Special Rules — 1225 Inst 8990 (PDF)

Elections. A taxpayer engaged in a real property trade or business, a farming business, or a non-automatically excepted regulated utility trade or business may elect not to limit business interest expense under section 163(j) for such trade or business. This is an irrevocable election.

If the real property trade or business or farming business election is in effect, you are required to use the alternative depreciation system (ADS) for certain property. See Pub. 946, How To Depreciate Property. Also, you are not entitled to the special depreciation allowance for that property. For a taxpayer with more than one qualifying business, the election is made with respect to each trade or business.

Electing real property trade or business. An electing real property trade or business must use the ADS for any nonresidential real property, residential rental property, and qualified improvement property used in its trade or business.

Revenue Procedure 2021-9. Revenue Procedure 2021-9 provides a safe harbor that allows a taxpayer engaged in a trade or business that manages or operates a residential living facility that provides certain supplemental assistive, nursing, and other routine medical services to treat such trade or business as a real property trade or business. See Revenue Procedure 2021-9 for additional information and requirements to qualify for the safe harbor.

Caution: Any additions or subtractions from taxable income in arriving at ATI are limited to the amount by which the item affects taxable income.

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Electing farming business. An electing farming business must use the ADS for any farming property the taxpayer owns with a recovery period of 10 years or more.

Regulated utility trade or business. Automatically excepted utility trades or businesses and electing utility trades or businesses cannot claim the additional first-year depreciation deduction under section 168(k) for any property that is primarily used in the excepted regulated utility trade or business.

Safe harbor for real estate investment trusts (REITs). Under certain circumstances, a REIT (and a partnership controlled by one or more REITs) is eligible to make an election to be a real property trade or business. See Regulations section 1.163(j)-9(h).

Partnerships. If a partnership is subject to the section 163(j) limitation, the section 163(j) limitation is applied at the partnership level. If a partnership has deductible business interest expense, such deductible business interest expense is not subject to any further limitation under section 163(j) at the partner level. For all other purposes of the Code, however, deductible business interest expense retains its character as business interest expense at the partner level.

After completing Form 8990, the partnership must determine how the deductible business interest expense, excess business interest expense, excess taxable income, and excess business interest income are allocated among the partners. Worksheet A—Determination of Each Partner’s Deductible Business Interest Expense and Section 163(j) Excess Items and Worksheet B—Determination of Each Partner’s Relevant Section 163(j) Items are to be used to determine the amount of each item allocable to each partner. See Regulations section 1.163(j)-6(f)(2) for additional information on the allocation.

Self-charged interest. See Regulations section 1.163(j)-6(n) for the treatment of business interest income and business interest expense with respect to lending transactions between a partnership and a partner.

If the partnership has a limitation on business interest expense, the disallowed business interest expense (excess business interest expense) is not carried over by the partnership, but is allocated to the partners.

How to make the election. To make an election for a real property, farming, or non-automatically excepted regulated utility trade or business, attach an election statement to a timely filed original tax return (including extensions). Once the election is made, it is irrevocable.

The statement must be titled “Section 1.163(j)-9 Election” (for real property or farming businesses) or “Section 1.163(j)-1(b)(15)(iii) Election” (for an electing utility trade or business), and must contain the following information for each electing trade or business:

The taxpayer’s name;
The taxpayer’s address;
The taxpayer’s social security number (SSN) or employer identification number (EIN);
A description of the taxpayer’s electing trade or business, sufficient to demonstrate qualification for an election, including the principal business activity code; and
A statement that the taxpayer is making an election pursuant to section 163(j)(7)(B) (as an electing real property trade or business) or (C) (as an electing farming business), or Regulations section 1.163(j)-1(b)(15)(iii) (as an electing utility trade or business), as applicable.

Consolidated group’s trade or business. Only the name and taxpayer identification number (TIN) of the agent for the group, as defined in Regulations section 1.1502-77, must be provided on the election statement.

Partnership’s trade or business. An election for a partnership must be made on the partnership’s return with respect to any trade or business that the partnership conducts. An election by a partnership does not apply to a trade or business conducted by a partner outside the partnership.

Taxpayers with both excepted and non-excepted trades or businesses. Taxpayers must allocate and apportion their interest expense, interest income, and other tax items between excepted and non-excepted trades or businesses, applying the rules under Regulations section 1.163(j)-10. An asset basis approach is generally used to allocate interest expense and interest income. Regulations section 1.163(j)-10(c) requires a taxpayer to attach a statement to its timely filed tax return, providing information related to the asset basis and allocation determination, as provided, in Regulations section 1.163(j)-10(c)(6)(iii).

Partner. A partner’s excess business interest expense is treated as paid or accrued by the partner in subsequent years to the extent the partner is allocated current year excess taxable income or excess business interest income from the same partnership.

If a partner not subject to the section 163(j) limitation has excess business interest expense from a prior year and is allocated excess taxable income or excess business interest income in the current year, the partner would file Form 8990 and the amount of excess business interest expense treated as paid or accrued in the current year would not be subject to further limitation under section 163(j). See Schedule A, Summary of Partner’s Section 163(j) Excess Items , later.

A partner subject to the section 163(j) limitation will include the amount of excess business interest expense treated as paid or accrued in figuring its current year business interest expense limitation.

If both a partnership and a partner are subject to the section 163(j) limitation, the partner’s current year business interest expense limitation computation will include the following amounts from each of its partnerships:

Current year excess taxable income,
Excess business interest expense treated as paid or accrued, and
Current year excess business interest income. These amounts will not include items from an excepted trade or business.

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If a partner is subject to the section 163(j) limitation and the partnership is not, see Ownership of pass-through entities not subject to the section 163(j) limitation , later.

In the event a partner sells a partnership interest and the partnership in which the interest is being sold owns only non-excepted trade or business assets, the gain or loss on the sale of the partnership interest is included in the partner’s ATI. If the partnership interest consists of both excepted and non-excepted assets, the partner may use the method set forth in Regulations section 1.163(j)-10(c) to determine the amount properly allocable to a non-excepted trade or business and, therefore, properly includible in the partner’s ATI.

income, except to the extent such interest expense or interest income is allocable to an excepted trade or business.

Excess business interest expense from a prior tax year that was suspended under section 704(d) (“neg- ative section 163(j) expense”). See Regulations section 1.163(j)-6(h) for basis adjustment calculations and ordering rules for losses under section 704(d).

Excess business interest expense in tiered partner- ships. See 2020 Proposed Regulations section 1.163(j)-6(j) for treatment of excess business interest expense in tiered partnerships.

S corporation. The section 163(j) limitation is applied at the S corporation level. Disallowed business interest expense is carried over by the S corporation and is treated as business interest expense paid or accrued in the following year.

Any investment interest expense, investment interest income, or investment expenses that a partnership pays, receives, or accrues and allocates to a C corporation partner as a separately stated item is treated by the C corporation as properly allocable to a trade or business of that partner. Similarly, for purposes of section 163(j), any other tax items of a partnership that are neither properly allocable to a trade or business of the partnership nor described in section 163(d) and that are allocated to a C corporation partner as separately stated items, are treated as properly allocable to a trade or business of that partner. See Regulations section 1.163(j)-4(b)(3)(i).

Current year business interest expense is deducted before disallowed business interest expense carryforwards, which are then deducted in the order of the year in which they were incurred, starting with the earliest year, subject to certain limitations.

Consolidated group. A consolidated group has a single section 163(j) limitation. A consolidated group files one Form 8990. For members entering or leaving the group, see Regulations section 1.163(j)-5 for applicable limitations.

Intercompany obligations. All intercompany obligations, as defined in Regulations section 1.1502-13(g)(2)(ii), are disregarded for purposes of determining a member’s business interest expense and business interest income and in figuring the consolidated group’s ATI.

For a shareholder subject to the section 163(j) limitation, the shareholder’s current year section 163(j) limitation computation will include the following amounts from each of its S corporations:

Current year excess taxable income, and
Current year excess business interest income. These amounts will not include items from an excepted trade or business.

Ownership of pass-through entities not subject to the section 163(j) limitation. If you are subject to the section 163(j) limitation and are an owner of a pass-through entity that is not subject to the section 163(j) limitation, your share of the pass-through business interest expense is not subject to the section 163(j) limitation, and your share of non-excepted trade or business items of income, gain, loss, and deduction (including business interest expense and business interest income) of such pass-through entity, if net positive, is included on line 13. You must request the pass-through entity to separately state, in sufficient detail, the items necessary to include on line 13.

In the event a partnership allocates excess business interest expense to one or more of its partners, and in a later tax year the partnership is an exempt entity, the excess business interest expense from the prior year is treated as business interest expense paid or accrued by the partner in the later year. See Regulations section 1.163(j)-6(m)(3).

C corporation business interest expense and in- come. Solely for section 163(j), all interest paid or accrued (or treated as paid or accrued) by a C corporation is business interest expense, and all interest includible in gross income by a C corporation is business interest

Tax-exempt corporations with unrelated business in- come (UBI). The rule for C corporation interest expense and income applies to a corporation that is subject to the unrelated business income tax under section 511 only with respect to that corporation’s items of income, gain, deduction, or loss that are taken into account in computing the corporation’s unrelated business taxable income, as defined in section 512.

Regulated investment companies (RICs) and real es- tate investment trusts (REITs). For special rules for determining ATI for RICs and REITs, see Regulations section 1.163(j)-4(b)(4). For a safe harbor for REITs (and partnerships controlled by one or more REITs) making an election to be an electing real property trade or business, see Regulations section 1.163(j)-9(h).

Trading partnerships. A trading partnership is a partnership engaged in a trade or business activity of trading personal property (including marketable securities) for the account of owners of interests in the activity, as described in Temporary Regulations section 1.469-1T(e) (6). A trading partnership is required to bifurcate its interest expense from a trading activity between partners that materially participate in the trading activity and partners that do not materially participate. Only the portion of the interest expense that is allocable to the materially participating partners is subject to limitation under section 163(j) at the partnership level. In addition, the trading partnership is required to bifurcate all of its other items of income, gain, loss, and deduction from its trading activity allocable to the partners that do not materially participate.

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Such items are not taken into account at the partnership level as items from a trade or business for section 163(j), but instead are treated as items from an investment activity of the partnership.

Foreign persons with effectively connected income (ECI). A nonresident alien individual or foreign corporation that is not a relevant foreign corporation and that has ECI is also subject to the section 163(j) limitation. As foreign persons are only taxed on their ECI, ATI, business interest expense, business interest income, and floor plan financing interest expense are modified to limit such amounts to income, which is ECI and expenses properly allocable to ECI. A relevant foreign corporation means any foreign corporation whose classification is relevant under Regulations section 301.7701-3(d)(1) for a tax year, other than solely pursuant to sections 881 or 882. Before applying section 163(j), a foreign corporation that has ECI must first determine its business interest expense allocable to ECI under Regulations section 1.882-5. Business interest expense allocable to ECI is reported on Schedule I (Form 1120-F). Disallowed business interest expense carryforward, as determined under section 163(j), that was allocable to ECI in a prior year but deductible in the current tax year and any current year ECI business interest expense that becomes disallowed business interest expense carryforward, after applying section 163(j), are also included on Schedule I (Form 1120-F).

Relevant foreign corporations. Section 163(j) generally applies to determine the deductibility of a relevant foreign corporation’s business interest expense for purposes of computing its taxable income (determined under Regulations section 1.952-2 or the rules of section 882) in the same manner as it applies to determine the deductibility of a domestic C corporation’s business interest expense for purposes of computing its taxable income. An applicable CFC means a foreign corporation described in section 957, but only if the foreign corporation has at least one U.S. shareholder that owns (within the meaning of section 958(a)) stock of the foreign corporation.

CFC group election. In order to make a CFC group election under Regulations section 1.163(j)-7(e), each designated U.S. person (as defined in Regulations section 1.163(j)-7(k)(12)) must attach the election statement described in Regulations section 1.163(j)-7(e)(5)(iv) to the CFC group’s Form 8990 in the year the CFC group election is made. The statement must include the name and taxpayer identification number of all designated U.S. persons, a statement that the CFC group election is being made, the specified period (as defined in Regulations section 1.163(j)-7(k)(29)) for which the CFC group election is being made, the name of each CFC group member, and its specified tax year with respect to the specified period. If a CFC group election was previously revoked, the statement must include a certification that the specified period for which the election is made did not begin before 60 months following the last day of the specified period for which the election was revoked. See Regulations section 1.163(j)-7(e)(5)(ii).

If a CFC group election is in effect, a single section 163(j) limitation is computed for a specified period of a CFC group. A CFC group sums each of its CFC group member’s separate-company applicable amounts for a specified period. Items of a CFC group member are translated into a single currency (which may be the U.S. dollar or the functional currency of a plurality of the CFC group members) for the CFC group and back to the functional currency of the CFC group member using the average exchange rate for the CFC group member’s specified tax year (as defined in Regulations section 1.163(j)-7(k)(30)), using any reasonable method, consistently applied. Only non-ECI amounts are included in the CFC group calculation. A separate section 163(j) calculation and Form 8990 must be filed for the ECI of a CFC group member, if any. The CFC group member’s ECI attributes are treated, for this purpose, as attributes of a separate applicable CFC.

Form 8990 for each CFC group member. When a CFC group election is in effect, the U.S. shareholders of each CFC group member must file Form 8990 with Form 5471 for each CFC group member on a separate entity basis (unless a safe-harbor election is in effect for the CFC group). On each CFC group member’s Form 8990, report the individual CFC group member’s amounts on line 1 through line 25. Do not complete line 26 through line 29 and report the CFC group member’s current year business interest expense deduction and disallowed business interest expense (as determined under Regulations section 1.163(j)-7(c)(3)) on lines 30 and 31.

Additional Form 8990 for CFC group. In addition to the Form 8990 that is filed for each CFC group member, a separate Form 8990 must be filed for the CFC group in order to report the combined limitation of the CFC group. The CFC group’s Form 8990 must be filed by the specified group parent, if the specified group parent is a qualified U.S. person. If the specified group parent is a CFC, the U.S. shareholders that file Form 5471 for the specified group parent must file the CFC group’s Form 8990 with Form 5471 of the specified group parent. In addition, if a U.S. shareholder that files Form 5471 for a CFC group member is not the specified group parent and does not file Form 5471 for the specified group parent, the CFC group’s Form 8990 should be attached to such U.S. shareholder’s tax return.

On the CFC group’s Form 8990, line 1 through line 25 should be completed by adding together the individual amounts reported by each CFC group member on a separate entity basis. However, for purposes of determining ATI of a CFC group, the limitation that ATI cannot be less than zero applies with respect to the ATI of the CFC group but not the ATI of any CFC group member. Line 26 through line 31 of Form 8990 should be completed by reference to the total amounts reported on line 1 through line 25. Each designated U.S. person should attach a statement identifying the specified group parent, the specified period, and the name and specified tax year of each CFC group member.

On the CFC group’s Form 8990, enter “Specified Group Parent” as the name of the foreign entity on line A. Enter zeros for the foreign entity’s EIN number. Do not complete Schedule A or Schedule B of the CFC group’s Form 8990.

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Compliance with these instructions satisfies the statement requirement under Regulations section 1.163(j)-7(e)(5)(iv) and the annual information reporting requirement under Regulations section 1.163(j)-7(e)(6).

Revocation of CFC group election. In order to revoke a CFC group election, each designated U.S. person must attach the statement described in Regulations section 1.163(j)-7(e)(5)(iv) to the Form 8990 that is filed by or on behalf of the specified group parent. The statement must include the name and taxpayer identification number of all designated U.S. persons, a statement that the CFC group election is being revoked, the name of the specified group parent, the specified period for which the election is revoked, and the name and specified tax year of each specified group member. The statement must also include a certification that the specified period for which the election is revoked did not begin before 60 months following the last day of the specified period for which the election was made. See Regulations section 1.163(j)-7(e) (5)(ii).

Specified group parent. A specified group parent means a qualified U.S. person or an applicable CFC. A qualified U.S. person means a United States person described in section 7701(a)(30)(A) or (C). Members of a consolidated group that file (or that are required to file) a consolidated U.S. federal income tax return are treated as a single qualified U.S. person, and individuals described in section 7701(a)(30)(A) whose filing status is married filing jointly are treated as a single qualified U.S. person.

Designated U.S. person. With respect to a specified group, a designated U.S. person means either the specified group parent (if the specified group parent is a qualified U.S. person) or each controlling domestic shareholder (see Regulations section 1.964-1(c)(5)(i)) of the specified group parent (if the specified group parent is an applicable CFC). With respect to a stand-alone applicable CFC, each controlling domestic shareholder of the stand-alone applicable CFC is a designated U.S. person.

Safe-harbor election. If a safe-harbor election is in effect with respect to a tax year of a stand-alone applicable CFC or a specified tax year of a CFC group member, then, for such year, no portion of the applicable CFC’s business interest expense is disallowed under the section 163(j) limitation. See instructions to Worksheet C, and complete Worksheet C before completing Part I.

If the safe-harbor election is made for a stand-alone applicable CFC, the U.S. shareholders that file Form 8990 for the stand-alone applicable CFC must attach Worksheet C to their tax return together with the Form 8990 of the stand-alone applicable CFC and complete Part I of the stand-alone applicable CFC’s Form 8990 in accordance with the instructions to Worksheet C. Check the “Yes” box on line D of the stand-alone applicable CFC’s Form 8990.

If the safe-harbor election is made for a CFC group, the U.S. shareholders that file the CFC group’s Form 8990 must attach Worksheet C to their tax return together with the CFC group’s Form 8990 and complete Part I of the CFC group’s Form 8990 in accordance with the

instructions to Worksheet C. Check the “Yes” box on line D of the CFC group’s Form 8990.

A safe-harbor election is valid only if made by each designated U.S. person. The requirement to file the election statement described in Regulations section 1.163(j)-7(h)(5)(ii) is satisfied by attaching Worksheet C in compliance with these instructions.

The safe-harbor election is available if a CFC group’s (or stand-alone applicable CFC’s) business interest expense is equal to or less than either (a) its business interest income or (b) 30% of the lesser of (i) its qualified tentative taxable income (QTTI) or (ii) its eligible amount. See Regulations section 1.163(j)-7(h)(3). A CFC group is not eligible for the safe-harbor election if any CFC group member has a pre-group disallowed business interest expense carryforward. See Regulations section 1.163(j)-7(k)(19) for the specified period. See Regulations section 1.163(j)-7(h)(2). See the instructions for Worksheet C for additional information.

The safe-harbor election does not apply to excess business interest expense, as described in Regulations section 1.163(j)-6(f)(2), until the tax year in which it is treated as paid or accrued by an applicable CFC under Regulations section 1.163(j)-6(g)(2)(i). Excess business interest expense is not taken into account for purposes of this election until a tax year in which it is treated as paid or accrued by an applicable CFC under Regulations section 1.163(j)-6(g)(2)(i). See Regulations section 1.163(j)-7(h) for full election rules.

Limitation on pre-group disallowed business interest expense carryforward. The amount of the pre-group disallowed business interest expense carryforwards that may be included in any CFC group member’s business interest expense deduction for any specified tax year may not exceed the aggregate section 163(j) limitation for all specified periods of the CFC group, determined by reference only to the CFC group member’s items of income, gain, deduction, and loss, and reduced (including below zero) by the CFC group member’s business interest expense (including disallowed business interest expense carryforwards) taken into account as a deduction by the CFC group member in all specified tax years in which the CFC group member has continuously been a CFC group member of the CFC group (cumulative section 163(j) pre-group carryforward limitation). See Regulations section 1.163(j)-7(c)(3)(iv).

U.S. shareholder of an applicable CFC. A U.S. shareholder of an applicable CFC, in order to arrive at ATI, must reduce its tentative taxable income, by, among other items, an amount equal to the sum of any specified deemed inclusions that were included in the computation of the taxpayer’s tentative taxable income, reduced by the portion of the deduction allowed under section 250(a) by reason of the specified deemed inclusions. See Regulations section 1.163(j)-1(b)(1)(ii)(G). A specified deemed inclusion means the inclusion of an amount by a U.S. shareholder (as defined in section 951(b)) in gross income under sections 78, 951(a), or 951A(a) with respect to an applicable CFC that is properly allocable to a non-excepted trade or business. A specified deemed inclusion also includes any amount included in a domestic partnership’s gross income under sections 951(a) or

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951A(a) with respect to an applicable CFC to the extent such amounts are attributable to investment income of the partnership and are allocated to a domestic C corporation that is a direct (or indirect) partner and treated as properly allocable to a non-excepted trade or business of the domestic C corporation.

Section 1.163(j)-7(j) of the 2020 Proposed Regulations does, however, allow a U.S. shareholder to add to its tentative taxable income a portion of its specified deemed inclusions that are attributable to either a stand-alone applicable CFC or a CFC group member, except to the extent attributable to an inclusion under section 78 with respect to an applicable CFC, provided the applicable requirements are met. That portion is equal to the ratio of the applicable CFC’s excess taxable income over its ATI.

Change in ATI computation. For tax years beginning before 2022 and after 2024, ATI is computed without deductions for depreciation, amortization, depletion, and any other deduction prescribed in published guidance. For tax years 2022 through 2024, ATI includes deductions for depreciation, amortization, or depletion attributable to a trade or business.

Change from being subject to section 163(j) to being exempt from section 163(j) under the small business exemption. A taxpayer that has disallowed business interest expense from a prior year and meets the small business exemption in the current year is no longer required to limit their business interest expense for section 163(j) purposes. Similarly, a partner with excess business interest expense from a partnership is not required to limit such excess business interest expense under section 163(j) if the partnership meets the small business exemption in the current year and the partner also meets the small business exemption in the current year.

Change from non-excepted trade or business to ex- cepted trade or business. If a taxpayer has disallowed business interest expense from a prior year, or excess business interest expense from a partnership, for which an election to be an excepted trade or business is made in the current year, then the disallowed business interest expense carried forward, or excess business interest expense, is still subject to the section 163(j) limitation.