Coordination With Other Limitations

Categorization and allocation of interest expense. Current year interest expense must be categorized under Temporary Regulations section 1.163-8T (for example, as investment interest, personal interest, or business interest) before computing the section 163(j) limitation on the deduction for business interest expense. Also, see Proposed Regulations section 1.163-14 ((85 FR 56846) (2020 Proposed Regulations)) for rules on allocating interest expense associated with debt proceeds for pass-through entities. Only business interest expense is subject to the section 163(j) limitation.

For purposes of the section 163(j) limitation only, business interest expense refers to interest expense properly allocable to trades or businesses that are not excepted trades or businesses. See Taxpayers with both excepted and non-excepted trades or businesses , later, for allocating interest expense between excepted and non-excepted trades or businesses before computing the section 163(j) limitation.

Interest expense limitations. An expense that has been disallowed, deferred, or capitalized in the current tax year, or which has not yet been accrued, is not taken into account for section 163(j) purposes. Section 163(j) applies after any basis limitation and before the operation of the at-risk, passive activity loss, or excess business loss limitations. See Regulations section 1.163(j)-3 for additional information on interactions of section 163(j) with other code provisions relating to interest expense.

If a taxpayer’s deduction for business interest expense is limited under section 163(j) and such taxpayer has more than one business activity for purposes of either the at-risk (section 465) or passive activity loss (section 469) limitation provisions, then the section 163(j) limitation will apply to the overall business interest expense from all the business activities of the taxpayer. The proportion of each activity’s business interest expense that is disallowed is the same proportion as the disallowed business interest expense over the total business interest expense. See Regulations section 1.163(j)-3(c), example 4, and Temporary Regulations section 1.163-8T.

Partner basis limitations. Deductible business interest expense and excess business interest expense are subject to section 704(d) loss limitation rules. See Regulations section 1.163(j)-6(h)(1) and (2).