units in the facility must be 90 days or more.

Taxpayers allowed to rely on the proposed safe harbor.

Notice 2020-59, Section 4.01 of the proposed revenue procedure.

Notice 2020-59Safe Harbor for a Trade or Business


Transition Rules



Treatment of interest expense disallowed under “old” section 163(j)

Disallowed disqualified interest expense under “old” section 163(j) is carried forward to the taxpayer’s first tax year beginning after 2017. Subject to disallowance as disallowed business interest expense carryforward unless properly allocable to an excepted trade or business.

Earnings and profits (“E&P”) not reduced for tax years beginning after 2017 by disallowed disqualified interest expense that reduced E&P in a prior year.

Follows approach of 2018 Proposed Regulations

Clarifies that disqualified interest that is properly allocable to an excepted trade or business also is carried forward and is not subject to the section 163(j) limitation.

Provides for allocation rules to determine the amount of the disallowed disqualified interest expense that is properly allocable to an excepted trade or business.

2018 Prop. Treas. Reg. § 1.163(j)-11(b)(1)-(2); Treas. Reg. § 1.163(j)-11(c)(1)-(2); Treas. Reg. § 1.163(j)-10(a)(6)

Transition Rules


This document contains general information only and Deloitte is not, by means of this document, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This document is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this document.

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*the 2020 final regulations and the 2020 proposed regulations … · the 2020 final regulations are...

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