Sec. 1.163(j)-1 Definitions.

(1) In general. For purposes of paragraphs (b)(1)(ii)(C), (D), and (E) and paragraphs (b)(1)(iv)(B) and (E) of this section, except as otherwise provided in this paragraph (b)(1)(iv)(A), the term sale or other disposition does not include a transfer of an asset to an acquiring corporation in a transaction to which section 381(a) applies.

(2) Intercompany transactions. For purposes of paragraphs (b)(1)(ii)(C) and (D) and paragraphs (b)(1)(iv)(B) and (b)(1)(iv)(E)(1) and (2) of this section, the term sale or other disposition excludes all intercompany transactions, within the meaning of §1.1502-13(b)(1)(i), to the extent necessary to achieve single-entity taxation of the consolidated group.

(3) Deconsolidations. Notwithstanding any other rule in this paragraph (b)(1)(iv)(A), any transaction in which a member (S) leaves a consolidated group (selling group), including a section 381(a) transaction described in paragraph (b)(1)(iv)(A)(1) of this section, is treated as a taxable disposition of all S stock held by any member of the selling group for purposes of paragraphs (b)(1)(ii)(C) and (D) and paragraphs (b)(1)(iv)(B) and (b)(1)(iv)(E)(1) and (2) of this section, unless the transaction is described in §1.1502-13(j)(5)(i). Following S’s deconsolidation, any subsequent sales or dispositions of S stock by the selling group do not trigger further adjustments under paragraphs (b)(1)(ii)(C) and (D) and paragraphs (b)(1)(iv)(B) and (b)(1)(iv)(E)(1) and (2) of this section. If a transaction is described in §1.1502-13(j)(5)(i), the transaction is not treated as a sale or other disposition for purposes of paragraphs (b)(1)(ii)(C) and (D) and paragraphs (b)(1)(iv)(B) and (b)(1)(iv)(E)(1) and (2) of this section. See also the successor rules in paragraph (b)(1)(iv)(C) of this section.

(4) Nonrecognition transactions. The disposition of property, member stock (other than in a deconsolidation described in paragraph (b)(1)(iv)(A)(3) of this section), or partnership interests in a nonrecognition transaction, other than a section 381(a) transaction described in paragraph (b)(1)(iv)(A)(1) of this section, is treated as a taxable disposition of the property, member stock, or partnership interest disposed of for purposes of paragraph (b)(1)(iv)(E)(1)(i), (b)(1)(iv)(E)(2)(i), and (b)(1)(iv)(E)(3)(i) of this section, respectively. For example, if a taxpayer transfers property to a wholly owned, non-consolidated subsidiary, the transfer of the property is treated as a taxable disposition for purposes of paragraph (b)(1)(iv)(E)(1)(i) of this section notwithstanding the application of section 351.

(1) In general. If paragraph (b)(1)(ii)(C), (D), or (E) of this section applies to adjust the tentative taxable income of a consolidated group, and if the consolidated group does not use the alternative computation method in paragraph (b)(1)(iv)(E) of this section, the amount of the adjustment under paragraph (b)(1)(ii)(C) of this section equals the greater of the allowed or allowable depreciation, amortization, or depletion of the property, as provided under section 1016(a)(2), for the consolidated group for the taxable years beginning after December 31, 2017, and before January 1, 2022, with respect to such property.

(2) Application of the alternative computation method. If paragraph (b)(1)(ii)(C), paragraph (b)(1)(ii)(D), or paragraph (b)(1)(ii)(E) of this section applies to adjust the tentative taxable income of a consolidated group, and if the consolidated group uses the alternative computation method in paragraph (b)(1)(iv)(E) of this section, the amount of the adjustment computed under paragraph (b)(1)(iv)(E)(1)(i), paragraph (b)(1)(iv)(E)(2)(i), or paragraph (b)(1)(iv)(E)(3)(i) of this section must take into account the net gain that would be taken into account by the consolidated group, including from intercompany transactions, determined by treating the sale or other disposition as a taxable transaction (see paragraphs (b)(1)(iv)(A)(3) and (4) of this section regarding deconsolidations and certain nonrecognition transactions, respectively).

(1) Successor assets. This paragraph (b)(1)(iv)(C)(1) applies if deductions described in paragraph (b)(1)(ii)(C) of this section are allowed or allowable to a consolidated group member (S) and either the depreciable property or S’s stock is subsequently transferred to another member (S1) in an intercompany transaction in which the transferor receives S1 stock. If this paragraph (b)(1)(iv)(C)(1) applies, and if the transferor’s basis in the S1 stock received in the intercompany transaction is determined, in whole or in part, by reference to its basis in the depreciable property or the S stock, the S1 stock received in the intercompany transaction is treated as a successor asset for purposes of paragraph (b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this section. Thus, except as otherwise provided in paragraph (b)(1)(iv)(D) of this section, the subsequent disposition of either the S1 stock or the S stock (or both) may require the application of the adjustment rules of paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section.

(2) Successor entities. The acquiring corporation in a section 381(a) transaction to which the exception in paragraph (b)(1)(iv)(A)(1) of this section applies is treated as a successor to the distributor or transferor corporation for purposes of paragraphs (b)(1)(ii)(C) through (E) and (b)(1)(iv)(B) and (E) of this section. Therefore, for example, in applying paragraphs (b)(1)(ii)(C) through (E) and (b)(1)(iv)(B) and (E) of this section, the acquiring corporation is treated as succeeding to the allowed or allowable items of the distributor or transferor corporation. Similarly, the surviving group in a transaction described in §1.1502-13(j)(5)(i) to which the exception in paragraph (b)(1)(iv)(A)(3) of this section applies is treated as a successor to the terminating group for purposes of paragraphs (b)(1)(ii)(C) through (E) and (b)(1)(iv)(B) and (E) of this section.

(1) In general. The aggregate of the subtractions from tentative taxable income of a consolidated group under paragraphs (b)(1)(ii)(C) through (E) or paragraphs (b)(1)(iv)(E)(1) through (3) of this section with respect to an item of property (including with regard to dispositions of successor assets described in paragraph (b)(1)(iv)(C)(1) of this section) cannot exceed the aggregate amount of the consolidated group members’ deductions described in paragraph (b)(1)(ii)(C) of this section with respect to such item of property. In addition, once an item of property is no longer held by any member of a consolidated group (whether or not an adjustment to the tentative taxable income of the group is made under paragraph (b)(1)(ii)(C) of this section with respect to the direct or indirect disposition of that property), no further adjustment to the group’s tentative taxable income is made under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section in relation to the same property with respect to any subsequent stock disposition.

(2) Adjustments following deconsolidation. If a corporation (S) leaves a consolidated group (Group 1) in a transaction that requires an adjustment under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section, no further adjustment is required under paragraph (b)(1)(ii)(C) or (E) or paragraph (b)(1)(iv)(E)of this section in a separate return year (as defined in §1.1502-1(e)) of S with respect to depreciation, amortization, or depletion deductions allowed or allowable to Group 1. See paragraph (b)(1)(iv)(A) of this section for special rules regarding the meaning of the term "sale or other disposition" for purposes of the adjustments required under paragraphs (b)(1)(ii)(C) through (E) and paragraphs (b)(1)(iv)(B) and (E) of this section. For example, assume that S deconsolidates from Group 1 in a transaction not described in §1.1502-13(j)(5)(i) after holding property for which depreciation, amortization, or depletion deductions were allowed or allowable in Group 1. On the deconsolidation, S and Group 1 would adjust tentative taxable income with regard to that property. See paragraphs (b)(1)(iv)(A)(3), (b)(1)(ii)(D), and (b)(1)(iv)(E)(2) of this section. If, following the deconsolidation, S sells the property referred to in the previous sentence, no subtraction from tentative taxable income is made under paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1) of this section during S’s separate return year with regard to the amounts included in Group 1. See paragraphs (b)(1)(iv)(A)(3), (b)(1)(ii)(D), and (b)(1)(iv)(E)(2) of this section.

(1) Alternative computation method for property dispositions. With respect to the sale or other disposition of property, the lesser of:

(2) Alternative computation method for dispositions of member stock. With respect to the sale or other disposition by a member of a consolidated group of stock of another member for whom depreciation, amortization, or depletion was allowed or allowable with regard to an item of property (or stock of any successor to that member), the lesser of:

(3) Alternative computation method for dispositions of partnership interests. With respect to the sale or other disposition of an interest in a partnership, the lesser of:

(1) In general. A subtraction from (or negative adjustment to) tentative taxable income that is required under paragraph (b)(1)(ii)(C), (D), or (E) or paragraph (b)(1)(iv)(B) or (E) of this section is reduced to the extent the taxpayer establishes that the positive adjustments to tentative taxable income under paragraphs (b)(1)(i)(D) through (F) of this section in a prior taxable year did not result in an increase in the amount allowed as a deduction for business interest expense for such year. The extent to which the positive adjustments under paragraphs (b)(1)(i)(D) through (F) of this section resulted in an increase in the amount allowed as a deduction for business interest expense in a prior taxable year (such amount of positive adjustments, the negative adjustment cap) is determined after taking into account all other adjustments to tentative taxable income under paragraph (b)(1)(i) and (ii) of this section for that year, as established through books and records. The amount of the negative adjustment cap for a prior taxable year is reduced in future taxable years to the extent of negative adjustments under paragraphs (b)(1)(ii)(C) through (E) and paragraphs (b)(1)(iv)(B) and (E) of this section with respect to the prior taxable year.

(2) Example. A is a calendar-year individual taxpayer engaged in a trade or business that is neither an excepted trade or business nor eligible for the small business exemption. A has no disallowed business interest expense carryforwards. In 2021, A has $100x of business interest expense, no business interest income or floor plan financing interest expense, and $400x of tentative taxable income. After taking into account the adjustments to tentative taxable income under paragraph (b)(1)(i) and (ii) of this section other than positive adjustments under paragraphs (b)(1)(i)(D) through (F) of this section, A has tentative taxable income of $450x. A increases its tentative taxable income by $30x (from $450x to $480x) under paragraph (b)(1)(i)(D) of this section to reflect $30x of depreciation deductions with respect to Asset Y in 2021. Thus, for 2021, A would have a section 163(j) limitation of $135x ($450x x 30 percent) without regard to adjustments under paragraphs (b)(1)(i)(D) through (F) of this section. After the application of paragraph (b)(1)(i)(D) of this section, A has a section 163(j) limitation of $144x ($480x x 30 percent). In 2022, A sells Asset Y at a gain of $50x. Under paragraph (b)(1)(iv)(F)(1) of this section, A is not required to reduce its tentative taxable income in 2022 under paragraph (b)(1)(ii)(C) through (E) or paragraph (b)(1)(iv)(E) of this section. As established by A, the $30x addition to tentative taxable income under paragraph (b)(1)(i)(D) of this section resulted in no increase in the amount allowed as a deduction for business interest expense in 2021.

(1) Facts. In 2021, A purchases a depreciable asset (Asset X) for $30x and fully depreciates Asset X under section 168(k). For the 2021 taxable year, A establishes that its ATI before adding back depreciation deductions with respect to Asset X under paragraph (b)(1)(i)(D) of this section is $130x, and that its ATI after adding back depreciation deductions with respect to Asset X under paragraph (b)(1)(i)(D) of this section is $160x. A incurs $45x of business interest expense in 2021. In 2024, A sells Asset X to an unrelated third party for $25x.

(2) Analysis. A’s section 163(j) limitation for 2021 is $48x ($160x × 30 percent). Thus, all $45x of A’s business interest expense incurred in 2021 is deductible in that year. Under paragraph (b)(1)(ii)(C) of this section, A must subtract $30x from its tentative taxable income in computing its ATI for its 2024 taxable year. Alternatively, under paragraph (b)(1)(iv)(E)(1) of this section, A must subtract $25x (the lesser of $30x or $25x ($25x - $0x)) from its tentative taxable income in computing its ATI for its 2024 taxable year. However, the negative adjustments under paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)(1) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Under that paragraph, A’s negative adjustment under either paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1) of this section is capped at $20x, or $150x (the amount of ATI that A needed in order to deduct all $45x of business interest expense in 2021) minus $130x (the amount of A’s tentative taxable income in 2021 before adding back any amounts under paragraph (b)(1)(i)(D) through (F) of this section). As established by A, the additional $10x ($30x - $20x) of depreciation deductions that were added back to tentative taxable income in 2021 under paragraph (b)(1)(i)(D) of this section did not increase A’s business interest expense deduction for that year.

(3) Transfer of assets in a nonrecognition transaction to which section 381 applies. The facts are the same as in paragraph (b)(1)(viii)(A)(1) of this section, except that, rather than sell Asset X to an unrelated third party in 2024, A merges with and into an unrelated third party in 2024 in a transaction described in section 368(a)(1)(A) in which no gain is recognized. As provided in paragraph (b)(1)(iv)(A)(1) of this section, the merger transaction is not treated as a "sale or other disposition" for purposes of paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1) of this section. Thus, no adjustment to tentative taxable income is required in 2024 under paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1) of this section.

(4) Transfer of assets in a nonrecognition transaction to which section 351 applies. The facts are the same as in paragraph (b)(1)(viii)(A)(1) of this section, except that, rather than sell Asset X to an unrelated third party in 2024, A transfers Asset X to B (A’s wholly owned subsidiary) in 2024 in a transaction to which section 351 applies. The section 351 transaction is treated as a "sale or other disposition" for purposes of paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)(1) of this section, and it is treated as a taxable disposition for purposes of paragraph (b)(1)(iv)(E)(1) of this section. See paragraph (b)(1)(iv)(A)(1) and (4) of this section. However, the negative adjustments under paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)(1) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Thus, A must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year.

(1) Facts. In 2021, S purchases a depreciable asset (Asset Y) for $30x and fully depreciates Asset Y under section 168(k). P reduces its basis in its S stock by $30x under §1.1502-32 to reflect S’s depreciation deductions with respect to Asset Y. For the 2021 taxable year, the P group establishes that its ATI before adding back S’s depreciation deductions with respect to Asset Y under paragraph (b)(1)(i)(D) of this section is $130x, and that its ATI after adding back S’s depreciation deductions with respect to Asset Y under paragraph (b)(1)(i)(D) of this section is $160x. The P group incurs $45x of business interest expense in 2021. In 2024, P sells all of its S stock to an unrelated third party at a gain of $25x.

(2) Analysis. The P group’s section 163(j) limitation for 2021 is $48x ($160x × 30 percent). Thus, all $45x of the P group’s business interest expense incurred in 2021 is deductible in that year. Under paragraph (b)(1)(ii)(D) of this section, the P group must subtract $30x from its tentative taxable income in computing its ATI for its 2024 taxable year. Alternatively, under paragraph (b)(1)(iv)(E)(2) of this section, the P group must subtract $25x (the lesser of $30x or $25x) from its tentative taxable income in computing its ATI for its 2024 taxable year. However, the negative adjustments under paragraphs (b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Under that paragraph, the P group’s negative adjustment under either paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section is capped at $20x, or $150x (the amount of ATI the P group needed in order to deduct all $45x of business interest expense in 2021) minus $130x (the amount of the P group’s tentative taxable income in 2021 before adding back any amounts under paragraph (b)(1)(i)(D) through (F) of this section). As established by the P group, the additional $10x ($30x - $20x) of depreciation deductions that were added back to tentative taxable income in 2021 under paragraph (b)(1)(i)(D) of this section did not increase the P group’s business interest expense deduction for that year.

(3) Disposition of less than all member stock. The facts are the same as in paragraph (b)(1)(viii)(B)(1) of this section, except that, in 2024, P sells half of its S stock to an unrelated third party. The results are the same as in paragraph (b)(1)(viii)(B)(2) of this section. See paragraph (b)(1)(iv)(A)(3) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. No further adjustment under paragraphs (b)(1)(ii)(C) and (D) or paragraphs (b)(1)(iv)(E)(1) and (2) of this section is required if P subsequently sells its remaining S stock or if S subsequently disposes of Asset Y. See paragraphs (b)(1)(iv)(A)(3) and (b)(1)(iv)(D) of this section.

(4) Intercompany transfer; disposition of successor assets.

(5) Alternative computation and non-deconsolidating disposition of member stock. The facts are the same as in paragraph (b)(1)(viii)(B)(1) of this section, except that, in 2024, P sells just ten percent of its S stock to an unrelated third party at a gain of $2.5x. Under paragraph (b)(1)(iv)(E)(2) of this section, the lesser of P’s gain recognized on the sale of the S stock ($2.5x) and the investment adjustments under §1.1502-32 with respect to the S stock P sold ($3x) is $2.5x, an amount less than the $20x limitation under paragraph (b)(1)(iv)(F) of this section. Thus, the P group must subtract $2.5x from its tentative taxable income in computing its ATI for its 2024 taxable year.

(6) Non-deconsolidating disposition of member stock followed by asset disposition. The facts are the same as in paragraph (b)(1)(viii)(B)(5) of this section, except that, in 2025, S sells Asset Y to an unrelated third party for a gain of $20x. Under paragraph (b)(1)(iv)(E)(1) of this section, the amount of the adjustment in 2025 is the lesser of two amounts. The first amount is the amount of S’s gain recognized on the sale of Asset Y ($20x). See paragraph (b)(1)(iv)(E)(1)(i) of this section. The second amount is the amount of depreciation with respect to Asset Y (see paragraph (b)(1)(iv)(E)(1)(ii) of this section), reduced by the amount of depreciation previously taken into account in the computation under paragraph (b)(1)(iv)(E)(2)(ii) of this section ($30x - $3x, or $27x). See paragraph (b)(1)(iv)(D)(1) of this section. Thus, the amount of the adjustment under paragraphs (b)(1)(iv)(D) and (b)(1)(iv)(E)(1) of this section is $20x. In turn, this amount is subject to the negative adjustment cap under paragraph (b)(1)(iv)(F), which, after accounting for the negative adjustment on the earlier sale of S stock in 2024, is $17.5x ($20x - $2.5x). Accordingly, the P group must subtract $17.5x from its tentative taxable income in computing its ATI for its 2025 taxable year.

(1) Facts. The facts are the same as in paragraph (b)(1)(viii)(B)(1) of this section, except that, in 2024, S sells Asset Y to an unrelated third party for $25x and, in 2025, P sells all of its S stock to an unrelated third party at a gain of $25x.

(2) Analysis. The results are the same as in paragraph (b)(1)(viii)(B)(2) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. P’s sale of all of its S stock in 2025 is a "sale or other disposition" for purposes of paragraph (b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this section. However, pursuant to paragraph (b)(1)(iv)(D)(1) of this section, no further adjustment to the P group’s tentative taxable income is required in 2025 under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section.

(3) Disposition of S stock prior to S’s asset disposition. The facts are the same as in paragraph (b)(1)(viii)(C)(1) of this section, except that, in 2024, P sells all of its S stock to an unrelated third party at a gain of $25x and, in 2025, S sells Asset Y to an unrelated third party for $25x. The results are the same as in paragraph (b)(1)(viii)(B)(2) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. Pursuant to paragraph (b)(1)(iv)(D)(2) of this section, no adjustment to the acquiring group’s tentative taxable income is required in 2025 under paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1) of this section.

(4) Deconsolidation of S in nonrecognition transaction. The facts are the same as in paragraph (b)(1)(viii)(C)(3) of this section, except that, rather than sell all of its S stock to an unrelated third party, P causes S to merge with and into an unrelated third party in a transaction described in section 368(a)(1)(A). As provided in paragraph (b)(1)(iv)(A)(3) of this section, the merger transaction is treated as a taxable disposition of all of P’s stock in S for purposes of paragraphs (b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this section because S leaves the P group. Thus, the results are the same as in paragraph (b)(1)(viii)(C)(3) of this section.

(1) Facts. P wholly owns T, which wholly owns S. In 2021, S purchases a depreciable asset (Asset Z) for $30x and fully depreciates Asset Z under section 168(k). T reduces its basis in its S stock, and P reduces its basis in its T stock, by $30x under §1.1502-32 to reflect S’s depreciation deductions with respect to Asset Z. For the 2021 taxable year, the P group establishes that its ATI before adding back S’s depreciation deductions with respect to Asset Z under paragraph (b)(1)(i)(D) of this section is $130x, and that its ATI after adding back S’s depreciation deductions with respect to Asset Z under paragraph (b)(1)(i)(D) of this section is $160x. The P group incurs $45x of business interest expense in 2021. In 2024, T sells all of its S stock to an unrelated third party at a gain of $25x. In 2025, P sells all of its T stock to an unrelated third party at a gain of $40x.

(2) Analysis. The results are the same as in paragraph (b)(1)(viii)(B)(2) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. Pursuant to paragraph (b)(1)(iv)(D)(1) of this section, no negative adjustment to the P group’s tentative taxable income is required in 2025 under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section.

(3) Disposition of T stock in 2024. The facts are the same as in paragraph (b)(1)(viii)(D)(1) of this section, except that, in 2024, P sells all of its T stock to another consolidated group at a gain of $40x and, in 2025, T sells all of its S stock to an unrelated party at a gain of $25x. Whereas the transaction described in paragraph (b)(1)(viii)(B)(4) of this section is treated as a taxable disposition of both the T stock and the S stock, only the actual disposition of the T stock in the transaction described in this paragraph (b)(1)(viii)(D)(3) is treated as a taxable disposition for purposes of paragraphs (b)(1)(ii)(D) and (b)(1)(iv)(E)(2) of this section. See paragraph (b)(1)(iv)(A)(3) of this section. However, the results are the same as in paragraph (b)(1)(viii)(B)(2) and (b)(1)(viii)(B)(4) of this section because of the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Thus, the P group must subtract $20x from its tentative taxable income in computing its ATI for its 2024 taxable year. Pursuant to paragraph (b)(1)(iv)(D) of this section, no negative adjustment to the acquiring group’s tentative taxable income is required in 2025 under paragraph (b)(1)(ii)(D) or paragraph (b)(1)(iv)(E)(2) of this section.

(1) Facts. In 2021, A purchases Assets X and Y for $30x and $80x, respectively, and fully depreciates each asset under section 168(k). For the 2021 taxable year, A establishes that its ATI before adding back depreciation deductions with respect to Assets X and Y under paragraph (b)(1)(i)(D) of this section is $150x, and that its ATI after adding back depreciation deductions with respect to Assets X and Y under paragraph (b)(1)(i)(D) of this section is $260x. A incurs $75x of business interest expense in 2021. In 2024, A sells Assets X and Y to an unrelated third party for $40x and $90x, respectively.

(2) Analysis. A’s section 163(j) limitation for 2021 is $78x ($260x × 30 percent). Thus, all $75x of A’s business interest expense incurred in 2021 is deductible in that year. Under paragraph (b)(1)(ii)(C) of this section, A must subtract $110x ($30x + $80x) from its tentative taxable income in computing its ATI for its 2024 taxable year. Alternatively, under paragraph (b)(1)(iv)(E)(1) of this section, A must subtract $30x with respect to Asset X (the lesser of $30x or $40x ($40x - $0x)), and $80x with respect to Asset Y (the lesser of $80x or $90x ($90x - $0x)), from its tentative taxable income in computing its ATI for its 2024 taxable year. However, the negative adjustments under paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)(1) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Under that paragraph, A’s negative adjustment in 2024 under either paragraph (b)(1)(ii)(C) ($110x) or paragraph (b)(1)(iv)(E)(1) (also $110x) of this section is limited to $100x. This amount equals $250x (the amount of ATI that A needed in order to deduct all $75x of business interest expense in 2021) minus $150x (the amount of A’s tentative taxable income in 2021 before adding back any amounts under paragraph (b)(1)(i)(D) through (F) of this section). As established by A, the additional $10x ($110x - $100x) of depreciation deductions that were added back to tentative taxable income in 2021 under paragraph (b)(1)(i)(D) of this section did not increase A’s business interest expense deduction for that year.

(3) Sale of assets in different taxable years. The facts are the same as in paragraph (b)(1)(viii)(E)(1) of this section, except that A sells Asset Y to an unrelated third party for $90x in 2025. Under paragraph (b)(1)(ii)(C) of this section, A must subtract $30x from its tentative taxable income in computing its ATI for its 2024 taxable year. Alternatively, under paragraph (b)(1)(iv)(E)(1) of this section, A must subtract $30x (the lesser of $30x or $40x ($40x - $0x)) from its tentative taxable income in computing its ATI for its 2024 taxable year. Because A’s negative adjustment cap for its 2021 taxable year is $100x (see paragraph (b)(1)(viii)(E)(2) of this section), A’s negative adjustment in 2024 of $30x is not reduced under paragraph (b)(1)(iv)(F) of this section. In 2025, A must subtract $80x from its tentative taxable income under paragraph (b)(1)(ii)(C) of this section in computing its ATI. Alternatively, under paragraph (b)(1)(iv)(E)(1) of this section, A must subtract $80x (the lesser of $80x or $90x ($90x - $0x)) from its tentative taxable income in computing its ATI for its 2025 taxable year. However, the negative adjustments under paragraphs (b)(1)(ii)(C) and (b)(1)(iv)(E)(1) of this section are both subject to the negative adjustment cap in paragraph (b)(1)(iv)(F) of this section. Moreover, A’s negative adjustment cap for its 2021 taxable year is reduced from $100x to $70x to reflect A’s $30x negative adjustment in 2024. See paragraph (b)(1)(iv)(F) of this section. Thus, A’s negative adjustment for 2025 under either paragraph (b)(1)(ii)(C) or paragraph (b)(1)(iv)(E)(1) of this section is reduced from $80x to $70x. As established by A, the additional $10x ($110x - $100x) of depreciation deductions that were added back to tentative taxable income in 2021 under paragraph (b)(1)(i)(D) of this section did not increase A’s business interest expense deduction for that year.

(1) That furnishes or sells--

(2) To the extent that the rates for the furnishing or sale of the items in paragraph (b)(15)(i)(A)(1) of this section--

(1) In general. An election under paragraph (b)(15)(iii) of this section is made with respect to each eligible trade or business of the taxpayer and applies only to the trade or business for which the election is made. An election under paragraph (b)(15)(iii) of this section applies to the taxable year in which the election is made and to all subsequent taxable years.

(2) Irrevocability. An election under paragraph (b)(15)(iii) of this section is irrevocable.

(1) In general. Subject to paragraph (b)(15)(iii)(C)(5) of this section, a taxpayer makes an election under paragraph (b)(15)(iii) by attaching an election statement to the taxpayer’s timely filed original Federal income tax return, including extensions. A taxpayer may make elections for multiple trades or businesses on a single election statement.

(2) Election statement contents. The election statement should be titled “Section 1.163(j)-1(b)(15)(iii) Election” and must contain the following information for each trade or business:

(3) Consolidated group’s or partnership’s trade or business. The rules in §1.163(j)-9(d)(3) and (4) apply with respect to an election under paragraph (b)(15)(iii) of this section for a consolidated group’s or partnership’s trade or business.

(4) Termination of election. The rules in §1.163(j)-9(e) apply to determine when an election under paragraph (b)(15)(iii) of this section terminates.

(5) Additional guidance. The rules and procedures regarding the time and manner of making an election under paragraph (b)(15)(iii) of this section and the election statement contents in paragraph (b)(15)(iii)(C)(2) of this section may be modified through other guidance (see §§601.601(d) and 601.602 of this chapter). Additional situations in which an election may terminate under paragraph (b)(15)(iii)(C)(4) of this section may be provided through guidance published in the Federal Register or in the Internal Revenue Bulletin (see §601.601(d) of this chapter).

(1) Issuer. If a debt instrument is issued at a premium within the meaning of §1.163-13, any ordinary income under §1.163-13(d)(4) is treated as interest income of the issuer.

(2) Holder. If a taxable debt instrument is acquired at a premium within the meaning of §1.171-1 and the holder elects to amortize the premium, any amount deductible as a bond premium deduction under section 171(a)(1) and §1.171-2(a)(4)(i)(A) or (C) is treated as interest expense of the holder.

(1) In general. Except as otherwise provided in this paragraph (b)(22)(iii)(F), a section 163(j) interest dividend is treated as interest income.

(2) Limitation on amount treated as interest income. A shareholder may not treat any part of a section 163(j) interest dividend as interest income to the extent the amount of the section 163(j) interest dividend exceeds the excess of the amount of the entire dividend that includes the section 163(j) interest dividend over the sum of the conduit amounts other than interest-related dividends under section 871(k)(1)(C) and section 163(j) interest dividends that affect the shareholder’s treatment of that dividend.

(3) Conduit amounts. For purposes of paragraph (b)(22)(iii)(F)(2) of this section, the term conduit amounts means, with respect to any category of income (including tax-exempt interest) earned by a RIC for a taxable year, the amounts identified by the RIC (generally in a designation or written report) in connection with dividends of the RIC for that taxable year that are subject to a limit determined by reference to that category of income. For example, a RIC’s conduit amount with respect to its net capital gain is the amount of the RIC’s capital gain dividends under section 852(b)(3)(C).

(4) Holding period. Except as provided in paragraph (b)(22)(iii)(F)(5) of this section, no dividend is treated as interest income under paragraph (b)(22)(iii)(F)(1) of this section if the dividend is received with respect to a share of RIC stock--

(5) Exception to holding period requirement for money market funds and certain regularly declared dividends. Paragraph (b)(22)(iii)(F)(4)(i) of this section does not apply to dividends distributed by any RIC regulated as a money market fund under 17 CFR 270.2a-7 (Rule 2a-7 under the 1940 Act) or to regular dividends paid by a RIC that declares section 163(j) interest dividends on a daily basis in an amount equal to at least 90 percent of its excess section 163(j) interest income, as defined in paragraph (b)(35)(iv)(E) of this section, and distributes such dividends on a monthly or more frequent basis.

(1) Treatment as interest expense. Any expense or loss economically equivalent to interest is treated as interest expense if a principal purpose of structuring the transaction(s) is to reduce an amount incurred by the taxpayer that otherwise would have been described in paragraph (b)(22)(i), (ii), or (iii) of this section. For this purpose, the fact that the taxpayer has a business purpose for obtaining the use of funds does not affect the determination of whether the manner in which the taxpayer structures the transaction(s) is with a principal purpose of reducing the taxpayer’s interest expense. In addition, the fact that the taxpayer has obtained funds at a lower pre-tax cost based on the structure of the transaction(s) does not affect the determination of whether the manner in which the taxpayer structures the transaction(s) is with a principal purpose of reducing the taxpayer’s interest expense. For purposes of this paragraph (b)(22)(iv)(A)(1), any expense or loss is economically equivalent to interest to the extent that the expense or loss is--

(2) Corresponding treatment of amounts as interest income. If a taxpayer knows that an expense or loss is treated by the payor as interest expense under paragraph (b)(22)(iv)(A)(1) of this section, the taxpayer provides the use of funds for a period of time in the transaction(s) subject to paragraph (b)(22)(iv)(A)(1) of this section, the taxpayer earns income or gain with respect to the transaction(s), and such income or gain is substantially earned in consideration of the time value of money provided by the taxpayer, such income or gain is treated as interest income to the extent of the expense or loss treated by the payor as interest expense under paragraph (b)(22)(iv)(A)(1) of this section.

(1) Facts. A is engaged in a manufacturing business and uses the calendar year as its annual accounting period. A’s functional currency is the U.S. dollar and A conducts virtually all of its business in the U.S. dollar. A has no connection to Japan or the Japanese yen in the ordinary course of business. A projects that it will have business interest expense of $100x on an existing loan obligation with a stated principal amount of $2,000x (Loan 1) and no business interest income in its taxable year ending December 31, 2021. In early 2021, A enters into the following transactions, which A would not have entered into in the ordinary course of A’s trade or business:

(2) Analysis. A principal purpose of A entering into the transactions with Bank was to try to reduce the amount incurred by A that otherwise would be interest expense; in effect, A sought to alter A’s cost of borrowing by converting a substantial portion of its interest expense deductions on Loan 1 into section 165 deductions on the FX Swap ($100x interest expense related to Loan 1 compared to $20x interest expense related to Loan 2 and $80x section 165 deduction). A’s functional currency is the U.S. dollar and A conducts virtually all of its business in the U.S. dollar. A has no connection to Japan or the Japanese yen and would not have entered into the transactions in the ordinary course of A’s trade or business. The section 165 deductions related to the FX Swap were incurred by A in a series of transactions in which A secured the use of funds for a period of time and were substantially incurred in consideration of the time value of money. As a result, under paragraph (b)(22)(iv)(A)(1) of this section, for purposes of section 163(j), the $80x paid by A to Bank on the FX Swap is treated by A as interest expense.

(1) Facts. A is engaged in a manufacturing business and uses the calendar year as its annual accounting period. A does not use gold in its manufacturing business. In 2021, A expects to borrow $1,000x for six months. In January 2021, A borrows from B two ounces of gold at a time when the spot price for gold is $500x per ounce. A agrees to return the two ounces of gold in six months. A sells the two ounces of gold to C for $1,000x. A then enters into a contract with D to purchase two ounces of gold six months in the future for $1,013x. In exchange for the use of $1,000x in cash for six months, A has sustained a loss of $13x in connection with these related transactions. A would not have entered into the gold transactions in the ordinary course of A’s trade or business.

(2) Analysis. In a series of related transactions, A has obtained the use of $1,000x for six months and created a loss of $13x substantially incurred in consideration of the time value of money. A would not have entered into the gold transactions in the ordinary course of A’s trade or business. A entered into the transactions with a principal purpose of structuring the transactions to reduce its interest expense (in effect, A sought to convert what otherwise would be interest expense into a loss through the transactions). As a result, under paragraph (b)(22)(iv)(A)(1) of this section, for purposes of section 163(j), the loss of $13x is treated by A as interest expense.

(1) Facts. A is engaged in a manufacturing business and uses the calendar year as its annual accounting period. A’s functional currency is the U.S. dollar and A conducts virtually all of its business in the U.S. dollar. A has no connection to Argentina or the Argentine peso as part of its ordinary course of business. As of January 1, 2021, A expects to have adjusted taxable income (as defined in paragraph (b)(1) of this section) of $200x in the taxable year ending December 31, 2021. A also projects that it will have business interest expense of $70x on an existing loan in 2021. A has cash equivalents of $100x on which A expects to earn $5x of business interest income. In early 2021, A enters into the following transactions, which A would not have entered into in the ordinary course of A’s trade or business:

(2) Analysis. A principal purpose of A entering into the transactions was to increase the amount of business interest income received by A; in effect, A increased its business interest income by separately accounting for its net deduction of $5x per year on the FX Swap. A’s functional currency is the U.S. dollar and A conducts virtually all of its business in the U.S. dollar. A has no connection to Argentina or the Argentine peso and would not have entered into the transactions in the ordinary course of A’s trade or business. The FX Swap was incurred by A as a part of a transaction that A entered into with a principal purpose of artificially increasing its business interest income. As a result, under paragraph (b)(22)(iv)(B) of this section, for purposes of section 163(j), the $10x business interest income earned on the Note by A is reduced by $5x (the net $5x paid by A on the FX Swap).

(1) Facts. A is wholly owned by FC, a foreign corporation organized in foreign country X. A uses the calendar year for its annual accounting period. FC has a better credit rating than A. A needs to borrow $2,000x in the taxable year ending December 31, 2021, to fund its business operations. A also projects that, if it borrows $2,000x on January 1, 2021, and pays a market rate of interest, it will have business interest expense of $100x in its taxable year ending December 31, 2021. In early 2021, A enters into the following transactions:

(2) Analysis. A principal purpose of A entering into the transactions was to reduce the amount incurred by A that otherwise would be interest expense; in effect, A sought to convert a substantial portion of its interest expense deductions on Loan 1 into section 162 deductions on the Guarantee Fee Agreement ($100x interest expense had A borrowed without the Guarantee compared to $60x interest expense related to Loan 1 and $40x section 162 deduction). A would not have entered into the Guarantee Fee Agreement in the ordinary course of A’s trade or business. The $40x section 162 deductions related to the Guarantee Fee Agreement were incurred by A in a series of transactions in which A secured the use of funds for a period of time and were substantially incurred in consideration of the time value of money. As a result, under paragraph (b)(22)(iv)(A)(1) of this section, for purposes of section 163(j), the $40x paid by A to FC on the Guarantee Fee Agreement is treated by A as interest expense.

(1) Facts. A, B, and C are equal partners in ABC partnership. ABC is considering acquiring an additional loan from a third-party lender to expand its business operations. However, ABC already has significant debt and interest expense. For the purpose of reducing the amount of additional interest expense ABC would have otherwise incurred by borrowing, A agrees to make an additional contribution to ABC for use in its business operations in exchange for a guaranteed payment for the use of capital under section 707(c).

(2) Analysis. The guaranteed payment is deductible by ABC, incurred by ABC in a transaction in which ABC secures the use of funds for a period of time, substantially incurred in consideration of the time value of money, and not described in paragraph (b)(22)(i), (ii), or (iii) of this section. As a result, the guaranteed payment to A is economically equivalent to the interest that ABC would have incurred on an additional loan from a third-party lender. A principal purpose of A making a contribution in exchange for a guaranteed payment for the use of capital was to reduce the amount incurred by ABC that otherwise would be interest expense. As a result, under paragraph (b)(22)(iv)(A)(1) of this section, for purposes of section 163(j), such guaranteed payment is treated as interest expense of ABC for purposes of section 163(j). In addition, under paragraph (b)(22)(iv)(A)(2) of this section, if A knows that the guaranteed payment is treated as interest expense of ABC, because A provides the use of funds for a period of time in a transaction subject to paragraph (b)(22)(iv)(A)(1) of this section, A earns income or gain with respect to the transaction, and such income or gain is substantially earned in consideration of the time value of money provided by A, the guaranteed payment is treated as interest income of A for purposes of section 163(j).