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Final Interest Expense Regulations Provide Manufacturers Favorable Change

Final and proposed regulations were released on July 28, 2020 for computing the business interest deduction limitation under Section §163(j) of the Internal Revenue Code.

Although everyone might not be rejoicing at some of the final decisions made, those in the manufacturing and supply chain sectors will be pleased to hear about one favorable change made from the proposed regulations.

Prior to the release of the final regulations, there were concerns raised in regards to how adjusted taxable income (ATI) was calculated for taxpayers that manufacture or produce inventory. In the 2018 proposed regulations, deprecation capitalized to inventory under §263A and included in cost of goods sold (COGS) was not allowed to be added back to ATI. This limitation would have put manufacturers at a disadvantage compared to other businesses because their ATI would not include the addback of depreciation in COGS and therefore would result in a lower ATI. Since ATI is used to compute the limit on interest deductions, a lower ATI could potentially cause a higher tax liability.

For questions or additional information on the final regulations, please contact a member of the Manufacturing, Distribution & Logistics Group.

Thankfully the final regulations reversed the provision of the 2018 proposed regulations and allow for depreciation subject to capitalization to be added back to ATI regardless of whether it is deducted or capitalized into inventory under §263A. The main reason for this change is to prevent economic distortions based on industry. Now that depreciation subject to capitalization is added back to ATI, manufacturers are on an equal playing field with other industries for §163(j) interest limitation purposes.

Learn more about Carried Interest Regulations Under Section 1061.

Author: Amanda Voorman, CPA, MST | avoorman@withum.com

Manufacturing, Distribution & Logistics

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