Article
CFC interest expense limitation and the 2020 regulations
Oct. 18, 2020 · Authored by Brittain Cunningham, Andrew Yacoub, Stuart Myhill
On July 28, 2020 the U.S. Department of the Treasury and the IRS issued final and new proposed regulations for computing the business interest deduction limitation. These proposed regulations substantially revise a previous set of proposed regulations issued in 2018, including the interest capitalization rules for controlled foreign corporations (CFCs).
Taxpayers subject to the interest expense limitation should consider how the changes in these regulations could alter their chosen tax positions related to other areas of the Internal Revenue Code. An overview of key changes in the proposed regulations, as well as considerations for businesses, follows.
Key changes
The proposed regulations accomplish the following:
- Provide relief for taxpayers impacted by COVID-19 with an increased 50% adjusted taxable income (ATI) threshold for the 2019 and 2020 tax years
- Allow taxpayers to use their 2019 CFC group ATI for the 2020 tax year
- Confirm that U.S. shareholders must apply the interest-expense limitation in calculating the net income of CFCs
- Modify the calculation of the CFC group election and ATI
- Introduce an annual safe-harbor election for qualifying CFCs that allows U.S. shareholders with a valid CFC group to ignore the interest expense limitation rule
The interest-expense limitation could result in a significant increase in taxable income when compared to financial net income. Taxpayers that lost money in previous years could potentially pay additional tax simply due to excess interest expenses paid on loans.
Taxpayers can benefit from modeling the modifications made by these regulations — especially with respect to CFCs — and evaluating whether elections such as the CFC group election or GILTI high tax exclusion could result in a lower tax burden.
CFC group election
These are the key changes within the proposed regulations that specifically impact a taxpayer’s CFC group election:
- Allow for a carryover of a CFC’s excess taxable income (ETI) to a future tax year
- Allow a standalone CFC to make a group election
Tax tools companies can use to help improve cash flow
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.