The Tax Cuts and Jobs Act of 2017 (TCJA) included a provision¹ that limits the amount of business interest a taxpayer is permitted to deduct in their tax return each year. The provision did not provide clear guidance leaving Regulated Investment Companies (RICs) wondering if they are subject to the new rules and, if so, how to calculate the amount of business interest expense they may deduct. Proposed Treasury Regulations² were issued at the end of November 2018 which address these questions, but at the same time, they include a very broad definition of interest expense and interest income that subjects RICs to burdensome rules and interest limitation calculations. RICs (and other investment companies such as investment partnerships, hedge funds and private equity) should be concerned now about how to calculate the business interest expense limitation and the breadth of items included in the definition of interest expense and interest income.

Defining interest expense and income

Business interest expense and business interest income, is an amount paid, received or accrued to compensate for the forbearance or use of money under the terms of an instrument, contract, or series of transactions that would be treated as debt for US tax purposes.3 The list includes, in part, many items treated as interest such as original issue discount, market discount, premium amortization, qualified stated interest, interest on sale and repurchase agreements, and foreign currency gains and losses treated as interest.4 It also includes interest on the deemed loan portion of a significant non-periodic swap instrument that is not cleared through a clearing organization.5 The full list of items treated as interest for the business interest expense limitation is extensive and should be reviewed carefully, mindful of the various instruments, positions and transactions in your investment company’s portfolio.6


At best, a RIC’s determination of its net business interest expense deduction will be complicated. At worst, a RIC could suffer significant limitations to its investment expense deductions and losses because they are treated as business interest under the rules. Business interest for these purposes includes many more items than interest on debt instruments. RICs will have to monitor and track many items to determine their adjusted taxable income (ATI), business interest expense and business interest income. Additionally, RICs will have to track these items flowing from their investments in partnerships.

The rules affecting RICs

The business interest expense deduction is limited to the sum of investment interest income, 30% of adjusted taxable income (ATI), but not less than zero, and the taxpayer’s “floor plan financing interest expense” (the latter is not likely to be of concern to RICs).7 For these purposes, all of a C corporation’s interest expense and interest income is deemed business interest and all of a C corporation’s income, expense, gain, and loss is deemed attributable to a trade or business.8 RICs are C corporations and thus subject to these rules.9

  • A RIC’s dividends paid deduction does not reduce ATI for these purposes.10 This was one of the primary questions facing RICs under the initial business interest expense limitation rules in the TCJA.
  • Net business interest expense that exceeds the current year deduction limit is carried forward to the next year and, subject to the deduction limitation in that year, may be deducted after that year’s netbusiness interest deduction is taken. Deferrals carried forward from multiple years are deducted in the order in which they were created.11
  • Deferred business interest expense does not reduce a RIC’s earnings and profits until the year it is finall deducted.12 The rules apply to taxpayers with more than $25 million average gross receipts over the preceding three years.13

The business interest expense limitation rules established by the TCJA are effective for tax years beginning after December 31, 2017. The currently proposed regulations are effective for tax years ending after the regulations are published as final in the Federal Register. The proposed regulations may be followed for tax years beginning in 2018.14

 BBH Perspective

RICs and other investment companies should begin reviewing their portfolios and identifying items that will be treated as interest expense and income under these proposed regulations now. The heavy lifting will be in tracking “interest” and ATI and performing the calculations. Brown Brothers Harriman’s tax teams are ready to assist our clients in these efforts.


1. Internal Revenue Code §163(j)

2. Proposed Regulation 1.163(j)-1 through -11 (REG-106089-18)

3. For US tax purposes, debt is primarily defined under IRC §1275(a) and Treasury Regulation §1.1275-1(d) and other IRC sections and Treasury Regulations and that is not treated as stock under Treasury Regulation §1.385-3.

4. Internal Revenue Code §988(a)(2)

5. As described in Treasury Regulation §1.446-3(f)

6. See the full list at Proposed Regulation §1.163(j)-1(b)(20)

7. Internal Revenue Code §163(j)(1)

8. Proposed Regulation §1.163(j)-4(b)(1) and (b)(2)

9. Proposed Regulations §1.163(j)-4(a)

10. By operation of the proposed regulations, §1.163(j)-4(b)(4)(ii), ATI is calculated excluding the adjustments in IRC §852(b)(2). Thus, the Dividends Paid Deduction is not taken; net capital gain is included in ATI; and the dividends received deduction (DRD) would be allowed except that the DRD is added back to ATI under §1.163(j)-4(b)(4)(iii). Other adjustments in IRC §852(b)(2) not mentioned here are also ignored when calculating ATI.

11. Proposed Regulation §1.163(j)-5(b)(2)

12. Proposed Regulation §1.163(j)-4(c)(2)

13. Proposed Regulation §1.163(j)-2(d) and Internal Revenue Code §448(c)

14.Treasury requested comments on the proposed regulations. They were due January 9, 2019.



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