AICPA asks IRS for a narrower definition of interest for business

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The American Institute of CPAs testified Wednesday during an Internal Revenue Service hearing on proposed regulations for implementing the limitation on the deduction for business interest expense under the Tax Cuts and Jobs Act, calling for changes in how the IRS would define the term “interest,” the calculation of adjusted taxable income and the treatment of partnership income.

Wednesday’s testimony largely reflected a comment letter the AICPA sent to the IRS last week about the proposed regulations (see AICPA recommends changes in rules for deducting business interest expenses).

“The definition of interest in the proposed regulations is exceptionally broad,” said Julie Allen, vice chair of the AICPA Corporations and Shareholders Tax Technical Resource Panel, during her testimony before the IRS. “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.”

“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,” Allen added. “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.”

Allen also gave the AICPA’s position on the calculation of adjusted taxable income. “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,” she said. “They should be allowable as a deduction under 163(j) and as an add back to adjusted taxable income.”

Jose Carrasco, a member of the AICPA Partnership Tax Technical Resource Panel, also testified at the hearing and focused on two partnership-related issues in 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. He said the basic question is whether a UTP should be treated as a partner of the lower-tier partnership or as a flow-through entity. The AICPA contends 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,” he noted. “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 partnership-related issue that Carrasco spoke about involves basis adjustments when a partner disposes of less than substantially all of its interest in a partnership. There is a question what the phrase “substantially all” means when applied to an interest in a partnership, he noted. The AICPA recommends “defining ‘substantially all’ as used in Prop. Reg. § 1.163(j)-6(h)(3) to mean 80 percent or more of a partner’s interest in profits or capital of the partnership,” said Carrasco. “Such a definition is reasonably consistent with the way ‘substantially all’ is defined for other purposes within the code.”

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Tax regulations Tax deductions Partnerships AICPA IRS