Bloomberg Tax - Tax Management Memorandum Vol. 61, No. 18

On July 28, 2020, the Treasury Department (Treasury) and the IRS released a highly anticipated Proposed Regulations1 (Proposed Regulations) that responds to long-awaiting guidance regarding interest expenses associated with debt proceeds of partnerships and S corporations including, (1) where debt is used to fund certain distributions and, (2) where debt proceeds of partners or shareholders are allocated to the acquisition of an interest in a partnership or S corporation.2 This article provides an overview and analysis of this Proposed Regulations (i.e, Prop. Reg. §1.163-14), and examines the impact of the same on passthrough entities and their partners and shareholders.

作者: Kelley C. Miller

Overview

The guidance released concerns the limitation on the deduction for business interest expense following the amendment of the I.R.C. by the provisions commonly referred to as the Tax Cuts and Jobs Act of 20173 (TCJA).4 Prior to the release of the Proposed Regulations, pass-through entities and their owners were required to follow the debt tracing and interest allocation rules set forth in Reg. §1.163-8T. With the release of the Proposed Regulations, Treasury and the IRS have apparently determined that Reg. §1.163-8T does not adequately provide for debt proceeds by a pass-through entities and their owners under §163(j), and specifically, in circumstances where a partnership or S corporation used debt proceeds to make owner distributions.

Prior to the release of the Proposed Regulations, the debt tracing guidance that could be relied upon pass-through entities and their owners was that found in a temporary regulation released in 1987 that speaks to the allocation of interest expense and debt, and a trio of Notices that were released following this temporary regulation that provided discrete, but far from comprehensive, guidance on how pass-through entities and their owners should allocate distributed debt proceeds to debt financed distributions including, where an interest is acquired in a pass-through entity.

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