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AICPA Testifies Regarding Business Interest Expense Deduction

The American Institute of CPAs (AICPA) testified today at the public hearing by the Internal Revenue Service (IRS) on the proposed regulations (REG-106089-18) to implement changes made by the Tax Cuts and Jobs Act (TCJA) to Internal Revenue Code section 163(j), the limitation on the deduction for business interest expense. 

Julie Allen, vice chair of the AICPA Corporations and Shareholders Tax Technical Resource Panel, and Jose Carrasco, a member of the AICPA Partnership Tax Technical Resource Panel, testified on behalf of the AICPA.  They spoke about several specific issues the AICPA included in its extensive February 21 comment letter to the IRS about the proposed regulations.   

Allen focused her testimony on the definition of interest and the calculation of adjusted taxable income.

“The definition of interest in the proposed regulations is exceptionally broad, Allen said.”  She explained that “generally interest includes any amount, paid or accrued, as compensation for the use or forbearance of money on indebtedness.  This definition is consistent with the traditional definition of interest in other areas of the Code.”  The proposed regulations, however, “expand the traditional definition to sweep in amounts closely related to interest which affect the economic yield or cost of funds of a transaction involving interest.” 

Allen stated, “The AICPA does not support, and in fact opposes, this broadened and vastly different definition of interest from what we already have in the Tax Code.  Instead, we believe, the final regulations should define interest for purposes of section 163(j) as any amount generally treated as interest under other provisions of the Code or regulations.”

Regarding calculation of adjusted taxable income, Allen testified that “the AICPA recommends that the final regulations provide that depreciation, amortization, and depletion allowances allocable to inventory, capitalized, and recovered through cost of goods sold retain their original character. They should be allowable as a deduction under 163(j) and as an add back to adjusted taxable income.”

Carrasco highlighted two partnership-related issues in his testimony on which comments were requested in the Preamble to the proposed regulations. 

The first issue is whether, in a tiered partnership arrangement, carryforwards of excess business interest expense are allocated through the upper-tier partnerships or UTPs.  He explained that the basic question is whether a UTP should be treated as a partner of the lower-tier partnership or as a flow-through entity.  Carrasco stated that the AICPA believes that “the simplest and most administrable answer is to treat each UTP as a partner under section 163(j) for flow-through items derived from a lower-tier partnership.  That is why the final regulations should clarify that, in the context of a tiered partnership, the allocation of excess business interest expense to a UTP is suspended at that level. The interest would be released in the next taxable year in which the UTP is allocated excess taxable income from the appropriate lower-tier partnership.”

The second issue Carrasco testified about concerns basis adjustments when a partner disposes of less than substantially all of its interest in a partnership.  A key issue is what the phrase “substantially all” means when applied to an interest in a partnership, Carrasco said.  He stated the AICPA recommends “defining ‘substantially all’ as used in Prop. Reg. § 1.163(j)-6(h)(3) to mean 80% or more of a partner’s interest in profits or capital of the partnership.  Such a definition is reasonably consistent with the way ‘substantially all’ is defined for other purposes within the Code.” 

About the American Institute of CPAs
The American Institute of CPAs (AICPA) is the world’s largest member association representing the CPA profession, with more than 431,000 members in 137 countries and territories, and a history of serving the public interest since 1887. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting. The AICPA sets ethical standards for its members and U.S. auditing standards for private companies, nonprofit organizations, federal, state and local governments. It develops and grades the Uniform CPA Examination, offers specialized credentials, builds the pipeline of future talent and drives professional competency development to advance the vitality, relevance and quality of the profession.

The AICPA maintains offices in New York, Washington, DC, Durham, NC, and Ewing, NJ.

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