Announcement 2020-17

The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) are postponing until January 15, 2021, the due dates for reporting and paying the excise taxes under §§ 4971(a)(1) and 4971(f)(1) of the Internal Revenue Code with respect to certain delayed minimum required contributions to a single employer defined benefit plan. This postponement applies with respect to a required contribution to which the extended due date under § 3608(a) of the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136 (134 Stat. 281) (CARES Act), applies.

Section 4971(a)(1) imposes an excise tax on an employer that maintains a single employer defined benefit plan, equal to 10 percent of the aggregate unpaid minimum required contributions (as defined in § 4971(c)(4)) for all plan years remaining unpaid as of the end of any plan year ending with or within a taxable year. Section 4971(f)(1) imposes an excise tax on an employer maintaining such a plan equal to 10 percent of the amount of the liquidity shortfall as of the last day of any quarter that is not paid by the due date for the required installment for that quarter.

Section 54.6011-1(a) provides that any employer liable for tax under § 4971 must file an annual return on Form 5330 and include on it the information required by that form and those instruc

tions. The § 4971(a)(1) excise tax is reported on line 8a and Schedule D, line 2, of Form 5330. The § 4971(f)(1) excise tax is reported on line 9a and Schedule E, line 4, of Form 5330. Form 5330 and the Form 5330 instructions provide that these taxes must be reported and paid by the last day of the 7th month after the end of the employer’s tax year or 8-1/2 months after the last day of the plan year that ends with or within the filer’s tax year.

Section 3608(a)(1) of the CARES Act provides that the due date for paying any minimum required contribution under § 430(j) (including quarterly installments) that would otherwise be due during calendar year 2020 is extended until January 1, 2021. Without this extension, the due date for paying the minimum required contribution for a plan year ending December 31, 2019, would be September 15, 2020, and the determination of whether a plan has an unpaid minimum required contribution for that plan year also would be made as of that date. On August 6, 2020, the Treasury Department and the IRS issued Notice 2020-61, 2020-35 IRB 468, which provides guidance regarding § 3608 of the CARES Act, including the extended due date under § 3608(a)(1) for making a minimum required contribution.

As a result of the extension of the due date for making a minimum required contribution under § 3608(a) of the CARES Act, if an employer that is a calendar year taxpayer maintains a single employer defined benefit plan that is subject to § 430 with a calendar year plan year fails to pay the minimum required contribution for the 2019 plan year by the extended due date of January 1, 2021, then there would be an unpaid minimum required contribution for the 2019 plan year and the employer would become subject to the excise tax under § 4971(a). Similarly, if the employer fails to pay a required installment under

§ 430(j)(3) to satisfy a liquidity shortfall by the delayed due date of January 1, 2021, the excise tax under § 4971(f) would apply. However, absent the relief provided in this announcement, the due date for the employer’s reporting and payment obligations for the excise taxes with respect to these unpaid contributions would be September 15, 2020.

In order to coordinate the due date for reporting and paying the §§ 4971(a)(1) and 4971(f)(1) excise taxes with the extended due date for paying the minimum required contributions to which those excise taxes apply (January 1, 2021, pursuant to § 3608(a) of the CARES Act), the Treasury Department and the IRS are postponing the reporting and payment due date for those taxes. The new due date for reporting and paying the §§ 4971(a)(1) and 4971(f)(1) excise taxes with respect to a minimum required contribution to which § 3608(a) of the CARES Act applies is January 15, 2021. This announcement overrides the due date provided on Form 5330 and under the Form 5330 instructions for reporting and paying the excise taxes under §§ 4971(a)(1) and 4971(f)(1) with respect to a minimum required contribution to which § 3608(a) of the CARES Act applies. This announcement does not apply to the due dates for other excise taxes required to be reported on Form 5330.

The principal author of this announcement is Diane S. Bloom of the Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the IRS participated in the development of this guidance. For further information regarding this announcement, please contact Ms. Bloom at 202-317-6700 (not a toll-free number).

September 28, 2020 794 Bulletin No. 2020–40

Notice of Proposed Rulemaking

Limitation on Deduction for Business Interest Expense; Allocation of Interest Expense by Passthrough Entities; Dividends Paid by Regulated Investment Companies; Application of Limitation on Deduction for Business Interest Expense to United States Shareholders of Controlled Foreign Corporations and to Foreign Persons with Effectively Connected Income

REG-107911-18

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This notice of proposed rulemaking provides rules concerning the limitation on the deduction for business interest expense after amendment of the Internal Revenue Code (Code) by the provisions commonly known as the Tax Cuts and Jobs Act, which was enacted on December 22, 2017, and the Coronavirus Aid, Relief, and Economic Security Act, which was enacted on March 27, 2020. Specifically, these proposed regulations address application of the limitation in contexts involving passthrough entities, regulated investment companies (RICs), United States shareholders of controlled foreign corporations, and foreign persons with effectively connected income in the United States. These proposed regulations also provide guidance regarding the definitions of real property development, real property redevelopment, and a syndicate. These proposed regulations affect taxpayers that have business interest expense, particularly passthrough entities, their partners and shareholders, as well

as foreign corporations and their United States shareholders and foreign persons with effectively connected income. These proposed regulations also affect RICs that have business interest income, RIC shareholders that have business interest expense, and members of a consolidated group.

DATES: Written or electronic comments and requests for a public hearing must be received by November 2, 2020, which is 60 days after the date of filing for public inspection with the Office of the Federal Register.

ADDRESSES: Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-107911-18) by following the online instructions for submitting comments. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The IRS expects to have limited personnel available to process public comments that are submitted on paper through mail. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment submitted electronically, and when practicable on paper, to its public docket.

Send paper submissions to: CC:PA:LPD:PR (REG-107911-18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044.

FOR FURTHER INFORMATION CONTACT: Concerning §1.163(j)-1, Steven Harrison, (202) 317-6842, Michael Chin, (202) 317-6842 or John Lovelace, (202) 317-5363; concerning §1.163(j)-2, Sophia Wang, (202) 317-4890 or John Lovelace, (202) 317-5363, concerning §1.163-14, §1.163(j)-6, or §1.469-9, William Kostak, (202) 317-5279 or Anthony McQuillen, (202) 317-5027; concerning §1.163-15, Sophia Wang, (202) 317-4890; concerning §1.163(j)-7 or §1.163(j)-8, Azeka J. Abramoff, (202) 317-3800 or Raphael J. Cohen, (202) 317-6938, concerning §1.1256(e)-2, Sophia Wang, (202) 3174890 or Pamela Lew, (202) 317-7053;

concerning submissions of comments and/ or requests for a public hearing, Regina L. Johnson, (202) 317-5177 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under sections 163 (in particular section 163(j)), 469 and 1256(e) of the Code. Section 163(j) was amended as part of Public Law No. 115-97, 131 Stat. 2054 (December 22, 2017), commonly referred to as the Tax Cuts and Jobs Act (TCJA), and the Coronavirus Aid, Relief, and Economic Security Act, Public Law No. 116-136 (2020) (CARES Act). Section 13301(a) of the TCJA amended section 163(j) by removing prior section 163(j)(1) through (9) and adding section 163(j)(1) through (10). The provisions of section 163(j) as amended by section 13301 of the TCJA are effective for tax years beginning after December 31, 2017. The CARES Act further amended section 163(j) by redesignating section 163(j)(10), as amended by the TCJA, as new section 163(j)(11), and adding a new section 163(j)(10) providing special rules for applying section 163(j) to taxable years beginning in 2019 or 2020.

Section 163(j) generally limits the amount of business interest expense (BIE) that can be deducted in the current taxable year (also referred to in this Preamble as the current year). Under section 163(j)(1), the amount allowed as a deduction for BIE is limited to the sum of (1) the taxpayer’s business interest income (BII) for the taxable year; (2) 30 percent of the taxpayer’s adjusted taxable income (ATI) for the taxable year (30 percent ATI limitation); and (3) the taxpayer’s floor plan financing interest expense for the taxable year (in sum, the section 163(j) limitation). As further described later in this Background section, section 163(j)(10), as amended by the CARES Act, provides special rules relating to the ATI limitation for taxable years beginning in 2019 or 2020. Under section 163(j)(2), the amount of any BIE that is not allowed as a deduction in a taxable year due to the section 163(j) limita

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tion is treated as business interest paid in the succeeding taxable year.

The section 163(j) limitation applies to all taxpayers, except for certain small businesses that meet the gross receipts test in section 448(c) and certain trades or businesses listed in section 163(j)(7). Section 163(j)(3) provides that the section 163(j) limitation does not apply to any taxpayer that meets the gross receipts test under section 448(c), other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3).

Section 163(j)(4) provides special rules for applying section 163(j) in the case of passthrough entities. Section 163(j)(4)(A) requires that the section 163(j) limitation be applied at the partnership level, and that a partner’s ATI be increased by the partner’s share of excess taxable income, as defined in section 163(j)(4)(C), but not by the partner’s distributive share of income, gain, deduction, or loss. Section 163(j)(4)(B) provides that the amount of partnership BIE limited by section 163(j) (1) (EBIE) is carried forward at the partner level. Section 163(j)(4)(B)(ii) provides that EBIE allocated to a partner and carried forward is available to be deducted in a subsequent year only to the extent that the partnership allocates excess taxable income to the partner. As further described later in this Background section, section 163(j)(10), as amended by the CARES Act, provides a special rule for excess business interest expense allocated to a partner in a taxable year beginning in 2019. Section 163(j)(4)(B)(iii) provides rules for the adjusted basis in a partnership of a partner that is allocated EBIE. Section 163(j)(4)(D) provides that rules similar to the rules of section 163(j)(4)(A) and (C) apply to S corporations and S corporation shareholders.

Section 163(j)(5) and (6) define “business interest” and “business interest income,” respectively, for purposes of section 163(j). Generally, these terms include interest expense and interest includible in gross income that is properly allocable to a trade or business (as defined in section 163(j)(7)) and do not include investment income or investment expense within the meaning of section 163(d). The legislative history states that “a corporation has neither investment interest nor investment

income within the meaning of section 163(d). Thus, interest income and interest expense of a corporation is properly allocable to a trade or business, unless such trade or business is otherwise explicitly excluded from the application of the provision.” H. Rept. 115-466, at 386, fn. 688 (2017).

Under section 163(j)(7), the limitation on the deduction for business interest expense in section 163(j)(1) does not apply to certain trades or businesses (excepted trades or businesses). The excepted trades or businesses are the trade or business of providing services as an employee, electing real property businesses, electing farming businesses, and certain regulated utility businesses.

Section 163(j)(8) defines ATI as the taxable income of the taxpayer without regard to the following: items not properly allocable to a trade or business; business interest and business interest income; net operating loss (NOL) deductions; and deductions for qualified business income under section 199A. ATI also generally excludes deductions for depreciation, amortization, and depletion with respect to taxable years beginning before January 1, 2022, and it includes other adjustments provided by the Secretary of the Treasury.

Section 163(j)(9) defines “floor plan financing interest” as interest paid or accrued on “floor plan financing indebtedness.” These provisions allow taxpayers incurring interest expense for the purpose of securing an inventory of motor vehicles held for sale or lease to deduct the full expense without regard to the section 163(j) limitation.

Under section 163(j)(10)(A)(i), the amount of business interest that is deductible under section 163(j)(1) for taxable years beginning in 2019 or 2020 is computed using 50 percent, rather than 30 percent, of the taxpayer’s ATI for the taxable year (50 percent ATI limitation). A taxpayer may elect not to apply the 50 percent ATI limitation to any taxable year beginning in 2019 or 2020, and instead apply the 30 percent ATI limitation. This election must be made separately for each taxable year. Once the taxpayer makes the election, the election may not be revoked without the consent of the Secretary of the Treasury or his delegate. See section 163(j)(10)(A)(iii).

Sections 163(j)(10)(A)(ii)(I) and 163(j) (10)(A)(iii) provide that, in the case of a partnership, the 50 percent ATI limitation does not apply to partnerships for taxable years beginning in 2019, and the election to not apply the 50 percent ATI limitation may be made only for taxable years beginning in 2020, and may be made only by the partnership. Under section 163(j) (10)(A)(ii)(II), however, a partner treats 50 percent of its allocable share of a partnership’s excess business interest expense for 2019 as a business interest expense in the partner’s first taxable year beginning in 2020 that is not subject to the section 163(j) limitation (50 percent EBIE rule). The remaining 50 percent of the partner’s allocable share of the partnership’s excess business interest expense remains subject to the section 163(j) limitation applicable to excess business interest expense carried forward at the partner level. A partner may elect out of the 50 percent EBIE rule.

Section 163(j)(10)(B)(i) allows a taxpayer to elect to substitute its ATI for the last taxable year beginning in 2019 (2019 ATI) for the taxpayer’s ATI for a taxable year beginning in 2020 (2020 ATI) in determining the taxpayer’s section 163(j) limitation for the taxable year beginning in 2020.

Section 163(j)(11) provides cross-references to provisions requiring that electing farming businesses and electing real property businesses excepted from the section 163(j) limitation use the alternative depreciation system (ADS), rather than the general depreciation system, for certain types of property. The required use of ADS results in the inability of these electing trades or businesses to use the additional first-year depreciation deduction under section 168(k) for those types of property.

On December 28, 2018, the Department of the Treasury (Treasury Department) and the IRS (1) published proposed regulations under section 163(j), as amended by the TCJA, in a notice of proposed rulemaking (REG-106089-18) (2018 Proposed Regulations) in the Fed- eral Register (83 FR 67490), and (2) withdrew the notice of proposed rulemaking (1991-2 C.B. 1040) published in the Federal Register on June 18, 1991 (56 FR 27907 as corrected by 56 FR 40285 (August 14, 1991)) to implement rules

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under section 163(j) before amendment by the TCJA. The 2018 Proposed Regulations were issued following guidance announcing and describing regulations intended to be issued under section 163(j). See Notice 2018-28, 2018-16 I.R.B. 492 (April 16, 2018).

A public hearing on the 2018 Proposed Regulations was held on February 27, 2019. The Treasury Department and the IRS also received written comments responding to the 2018 Proposed Regulations (available at http://www.regulations. gov). In response to certain comments, the Treasury Department and the IRS are publishing this notice of proposed rulemaking to provide additional proposed regulations (these Proposed Regulations) under section 163(j).

Concurrently with the publication of these Proposed Regulations, the Treasury Department and the IRS are publishing in the Rules and Regulations section of this edition of the Federal Register (RIN 1545-BO73) final regulations under section 163(j) (the Final Regulations).

On April 10, 2020, the Treasury Department and the IRS released Revenue Procedure 2020-22, 2020-18 I.R.B. 745, to provide the time and manner of making a late election, or withdrawing an election, under section 163(j)(7)(B) to be an electing real property trade or business or section 163(j)(7)(C) to be an electing farming business for taxable years beginning in 2018, 2019, or 2020. Revenue Procedure 2020-22 also provides the time and manner of making or revoking elections provided by the CARES Act under section 163(j)(10) for taxable years beginning in 2019 or 2020. As described earlier in this Background section, these elections are: (1) to not apply the 50 percent ATI limitation under section 163(j)(10)(A)(iii); (2) to use the taxpayer’s 2019 ATI to calculate the taxpayer’s section 163(j) limitation for any taxable year beginning in 2020 under section 163(j)(10)(B); and (3) for a partner to elect out of the 50 percent EBIE rule under section 163(j)(10)(A)(ii)(II).

Explanation of Provisions

These Proposed Regulations would provide guidance in addition to the Final Regulations regarding the section 163(j) limitation. These Proposed Regulations

would also add or amend regulations under certain other provisions of the Code where necessary to provide conformity across the Income Tax Regulations. A significant number of the terms used throughout these Proposed Regulations are defined in §1.163(j)-1 of the Final Regulations and discussed in the Explanation of Provisions section of the 2018 Proposed Regulations and the Summary of Comments and Explanation of Revisions section of the Final Regulations. Some of these terms are further discussed in this Explanation of Provisions section as they relate to specific provisions of these Proposed Regulations.