We now know a little more about how the IRS is interpreting the application of the 30% business interest limitation that applies to tax years beginning after 2017, thanks to its release of Notice 2018-28 and an accompanying news release on April 2:
- A C corporation cannot have investment interest expense, which was being tossed around by tax practitioners as a possible strategy to avoid the 30% limitation on business interest expense. Note that this rule does not apply to S corporations. Still open to further debate and guidance: whether the interest expenses of a partnership in which the C corporation holds an interest will only be considered business interest as well or will retain the same character they had at the partnership level.
- In the case of affiliated groups that file consolidated tax returns, the interest on debt held by members of the consolidated group will be allocated at the consolidated group level rather than on a member-by-member basis. Still open to further debate and guidance: how the new deduction limit will be handled when members of the consolidated group who enter or leave the group are subject to the two exemptions in the new law (regulated public utilities and electing real property trades or businesses) or the group chooses not to file a consolidated return.
- Partners and S corporation shareholders will not be able to apply the new law in such a way as to inappropriately "double count" the business interest income of their partnership or S corporation.
- The disallowance and carryforward of a deduction for a C corporation’s business interest expense under the new law will not affect whether or when that business interest expense reduces E&P of the C corporation.
When can we expect more detailed guidance? Per Lawrence Axelrod, former special counsel to the IRS Associate Chief Counsel, “I would say the forecast date for the regulations is the same as the wait time for the new Tesla Model 3.” Tesla's website suggests customers “reserve your Model 3 today for delivery in 12 to 18 months.”