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Implications of section 163(j) proposed regulations for exempt organizations

Implications of section 163(j) for exempt organizations

The U.S. Treasury Department and IRS have released proposed regulations relating to the business interest limitation provisions of section 163(j)—a measure enacted as part of the new U.S. tax law. For tax years beginning after 2017, section 163(j) generally limits the deduction for business interest expense to the sum of a taxpayer’s “business interest income,” 30% of adjusted taxable income, and floor plan financing interest.

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The proposed regulations [PDF 1.5 MB] contain detailed information regarding the application of section 163(j) along with several references to tax-exempt organizations. In particular, the proposed regulations provide:

  • Taxpayers with average annual gross receipts of $25 million or less generally are not subject to the section 163(j) limitation. For organizations that are exempt from tax under section 501(a), the proposed regulations would provide that only gross receipts from unrelated trades or businesses are taken into account in determining whether the $25 million threshold is crossed. Thus, tax-exempt organizations described in section 501(a) with average annual gross receipts from unrelated trades or businesses of $25 million or less generally would not be subject to the section 163(j) limitation. Prop. Reg. section 1.163(j)-2(d)(2)(iv).
  • As a general matter, the rules regarding section 163(j) as applied to C corporations would apply to a tax-exempt corporation subject to tax under section 511 only with respect to that corporation’s items of income, gain, deduction, or loss that are taken into account in computing the corporation’s unrelated business taxable income. Prop. Reg. section 1.163(j)-4(b)(5).  
  • For tax-exempt organizations subject to tax under section 511, the proposed regulations would provide section 512 and the regulations thereunder determine the rules for allocating all income and expenses between and among trades or businesses that are excepted from the application of section 163(j) (e.g., certain electing real property trades or businesses) and those that are not. Prop. Reg. section 1.163(j)-10(a)(5).

 

Read a KPMG report of initial impressions and observations about the proposed regulations under section 163(j) for additional detail. 

 

For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Preston Quesenberry | +1 202 533 3985 | pquesenberry@kpmg.com

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