SECTION 3. TREATMENT OF

DISALLOWED DISQUALIFIED INTEREST FROM LAST TAXABLE YEAR BEGINNING BEFORE JANUARY 1, 2018

Prior to the Act, C corporation taxpayers that could not deduct all of their interest expense under section 163(j)(1)(A) could carry their disallowed disqualified interest forward to the succeeding taxable year under section 163(j)(1)(B). Such interest was treated as paid or accrued in the succeeding taxable year. Similarly, under section 163(j)(2), as amended by the Act, taxpayers that cannot deduct all of their business interest because of the limitation in section 163(j)(1) may carry their disallowed business interest forward to the succeeding taxable year, and such interest is treated as business interest paid or accrued in the succeeding taxable year.

Consistent with the approach of section 163(j)(1)(B) prior to the Act and section 163(j)(2), as amended by the Act, the Treasury Department and the IRS intend to issue regulations clarifying that taxpayers with disqualified interest disallowed under prior section 163(j)(1)(A) for the last taxable year beginning before January 1, 2018, may carry such interest forward as business interest to the taxpayer’s first taxable year beginning after December 31, 2017. The regulations will also clarify that business interest carried forward will be subject to potential disallowance under section 163(j), as amended by the Act, in the same manner as any other business interest otherwise paid or accrued in a taxable year beginning after December 31, 2017.

The regulations will also address the interaction of section 163(j) with section 59A, relating to the tax on base erosion payments of taxpayers with substantial gross receipts, which was added by section 14401 of the Act. The regulations will provide that business interest carried forward from a taxable year beginning before January 1, 2018, will be subject to section 59A in the same manner as interest paid or accrued in a taxable year beginning after December 31, 2017, and will clarify how

section 59A applies to that interest. Thus, for example, if interest paid or accrued by a taxpayer to a foreign person that is a related party as defined in section 59A(g) is carried forward to a taxable year beginning after December 31, 2017, and a deduction is otherwise allowable under Chapter 1 of the Code for such interest, then the interest is treated as a base erosion payment described in section 59A(d)(1) and is subject to the rules under section 59A(c)(3).

In addition, the regulations will provide rules for the allocation of business interest from a group treated as affiliated under the super-affiliation rules applicable to section 163(j) prior to the Act to taxpayers under section 163(j), as amended.

Prior to the Act, section 163(j)(2) (B)(ii) also allowed a corporation that was subject to the limitation in section 163(j)(1) to add to its annual limitation any “excess limitation carryforward” from the prior year, as defined in section 163(j)(2)(B)(ii). Section 163(j), as amended by the Act, does not have a provision that would allow an excess limitation carryforward. Thus, the Treasury Department and the IRS intend to issue regulations clarifying that no amount previously treated as an excess limitation carryforward may be carried to taxable years beginning after December 31, 2017.

For further information regarding carryforwards generally, contact Zachary King or Charles Gorham at (202) 3177003 (not a toll-free number). For further information regarding the interaction of sections 59A and 163(j), contact Sheila Ramaswamy or Steve Jensen at (202) 317-6938 (not a toll-free number).