Par. 9. As reserved in a final rule elsewhere in this issue of the Federal Register , effective November 13, 2020, § 1.163(j)-8 is added to read as follows:
(a) Overview. This section provides rules concerning the application of section 163(j) to foreign persons with ECI. Paragraph (b) of this section modifies the application of section 163(j) for a specified foreign person with ECI. Paragraph (c) of this section sets forth rules for a specified foreign partner in a partnership with ECI. Paragraph (d) of this section allocates disallowed business interest expense for relevant foreign corporations with ECI. Paragraph (e) of this section provides rules concerning disallowed business interest expense. Paragraph (f) of this section coordinates the application of section 163(j) with § 1.882-5 and the branch profits tax under section 884. Paragraph (g) of this section provides definitions that apply for purposes of this section. Paragraph (h) of this section illustrates the application of this section through examples.
(b) Application to a specified foreign person with ECI —(1) In general. If a taxpayer is a specified foreign person, then the taxpayer applies the modifications described in this paragraph (b), taking into account the application of paragraph (c) of this section.
(2) Modification of adjusted taxable income. Adjusted taxable income for a specified foreign person for a taxable year means the specified foreign person's adjusted taxable income, as determined under § 1.163(j)-1(b)(1), taking into account only items that are ECI.
(3) Modification of business interest expense. Business interest expense for a specified foreign person means business interest expense described in § 1.163(j)-1(b)(3) that is ECI, taking into account the application of paragraph (f)(1)(iii) of this section.
(4) Modification of business interest income. The business interest income of a specified foreign person means business interest income described in § 1.163(j)-1(b)(4) that is ECI.
(5) Modification of floor plan financing interest expense. The floor plan financing interest expense of a specified foreign person means floor plan financing interest expense described § 1.163(j)-1(b)(19) that is ECI.
(6) Modification of allocation of interest expense and interest income that is allocable to a trade or business. For purposes of applying § 1.163(j)-10(c) to a specified foreign person, only interest income and interest expense that are ECI and only assets that are U.S. assets, as defined in § 1.884-1(d), are taken into account. If the specified foreign person is also a specified foreign partner, this paragraph (b)(6) does not apply to any trade or business of the partnership.
(c) Rules for a specified foreign partner —(1) Characterization of excess taxable income —(i) In general. The portion of excess taxable income allocated to a specified foreign partner from a partnership pursuant to § 1.163(j)-6(f)(2) that is ECI is equal to the specified foreign partner's allocation of excess taxable income from the partnership multiplied by its specified ATI ratio with respect to the partnership, and the remainder is not ECI.
(ii) Specified ATI ratio. The term specified ATI ratio means the fraction described in this paragraph (c)(1)(ii). If the specified foreign partner's distributive share of ECI and distributive share of non-ECI are both positive, the numerator of this fraction is the specified foreign partner's distributive share of ECI and the denominator is the specified foreign partner's distributive share of partnership items of income, gain, deduction, and loss. If the specified foreign partner's distributive share of ECI is negative or zero and its distributive share of non-ECI is positive, this fraction is treated as zero. If the specified foreign partner's distributive share of non-ECI is negative or zero and its distributive share of ECI is positive, this fraction is treated as one. If the specified foreign partner's distributive share of ECI and distributive share of non-ECI are both negative, the numerator of this fraction is its distributive share of non-ECI and the denominator is its distributive share of partnership items of income, gain, deduction, and loss.
(iii) Distributive share of ECI. The term distributive share of ECI means the net amount of the specified foreign partner's distributive share of partnership items of income, gain, deduction, and loss that are ECI.
(iv) Distributive share of non-ECI. The term distributive share of non-ECI means the net amount of the specified foreign partner's distributive share of partnership items of income, gain, deduction, and loss that are not ECI.
(2) Characterization of excess business interest expense —(i) Allocable ECI excess BIE. The portion of excess business interest expense allocated to a specified foreign partner from a partnership pursuant to § 1.163(j)-6(f)(2) or paragraph (e)(2) of this section that is ECI ( allocable ECI excess BIE ) is equal to the excess, if any, of allocable ECI BIE over allocable ECI deductible BIE.
(ii) Allocable non-ECI excess BIE. The portion of excess business interest expense allocated to a specified foreign partner from a partnership pursuant to § 1.163(j)-6(f)(2) or paragraph (e)(2) of this section that is not ECI ( allocable non-ECI excess BIE ) is equal to the excess, if any, of allocable non-ECI BIE over allocable non-ECI deductible BIE.
(3) Characterization of deductible business interest expense —(i) In general. The portion of deductible business interest expense, if any, that is allocated to a specified foreign partner from a partnership pursuant to § 1.163(j)-6(f)(2) that is ECI ( allocable ECI deductible BIE ) is equal to the sum of the amounts described in paragraphs (c)(3)(ii)(A)( 1 )( i ) and (c)(3)(ii)(B)( 1 ) of this section. The portion of deductible business interest expense, if any, that is allocated to a specified foreign partner from a partnership pursuant to § 1.163(j)-6(f)(2) that is not ECI ( allocable non-ECI deductible BIE ) is equal to the sum of the amounts described in paragraphs (c)(3)(ii)(A)( 1 )( ii ) and (c)(3)(ii)(B)( 2 ) of this section.
(ii) Allocation between allocable ECI deductible BIE and allocable non-ECI deductible BIE. For purposes of paragraph (c)(3)(i) of this section—
(A) Allocation to hypothetical deductible amounts —( 1 ) In general. Subject to paragraph (c)(3)(ii)(A)( 2 ) of this section, deductible business interest expense that is allocated to the specified foreign partner from the partnership pursuant to § 1.163(j)-6(f)(2) is allocated pro rata to—
( i ) Hypothetical partnership ECI deductible BIE; and
( ii ) Hypothetical partnership non-ECI deductible BIE.
( 2 ) Limitation. The amount allocated to hypothetical partnership ECI deductible BIE in paragraph (c)(3)(ii)(A)( 1 )( i ) of this section cannot exceed the lesser of hypothetical partnership ECI deductible BIE or allocable ECI BIE, and the amount allocated to hypothetical partnership non-ECI deductible BIE in paragraph (c)(3)(ii)(A)( 1 )( ii ) of this section cannot exceed the lesser of hypothetical partnership non-ECI deductible BIE or allocable non-ECI BIE.
(B) Allocation of remaining deductible amounts. Deductible business interest expense that is allocated to the specified foreign partner from the partnership pursuant to § 1.163(j)-6(f)(2) in excess of the amount allocated in paragraph (c)(3)(ii)(A) of this section, if any, is allocated pro rata to—
( 1 ) Allocable ECI BIE, reduced by the amount described in paragraph (c)(3)(ii)(A)( 1 )( i ) of this section; and
( 2 ) Allocable non-ECI BIE, reduced by the amount described in paragraph (c)(3)(ii)(A)( 1 )( ii ) of this section.
(iii) Hypothetical partnership deductible business interest expense —(A) Hypothetical partnership ECI deductible BIE. The term hypothetical partnership ECI deductible BIE means the deductible business interest expense of the partnership, as defined in § 1.163(j)-6(b)(5), determined by only taking into account the specified foreign partner's allocable share of items that are ECI (including by reason of paragraph (f)(1)(iii) of this section).
(B) Hypothetical partnership non-ECI deductible BIE. The term hypothetical partnership non-ECI deductible BIE means the deductible business interest expense of the partnership, as defined in § 1.163(j)-6(b)(5), determined by only taking into account the specified foreign partner's allocable share of items that are not ECI (including by reason of paragraph (f)(1)(iii) of this section).
(4) Characterization of excess business interest income —(i) In general. The portion of excess business interest income allocated to a specified foreign partner from a partnership pursuant to § 1.163(j)-6(f)(2) that is ECI is equal to the specified foreign partner's allocation of excess business interest income from the partnership multiplied by its specified BII ratio with respect to the partnership, and the remainder is not ECI.
(ii) Specified BII ratio. The term specified BII ratio means the ratio of the specified foreign partner's allocable ECI BII to allocable business interest income (determined under § 1.163(j)-6(f)(2)(ii)).
(iii) Allocable ECI BII. The term allocable ECI BII means the specified foreign partner's allocable BII, as determined under § 1.163(j)-6(f)(2)(ii), computed by only taking into account income that is ECI.
(5) Rules for determining ECI. Except as described in paragraph (f)(1) of this section, if the determination as to whether partnership items are ECI is made by a direct or indirect partner, rather than the partnership itself, then for purposes of this paragraph (c), the partnership must use a reasonable method to characterize such items as ECI or as not ECI.
(d) Characterization of disallowed business interest expense by a relevant foreign corporation with ECI —(1) Scope. A relevant foreign corporation that has ECI and disallowed business interest expense for a taxable year determines the portion of its disallowed business interest expense and deductible business interest expense that is characterized as ECI or as not ECI under this paragraph (d). A relevant foreign corporation that is a specified foreign partner also applies the rules in paragraph (c) of this section. See also § 1.163(j)-7(f) for rules regarding CFC group members with ECI.
(2) Characterization of disallowed business interest expense —(i) FC ECI disallowed BIE. For purposes of this section, the portion of disallowed business interest expense of a relevant foreign corporation that is ECI ( FC ECI disallowed BIE ) is equal to the excess, if any, of FC ECI BIE over FC ECI deductible BIE.
(ii) FC non-ECI disallowed BIE. For purposes of this section, the portion of disallowed business interest expense of a relevant foreign corporation that is not ECI ( FC non-ECI disallowed BIE ) is equal to the excess, if any, of FC non-ECI BIE over FC non-ECI deductible BIE.
(3) Characterization of deductible business interest expense —(i) In general. The portion of deductible business interest expense, if any, that is ECI ( FC ECI deductible BIE ) is equal to the sum of the amounts described in paragraphs (d)(3)(ii)(A)( 1 )( i ) and (d)(3)(ii)(B)( 1 ) of this section. The portion of deductible business interest expense, if any, that is allocable to income that is not ECI ( FC non-ECI deductible BIE ) is equal to the sum of the amounts described in paragraphs (d)(3)(ii)(A)( 1 )( ii ) and (d)(3)(ii)(B)( 2 ) of this section.
(ii) Allocation between FC ECI deductible BIE and FC non-ECI deductible BIE. For purposes of paragraph (d)(3)(i) of this section—
(A) Allocation to hypothetical deductible amounts —( 1 ) In general. Subject to paragraph (d)(3)(ii)(A)( 2 ) of this section, deductible business interest expense is allocated pro rata to—
( i ) Hypothetical FC ECI deductible BIE; and
( ii ) Hypothetical FC non-ECI deductible BIE.
( 2 ) Limitation. The amount allocated to hypothetical FC ECI deductible BIE in paragraph (d)(3)(ii)(A)( 1 )( i ) of this section cannot exceed the lesser of hypothetical FC ECI deductible BIE or FC ECI BIE, and the amount allocated to hypothetical FC non-ECI deductible BIE in paragraph (d)(3)(ii)(A)( 1 )( ii ) of this section cannot exceed the lesser of hypothetical FC non-ECI deductible BIE or FC non-ECI BIE.
(B) Allocation of remaining deductible amounts. Deductible business interest expense in excess of the amount allocated in paragraph (d)(3)(ii)(A) of this section, if any, is allocated pro rata to—
( 1 ) FC ECI BIE, reduced by the amount described in paragraph (d)(3)(ii)(A)( 1 )( i ) of this section; and
( 2 ) FC non-ECI BIE, reduced by the amount described in paragraph (d)(3)(ii)(A)( 1 )( ii ) of this section.
(iii) Hypothetical FC deductible business interest expense —(A) Hypothetical FC ECI deductible BIE. The term hypothetical FC ECI deductible BIE means the deductible business interest expense of the relevant foreign corporation determined by only taking into account its items that are ECI.
(B) Hypothetical FC non-ECI deductible BIE. The term hypothetical FC non-ECI deductible BIE means the deductible business interest expense of the relevant foreign corporation determined by only taking into account its items that are not ECI.
(e) Rules regarding disallowed business interest expense —(1) Retention of character in a succeeding taxable year. Disallowed business interest expense of a specified foreign person or a relevant foreign corporation for a taxable year (including excess business interest expense allocated to a specified foreign partner under § 1.163(j)-6(f)(2) or paragraph (e)(2) of this section) that is ECI or is not ECI retains its character as ECI or as not ECI in a succeeding taxable year.
(2) Deemed allocation of excess business interest expense of a partnership to a specified foreign partner. For purposes of this paragraph (e) and paragraphs (c)(2), (g)(3), and (g)(7) of this section, a specified foreign partner's allocable share of business interest expense is deemed to include its allocable share of excess business interest expense of a partnership in which it is a direct or indirect partner. For purposes of this paragraph (e)(2), a specified foreign partner's allocable share of excess business interest expense of a partnership in which it is a direct or indirect partner is determined as if the excess business interest expense of the partnership were deductible in the taxable year in which the interest expense is first paid or accrued.
(3) Ordering rule for conversion of excess business interest expense to business interest expense paid or accrued by a partner. A specified foreign partner's allocable share of excess business interest expense (determined under § 1.163(j)-6(f)(2) or paragraph (e)(2) of this section) is treated as business interest expense paid or accrued under § 1.163(j)-6(g)(2)(i) in the order of the taxable years in which the excess business interest expense arose, and pro rata between allocable ECI excess BIE and allocable non-ECI excess BIE that arose in the same taxable year. This paragraph (e)(3) applies before application of paragraph (b)(3) of this section.
(4) Allocable ECI excess BIE and allocable non-ECI excess BIE retains its character when treated as business interest expense paid or accrued in a succeeding taxable year. If excess business interest expense of a partnership in which a specified foreign partner is a direct or indirect partner is treated as business interest expense paid or accrued by the specified foreign partner or a partnership in which it is a direct or indirect partner under § 1.163(j)-6(g)(2)(i), then allocable ECI excess BIE is treated as business interest expense allocable to ECI and allocable non-ECI excess BIE is treated as business interest expense allocable to income that is not ECI.
(f) Coordination of the application of section 163(j) with § 1.882-5 and similar provisions and with the branch profits tax —(1) Coordination of section 163(j) with § 1.882-5 and similar provisions —(i) Ordering rule. A foreign corporation first determines its business interest expense allocable to ECI under § 1.882-5 or any other relevant provision ( § 1.882-5 and similar provisions ) before applying section 163(j) to the foreign corporation. If a foreign corporation has a disallowed business interest expense carryforward from a taxable year, then none of that business interest expense is taken into account for purposes of determining business interest expense under § 1.882-5 and similar provisions in a succeeding taxable year.
(ii) Treatment of excess business interest expense. For purposes of applying § 1.882-5 and similar provisions, the business interest expense of a specified foreign partner that is a direct or indirect partner in a partnership is determined without regard to the application of section 163(j) to the partnership. As a result, for purposes of applying § 1.882-5 and similar provisions, the specified foreign partner's share of business interest expense on liabilities of a partnership in which it is a direct or indirect partner is determined as if any excess business interest expense of the partnership (determined under § 1.163(j)-6(f)(2) or paragraph (e)(2) of this section) were deductible in the taxable year in which the business interest expense is first paid or accrued and not in a succeeding taxable year.
(iii) Attribution of certain § 1.882-5 interest expense among the foreign corporation and its partnership interests —(A) In general. If a foreign corporation is a specified foreign partner in one or more partnerships, then, for purposes of section 163(j) and the section 163(j) regulations, interest expense determined under § 1.882-5(b) through (d) or § 1.882-5(e) ( § 1.882-5 three-step interest expense ) is treated as attributable to liabilities of the foreign corporation or the foreign corporation's share of liabilities of each partnership in accordance with paragraphs (f)(1)(iii)(B) and (f)(1)(iii)(C) of this section. Accordingly, the portion of the § 1.882-5 three-step interest expense attributable to liabilities of the foreign corporation described in this paragraph (f)(1)(iii) is subject to section 163(j) and the section 163(j) regulations at the level of the foreign corporation. The portion of the § 1.882-5 three-step interest expense interest attributable to liabilities of a partnership described in this paragraph (f)(1)(iii) is subject to section 163(j) and the section 163(j) regulations at the partnership-level. See § 1.163(j)-6. This paragraph (f)(1)(iii) merely characterizes interest expense of the foreign corporation and its partnership interests as ECI or not ECI. It does not change the amount of interest expense of the foreign corporation or its partnership interests.
(B) Attribution of interest expense on U.S. booked liabilities. The § 1.882-5 three-step interest expense is treated as attributable, pro rata, to interest expense on U.S. booked liabilities of a foreign corporation, determined under § 1.882-5(d)(2)(ii)-(iii) or its interest expense on its share of U.S. booked liabilities of a partnership, determined under § 1.882-5(d)(2)(vii), as applicable, to the extent thereof (without regard to whether the foreign corporation uses the method described in § 1.882-5(b) through (d) or the method described in § 1.882-5(e) for purposes of determining § 1.882-5 interest expense).
(C) Attribution of excess § 1.882-5 three-step interest expense —( 1 ) In general. The § 1.882-5 three-step interest expense in excess of interest expense attributable to U.S. booked liabilities described in § 1.882-5(d)(2), if any ( excess § 1.882-5 three-step interest expense ), is treated as attributable to liabilities of the foreign corporation or the foreign corporation's allocable share of liabilities of one or more partnerships, in accordance with paragraphs (f)(1)(iii)(C)( 2 ) and (f)(1)(iii)(C)( 3 ) of this section, subject to the limitation in paragraph (f)(1)(iii)(C)( 4 ) of this section. For purposes of this paragraph (f)(1)(iii)(C), the term “U.S. assets” means U.S. assets described in § 1.882-5(b).
( 2 ) Attribution of excess § 1.882-5 three-step interest expense to the foreign corporation. Excess § 1.882-5 three-step interest expense is treated as attributable to interest expense on liabilities of the foreign corporation (and not its partnership interests) in proportion to its U.S. assets other than its partnership interests over all of its U.S. assets.
( 3 ) Attribution of excess § 1.882-5 three-step interest expense to partnerships —( i ) In general. Excess § 1.882-5 three-step interest expense is treated as attributable to interest expense on the foreign corporation's direct or indirect allocable share of liabilities of a partnership in proportion to the portion of the partnership interest that is treated as a U.S. asset under paragraph (f)(1)(iii)(C)( 3 )( ii ) of this section over all of the foreign corporation's U.S. assets.
( ii ) Direct and indirect partnership interests. If a foreign corporation owns an interest in a partnership that does not own an interest in any other partnerships, the portion of the partnership interest that is a U.S. asset is determined under § 1.882-5(b). If a foreign corporation owns an interest in a partnership (the top-tier partnership) that owns an interest in one or more other partnerships, directly or indirectly (the lower-tier partnerships), the portion of the foreign corporation's direct or indirect interest in the top-tier partnership and lower-tier partnerships that is a U.S. asset is determined by re-attributing the portion of the top-tier partnership interest that is a U.S. asset, as determined under § 1.882-5(b), among the foreign corporation's direct interest in the top-tier partnership and indirect interests in each lower-tier partnership in proportion to their contribution to the portion of the foreign corporation's interest in the upper-tier partnership that is a U.S. asset. Each partnership interest's contribution is determined based on a reasonable method consistent with the method used to determine the portion of the top-tier partnership interest that is a U.S. asset under § 1.882-5(b).
( 4 ) Limitation on attribution of excess § 1.882-5 three-step interest expense. The portion of excess § 1.882-5 three-step interest expense attributable to a foreign corporation under paragraph (f)(1)(iii)(C)( 2 ) of this section or to a partnership under paragraph (f)(1)(iii)(C)( 2 ) or (f)(1)(iii)(C)( 3 ) of this section, as applicable, is limited to interest on liabilities of the foreign corporation or the foreign corporation's allocable share of liabilities of the partnership, reduced by the sum of the amounts of interest expense on its U.S. booked liabilities described in § 1.882-5(d)(2) and interest expense on liabilities described in § 1.882-5(a)(1)(ii)(A) or (B) (regarding direct allocations of interest expense). The portion of any excess § 1.882-5 three-step interest expense that would be treated as attributable to the foreign corporation or a partnership interest, as applicable, but for this paragraph (f)(1)(iii)(C)( 4 ) is re-attributable in accordance with the rules and principles of this paragraph (f)(1)(iii)(C). The portion of any excess § 1.882-5 three-step interest expense that cannot be re-attributed under the rules of (f)(1)(iii)(C)( 1 ) through ( 3 ) of this section because of the application of the first sentence of this paragraph (f)(1)(iii)(C)( 4 ) is attributable, first to interest on liabilities of the foreign corporation, and then, pro rata, to the foreign corporation's allocable share of interest on liabilities of its direct or indirect partnership interests, to the extent such attribution is not in excess of the limitation described in this paragraph (f)(1)(iii)(C)( 4 ), and without regard to whether the foreign corporation or its partnership interests have U.S. assets.
(2) Coordination with the branch profits tax. The disallowance and carryforward of business interest expense under § 1.163(j)-2(b) and (c) will not affect the computation of the U.S. net equity of a foreign corporation, as defined in § 1.884-1(c).
(g) Definitions. The following definitions apply for purposes of this section.
(1) § 1.882-5 and similar provisions. The term § 1.882-5 and similar provisions has the meaning provided in paragraph (f)(1)(i) of this section.
(2) § 1.882-5 three-step interest expense. The term § 1.882-5 three-step interest expense has the meaning provided in paragraph (f)(1)(iii)(A) of this section.
(3) Allocable ECI BIE. The term allocable ECI BIE means, with respect to a partnership, the specified foreign partner's allocable share of the partnership's business interest expense that is ECI, taking into account the application of paragraph (e)(2) of this section.
(4) Allocable ECI BII. The term allocable ECI BII has the meaning provided in paragraph (c)(4)(ii) of this section.
(5) Allocable ECI deductible BIE. The term allocable ECI deductible BIE has the meaning provided in paragraph (c)(3)(i) of this section.
(6) Allocable ECI excess BIE. The term allocable ECI excess BIE has the meaning provided in paragraph (c)(2)(i) of this section.
(7) Allocable non-ECI BIE. The term allocable non-ECI BIE means, with respect a partnership, the specified foreign partner's allocable share of the partnership's business interest expense that is not ECI, taking into account the application of paragraph (e)(2) of this section.
(8) Allocable non-ECI deductible BIE. The term allocable non-ECI deductible BIE has the meaning provided in paragraph (c)(3)(i) of this section.
(9) Allocable non-ECI excess BIE. The term allocable non-ECI excess BIE has the meaning provided in paragraph (c)(2)(ii) of this section.
(10) Distributive share of ECI. The term distributive share of ECI has the meaning provided in paragraph (c)(1)(iii) of this section.
(11) Distributive share of non-ECI. The term distributive share of non-ECI has the meaning provided in paragraph (c)(1)(iv) of this section.
(12) Effectively connected income. The term effectively connected income (or ECI ) means income or gain that is ECI, as defined in § 1.884-1(d)(1)(iii), and deduction or loss that is allocable to, ECI, as defined in § 1.884-1(d)(1)(iii).
(13) Excess § 1.882-5 three-step interest expense. The term excess § 1.882-5 three-step interest expense has the meaning provided in paragraph (f)(1)(iii)(C)( 1 ) of this section.
(14) FC ECI BIE. The term FC ECI BIE means, with respect to a relevant foreign corporation and a taxable year, business interest expense that is ECI, determined without regard to the application of section 163(j) and the section 163(j) regulations except for the application of paragraph (f)(1)(iii) of this section.
(15) FC ECI deductible BIE. The term FC ECI deductible BIE has the meaning provided in paragraph (d)(3)(i) of this section.
(16) FC ECI disallowed BIE. The term FC ECI disallowed BIE has the meaning provided in paragraph (d)(2)(i) of this section.
(17) FC non-ECI BIE. The term FC non-ECI BIE means, with respect to a relevant foreign corporation and a taxable year, business interest expense that is not ECI, determined without regard to the application of section 163(j) and the section 163(j) regulations except for the application of paragraph (f)(1)(iii) of this section.
(18) FC non-ECI deductible BIE. The term FC non-ECI deductible BIE has the meaning provided in paragraph (d)(3)(i) of this section.
(19) FC non-ECI disallowed BIE. The term FC non-ECI disallowed BIE has the meaning provided in paragraph (d)(2)(ii) of this section.
(20) Hypothetical partnership ECI deductible BIE. The term hypothetical partnership ECI deductible BIE has the meaning provided in paragraph (c)(3)(iii)(A) of this section.
(21) Hypothetical partnership non-ECI deductible BIE. The term hypothetical partnership non-ECI deductible BIE has the meaning provided in paragraph (c)(3)(iii)(B) of this section.
(22) Hypothetical FC ECI deductible BIE. The term hypothetical FC ECI deductible BIE has the meaning provided in paragraph (d)(3)(iii)(A) of this section.
(23) Hypothetical FC non-ECI deductible BIE. The term hypothetical FC non-ECI deductible BIE has the meaning provided in paragraph (d)(3)(iii)(B) of this section.
(24) Specified ATI ratio. The term specified ATI ratio has the meaning provided in paragraph (c)(1)(ii) of this section.
(25) Specified BII ratio. The term specified BII ratio has the meaning provided in paragraph (c)(4)(ii) of this section.
(26) Specified foreign partner. The term specified foreign partner means, with respect to a partnership that has ECI, a direct or indirect partner that is a specified foreign person or a relevant foreign corporation.
(27) Specified foreign person. The term specified foreign person means a nonresident alien individual, as defined in section 7701(b) and the regulations under section 7701(b), or a foreign corporation other than a relevant foreign corporation.
(28) Successor. The term successor includes, with respect to a foreign corporation, the acquiring corporation in a transaction described in section 381(a) in which the foreign corporation is the distributor or transferor corporation.
(h) Examples. The following examples illustrate the application of this section. For all examples, assume that all referenced interest expense is deductible but for the application of section 163(j), the small business exemption under § 1.163(j)-2(d) is not available, no entity is engaged in an excepted trade or business, no business interest expense is floor plan financing interest expense, all entities have the same taxable year, all entities use the U.S. dollar as their functional currency, no foreign corporation is a relevant foreign corporation, all relevant taxable years begin after December 31, 2020, and, for purposes of computing ATI, none of the adjustments described in § 1.163(j)-1(b) are relevant other than the adjustment for business interest expense.
(1) Example 1. Limitation on business interest deduction of a foreign corporation —(i) Facts. FC, a foreign corporation, has $100x of gross income that is ECI. FC has $60x of other income which is not ECI. FC has total expenses of $100x, of which $50x is business interest expense. Assume that FC has $30x of § 1.882-5 three-step interest expense. Under section 882(c) and the regulations, FC has $40x of other expenses that are ECI, none of which are business interest expense. FC does not have any business interest income. All amounts described in this paragraph (h)(1)(i) are with respect to a single taxable year of FC.
(ii) Analysis. FC is a specified foreign person under paragraph (g)(27) of this section. The amount of FC's business interest expense that is disallowed for the taxable year is determined under § 1.163(j)-2(b) with respect to business interest expense described in paragraph (b)(3) of this section. Under paragraph (b)(3) of this section, FC has business interest expense of $30x. Under paragraph (b)(2) of this section, FC has ATI of $60x ($100x−$40x). Accordingly, FC's section 163(j) limitation is $18x ($60x × 30 percent). Because FC's business interest expense ($30x) that is ECI exceeds the section 163(j) limitation ($18x), FC may only deduct $18x of business interest expense. Under § 1.163(j)-2(c), the remaining $12x is disallowed business interest expense carryforward, and under paragraph (f)(1)(i) of this section, the $12x is not taken into account for purposes of applying § 1.882-5 in the succeeding taxable year.
(2) Example 2. Use of a disallowed business interest expense carryforward —(i) Facts. The facts are the same as in Example 1 in paragraph (h)(1)(i) of this section except that for the taxable year FC has $300x of gross income that is all ECI. Furthermore, assume that for the taxable year FC has a disallowed business interest expense carryforward of $25x with respect to business interest expense described in paragraph (b)(3) of this section.
(ii) Analysis. Under paragraph (f)(1)(i) of this section, FC's $25x of disallowed business interest expense carryforward is not taken into account for purposes of determining FC's interest expense under § 1.882-5 for the taxable year. Therefore, FC has $30x of § 1.882-5 three-step interest expense. Under paragraph (b)(2) of this section, FC has ATI of $260x ($300x of gross income reduced by $40 of expenses other than business interest expense). Accordingly, FC's section 163(j) limitation is $78x ($260x × 30 percent). Because FC's business interest expense ($55x) does not exceed the section 163(j) limitation ($78x), FC may deduct all $55x of business interest expense.
(3) Example 3. Foreign corporation is engaged in a U.S. trade or business and is also a specified foreign partner —(i) Facts. FC, a foreign corporation, owns a 50-percent interest in ABC, a partnership that has ECI. In addition to owning a 50-percent interest in ABC, FC conducts a separate business that is engaged in a trade or business in the United States, Business Y. Business Y produces $65x of taxable income before taking into account business interest expense and has U.S. assets with an adjusted basis of $300x, business interest expense of $15x on $160x of liabilities, and no business interest income. All of the liabilities of Business Y are U.S. booked liabilities for purposes of § 1.882-5(d). FC also has various foreign operations, some of which have U.S. dollar denominated debt. ABC has two lines of business, Business S and Business T. FC is allocated 50 percent of all items of income and expense of Business S and Business T. Business S produces $140x of taxable income before taking into account business interest expense, and Business T produces $80x of taxable income before taking into account business interest expense. Business S has business interest expense of $20x on $400x of liabilities and no business interest income. Business T has business interest expense of $10x on $150x of liabilities and no business interest income. With respect to FC, only Business S produces ECI. FC has an outside basis of $600x in the portion of its ABC partnership interest that is a U.S. asset for purposes of § 1.882-5(b), step 1. All of the liabilities of Business S are U.S. booked liabilities for purposes of § 1.882-5(d). FC computes its interest expense under the three-step method described in § 1.882-5(b) through (d) and for purposes of § 1.882-5(c), step 2, FC uses the fixed ratio of 50 percent described in § 1.882-5(c)(4) for taxpayers that are neither a bank nor an insurance company. Under § 1.882-5(d)(5)(ii), FC's interest rate on excess U.S. connected liabilities is 5 percent. For the taxable year, assume FC has total interest expense of $100x for purposes of § 1.882-5(a)(3). All amounts described in this paragraph (h)(3)(i) are with respect to a single taxable year of FC or ABC, as applicable.
(ii) Analysis —(A) Application of § 1.882-5 to FC. FC is a specified foreign person under paragraph (g)(27) of this section and a specified foreign partner under paragraph (g)(26) of this section. Under paragraph (f)(1) of this section, FC first determines its § 1.882-5 three-step interest expense and then applies section 163(j). Under § 1.882-5(b), step 1, FC has U.S. assets of $900x ($600x of basis in the portion of its ABC partnership interest that is a U.S. asset determined using the asset method described in § 1.884-1(d)(3)(ii) + $300x basis in U.S. assets of Business Y). Under § 1.882-5(c), step 2, applying the 50-percent fixed ratio described in § 1.882-5(c)(4), FC has U.S. connected liabilities of $450x ($900x × 50 percent). Under § 1.882-5(d), step 3, FC has U.S. booked liabilities of $360x ($200x attributable to its 50-percent share of Business S liabilities of ABC + $160x of Business Y liabilities) and interest on U.S. booked liabilities of $25x ($10x attributable to its 50-percent share of $20x interest expense of Business S + $15x of Business Y interest expense). FC has excess U.S. connected liabilities of $90x ($450x−$360x) and under § 1.882-5(d)(5) has interest expense on excess U.S. connected liabilities of $4.50x ($90x × 5 percent), which is excess § 1.882-5 three-step interest expense. FC's § 1.882-5 three-step interest expense is $29.50x ($25x + $4.50x).
(B) Attribution of § 1.882-5 business interest expense between FC and ABC. Under paragraph (f)(1)(iii) of this section, FC's § 1.882-5 three-step interest expense is attributable to interest on its liabilities or on its share of ABC liabilities. Under paragraph (f)(1)(iii)(B), FC's § 1.882-5 three-step interest expense of $29.50x is first attributable to $15 of interest expense on FC's (Business Y) U.S. booked liabilities and $10x of interest expense on FC's share of U.S. booked liabilities of ABC. Under paragraph (f)(1)(iii)(C)( 2 ) of this section, of the excess § 1.882-5 three-step interest expense of $4.50x ($29.50x−$15x−$10x), 66.67 percent ($600x of basis in the portion of the ABC partnership interest that is a U.S. asset/$900x of total U.S. assets), or $3.00x, is attributable to interest expense on FC's share of liabilities of ABC and 33.33 percent ($300x U.S. assets other than partnership interests/$900x of total U.S. assets), or $1.50x, is attributable to interest expense on liabilities of FC. As a result, $16.50x of business interest expense ($15x + $1.50x) is attributed to FC and $13x of business interest expense ($10x + $3x) is attributed to ABC. The limitation under paragraph (f)(1)(iii)(C)( 4 ) of this section does not change the result described in the preceding sentence. Specifically, under paragraph (f)(1)(iii)(C)( 4 ) of this section, the amount attributed to ABC (tentatively, $3.00x) is limited to $5x (FC's 50-percent share of the $30x of business interest expense of ABC or $15x, reduced by FC's 50-percent share of the $20x of business interest expense on U.S. booked liabilities of Business S), and the amount attributed to FC (tentatively, $1.50x) is limited to $70x (FC's business interest expense of $100x, reduced by $15x of business interest expense on U.S. booked liabilities of Business Y and its $15x allocable share of ABC's business interest expense).
(C) Application of the section 163(j) limitation to ABC. Under § 1.163(j)-6(a), ABC computes a section 163(j) limitation at the partnership level. ABC has business interest expense of $30x ($20x from Business S and $10x from Business T). Under § 1.163(j)-6(d), ABC has ATI of $220x ($140 + $80). Under § 1.163(j)-2(b), ABC's section 163(j) limitation is $66x ($220x × 30 percent). Because ABC's business interest expense ($30x) does not exceed the section 163(j) limitation ($66x), all of ABC's business interest expense is deductible for the taxable year.
(D) Excess taxable income of ABC. Under § 1.163(j)-1(b)(15), ABC has excess taxable income of $120x ($220x × ($36x/$66x)). Under § 1.163(j)-6(f)(2), FC is allocated 50 percent of the $120x of ABC's excess taxable income or $60x of allocable excess taxable income. Under paragraph (c)(1) of this section, the amount of the allocable excess taxable income of $60x that is ECI is equal to FC's allocable excess taxable income multiplied by the specified ATI ratio. Under paragraph (c)(1)(iii) of this section, FC's distributive share of ECI of ABC is $57x (FC's 50-percent share of $140x (Business S income computed without regard to business interest expense) or $70x-$13x of business interest expense that is ECI). Under paragraph (c)(1)(iv) of this section, FC's distributive share of non-ECI of ABC is $38x (FC's 50-percent share of $80x (Business T income computed without regard to business interest expense) or $40x-$2x of business interest expense that is not ECI). FC's distributive share of partnership items of income, gain, deduction, and loss of ABC is $95x ($57x distributive share of ECI and $38x distributive share of non-ECI). Because both FC's distributive share of ECI and distributive share of non-ECI are positive, under paragraph (c)(1)(ii) of this section, the specified ATI ratio is 60 percent ($57x distributive share of ECI/$95x distributive share of partnership items of income, gain, deduction, and loss of ABC). As a result, the amount of FC's allocable excess taxable income from ABC that is ECI is $36x ($60 of allocable excess taxable income × 60 percent specified ATI ratio).
(E) Application of section 163(j) to FC. Under paragraph (b)(3) of this section, FC's business interest expense is $16.50x. Under § 1.163(j)-6(e)(1), FC's ATI is determined under § 1.163(j)-1(b)(1) without regard to FC's distributive share of any items of income, gain, deduction, or loss of ABC. Under paragraph (b)(2) of this section, FC's ATI is $101x ($65x of ECI from Business Y + $36x of allocable excess taxable income from ABC that is ECI). FC's section 163(j) limitation is $30.30x ($101x × 30 percent). Because FC's business interest expense ($16.50x) is less than FC's section 163(j) limitation ($30.30x) and all of its share of ABC's business interest expense that is allocable to ECI ($13x) is deductible, FC may deduct all $29.50x of § 1.882-5 three-step interest expense determined under paragraph (h)(3)(ii)(A) of this section.
(4) Example 4. Specified foreign partner with excess business interest expense from a partnership —(i) Facts —(A) In general. FC, a foreign corporation, owns a 50-percent interest in ABC, a partnership that has ECI. In addition to owning a 50-percent interest in ABC, FC conducts a separate business that is engaged in a trade or business in the United States, Business Y. Business Y produces $56x of taxable income before taking into account business interest expense and has U.S. assets with an adjusted basis of $800x, business interest expense of $16x on $200x of liabilities, and no business interest income. All of the liabilities of Business Y are U.S. booked liabilities for purposes of § 1.882-5(d). FC also has various foreign operations, some of which have U.S. dollar denominated debt.
(B) ABC Partnership. ABC has two lines of business, Business S and Business T, and owns a 50-percent interest in DEF, a partnership. FC is allocated 50 percent of all items of income and expenses of Business S and Business T and ABC's allocable share of items from partnership DEF. Business S produces $80x of taxable income before taking into account business interest expense, and Business T produces $90x of taxable income before taking into account business interest expense. Business S has business interest expense of $30x on $500x of liabilities and no business interest income. Business T has business interest expense of $50x on $500x of liabilities and no business interest income. With respect to FC, only Business S produces ECI. All of the liabilities of Business S are U.S. booked liabilities for purposes of § 1.882-5(d).
(C) DEF Partnership. DEF has two lines of business, Business U and Business V. ABC is allocated 50 percent of all items of income and expenses of Business U and Business V. Business U produces $100x of taxable income before taking into account business interest expense and Business V produces $140x of taxable income before taking into account business interest expense. Business U has business interest expense of $40x on $600x of liabilities and no business interest income. Business V has business interest expense of $60x on $600x of liabilities and no business interest income. With respect to FC, only Business U produces ECI. All of the liabilities of Business U are U.S. booked liabilities for purposes of § 1.882-5(d).
(D) Section 1.882-5. FC has an outside basis of $600x in the portion of its ABC partnership interest that is a U.S. asset for purposes of § 1.882-5(b), step 1, determined using the asset method described in § 1.884-1(d)(3)(ii). For purposes of § 1.884-1(d)(3)(ii), ABC has a total basis of $500 in assets that would be treated as U.S. assets if ABC were a foreign corporation, including a basis of $250x in the portion of its interest in DEF partnership interest that would be treated as a U.S. asset if ABC were a foreign corporation. FC computes its interest expense under the three-step method described in § 1.882-5(b) through (d), and for purposes of § 1.882-5(c), step 2, FC uses the fixed ratio of 50 percent described in § 1.882-5(c)(4) for taxpayers that are neither a bank nor an insurance company. FC has total interest expense of $100x for purposes of § 1.882-5(a)(3). Under § 1.882-5(d)(5)(ii), FC's interest rate on excess U.S. connected liabilities is 6 percent. All amounts described in this paragraph (h)(4)(i) are with respect to a single taxable year of FC, ABC, or DEF, as applicable.
(ii) Analysis —(A) Application of § 1.882-5 to FC. FC is a specified foreign person under paragraph (g)(27) of this section and a specified foreign partner under paragraph (g)(26) of this section. Under paragraph (f)(1) of this section, FC first determines its § 1.882-5 three-step interest expense and then applies section 163(j). Under § 1.882-5(b), step 1, FC has U.S. assets of $1400x ($600x of basis in the portion of its ABC partnership interest that is a U.S. asset + $800x basis in U.S. assets of Business Y). Under § 1.882-5(c), step 2, applying the 50-percent fixed ratio described in § 1.882-5(c)(4), FC has U.S. connected liabilities of $700x ($1400x × 50 percent). Under § 1.882-5(d), step 3, FC has U.S. booked liabilities of $600x ($250x attributable to its 50-percent share of Business S liabilities of ABC + $150x attributable to its indirect 25-percent share of Business U liabilities of DEF + $200x of Business Y liabilities), and interest on U.S. booked liabilities of $41x ($15x attributable to its 50-percent share of $30x interest expense of Business S + $10x attributable to its 25-percent share of $40 interest expense of Business U + $16x of Business Y interest expense). FC has excess U.S. connected liabilities of $100x ($700x−$600x) and under § 1.882-5(d)(5), interest expense on excess U.S. connected liabilities of $6x ($100x × 6 percent), which is excess § 1.882-5 three-step interest expense. FC's § 1.882-5 three-step interest expense is $47x ($41x + $6x).
(B) Attribution of certain § 1.882-5 business interest expense among FC, ABC, and DEF. Under paragraph (f)(1)(iii) of this section, FC's § 1.882-5 three-step interest expense is attributable to interest on its liabilities or on its share of ABC and DEF's liabilities. Under paragraph (f)(1)(iii)(B) of this section, FC's § 1.882-5 three-step interest expense of $47x is first attributable to $16 of interest expense on FC's U.S. booked liabilities, $15x of interest expense on FC's share of U.S. booked liabilities of ABC, and $10x of interest expense on FC's share of U.S. booked liabilities of DEF. Under paragraph (f)(1)(iii)(C)( 2 ) of this section, of the excess § 1.882-5 three-step interest expense of $6x ($47x−$16x−$15x−$10x), 42.86 percent ($600x of basis in the portion of the ABC partnership interest that is a U.S. asset/$1400x of total U.S. assets) or $2.57x is attributable to interest expense on FC's share of liabilities of ABC (and its partnership interests), and 57.14 percent ($800x U.S. assets other than partnership interests/$1400x of total U.S. assets) or $3.43x is attributable to interest expense on liabilities of FC. Under paragraph (f)(1)(iii)(C)( 3 ) of this section, of the $2.57x of business interest expense that is ECI and that is attributable to interest expense on FC's share of liabilities of ABC (and its partnership interests), 50 percent ($250x of basis in the portion of the DEF partnership interest that would be a U.S. asset if ABC were a foreign corporation/$500x total basis in assets that would be U.S. assets if ABC were a foreign corporation), or $1.29x, is attributable to interest expense on FC's share of liabilities of ABC and 50 percent ($250x of basis in assets other than partnership interests that would be U.S. assets if ABC were a foreign corporation/$500x of total basis in assets that would be U.S. assets if ABC were a foreign corporation), or $1.29x is attributable to interest expense on FC's share of liabilities of DEF. As a result, $19.43x ($16x + $3.43x) of business interest expense is attributed to FC, $16.29x ($15x + $1.29x) of business interest expense is attributed to ABC, and $11.29x ($10x + $1.29x) of business interest expense is attributed to DEF. The limitation under paragraph (f)(1)(iii)(C)( 4 ) of this section does not change the result described in the preceding sentence. Specifically, under paragraph (f)(1)(iii)(C)( 4 ) of this section, the amount attributed to FC (tentatively, $3.43x) is limited to $19x (FC's business interest expense of $100x, reduced by $16x of business interest expense on U.S. booked liabilities of Business Y, its $40x allocable share of ABC's business interest expense, and its $25 allocable share of DEF's business interest expense); the amount attributed to ABC (tentatively, $1.29x) is limited to $25x (FC's 50-percent share of the $80x of business interest expense of ABC, or $40x, reduced by FC's 50-percent share of the $30x of business interest expense on U.S. booked liabilities of Business S, or $15x); and the amount attributed to DEF (tentatively, $1.29x) is limited to $15x (FC's 25-percent share of the $100x of business interest expense of DEF, or $25x, reduced by FC's 25-percent share of the $40x of business interest expense on U.S. booked liabilities of Business U, or $10x).
(C) Application of section 163(j) to DEF —( 1 ) In general. Under § 1.163(j)-6(a), DEF computes a section 163(j) limitation at the partnership-level. DEF has business interest expense of $100x ($40x from Business U + $60x from Business V). Under § 1.163(j)-6(d), DEF has ATI of $240x ($100x + $140x). Under § 1.163(j)-2(b), DEF's section 163(j) limitation is $72x ($240x × 30 percent). Because DEF's business interest expense ($100x) exceeds the section 163(j) limitation ($72x), only $72x of DEF's business interest expense is deductible and $28x is disallowed under section 163(j). Pursuant to paragraph (e)(2) of this section, FC is allocated $7x of excess business interest expense (25 percent × $28x) and $18x of deductible business interest expense (25 percent × $72x).
( 2 ) Deductible business interest expense. Under paragraph (c)(3) of this section, in order to determine the portion of FC's allocable deductible business interest expense ($18x) that is allocable ECI deductible BIE and the portion that is allocable non-ECI deductible BIE, the hypothetical partnership ECI deductible BIE and hypothetical partnership non-ECI deductible BIE must be determined. Under paragraph (c)(3)(iii)(A) of this section, FC's hypothetical partnership ECI deductible BIE with respect to DEF is $7.50x ($25x of FC's allocable share of ECI before taking into account interest expense × 30 percent). Under paragraph (c)(3)(iii)(B) of this section, FC's hypothetical partnership non-ECI deductible BIE with respect to DEF is $10.50x ($35x of FC's allocable share of income that is not ECI before taking into account interest expense × 30 percent). Under paragraph (c)(3)(i) of this section, allocable ECI deductible BIE is equal to the amounts described in paragraphs (c)(3)(ii)(A)( 1 )( i ) and (c)(3)(ii)(B)( 1 ) of this section and allocable non-ECI deductible BIE is equal to the amounts described in paragraphs (c)(3)(ii)(A)( 1 )( ii ) and (c)(3)(ii)(B)( 2 ) of this section. Under paragraph (c)(3)(ii)(A)( 1 ) of this section, FC's allocable deductible business interest expense ($18x) is allocated pro rata between hypothetical partnership ECI deductible BIE ($7.50x) and hypothetical partnership non-ECI deductible BIE ($10.50x). However, the amount allocated to hypothetical partnership ECI deductible BIE cannot exceed the lesser of hypothetical partnership ECI deductible BIE ($7.50x) or allocable ECI BIE ($11.29x), and the amount allocated to hypothetical partnership non-ECI deductible BIE cannot exceed the lesser of hypothetical partnership non-ECI deductible BIE ($10.50x) or allocable non-ECI BIE (total allocable business interest expense of $25x reduced by allocable ECI BIE of $11.29x, or $13.71x). The portion of FC's allocable deductible business interest expense ($18x) from DEF that is allocable ECI deductible BIE is 41.67 percent ($7.50x of hypothetical partnership ECI deductible BIE/$18x of total hypothetical partnership deductible BIE), or $7.5x. The portion of FC's allocable deductible business interest expense from DEF ($18x) that is allocable non-ECI deductible BIE is 58.33 percent ($10.50x of hypothetical partnership ECI deductible BIE/$18x of total hypothetical partnership deductible BIE), or $10.50x. Because the full amount of FC's allocable deductible business interest expense ($18x) is allocable under paragraph (c)(3)(ii)(A)( 1 ) of this section, no portion is allocated under paragraph (c)(3)(ii)(B) of this section.
( 3 ) Excess business interest expense. Under paragraph (c)(2)(i) of this section, the portion of excess business interest expense allocated to FC from DEF pursuant to paragraph (e)(2) of this section ($7x) that is allocable ECI excess BIE is $3.79x ($11.29x of allocable ECI BIE−$7.50x allocable ECI deductible BIE). Under paragraph (c)(2)(ii) of this section, the portion of excess business interest expense allocated to FC from DEF pursuant to paragraph (e)(2) of this section ($7x) that is allocable non-ECI excess BIE is $3.21x ($13.71x of allocable non-ECI BIE−$10.50x allocable non-ECI deductible BIE).
(D) Application of section 163(j) to ABC —( 1 ) In general. Under § 1.163(j)-6(a), ABC computes a section 163(j) limitation at the partnership-level. ABC has business interest expense of $80x ($30x from Business S + $50x from Business T). Under § 1.163(j)-6(d), ABC has ATI of $170x ($80x + $90x). Under § 1.163(j)-2(b), ABC's section 163(j) limitation is $51x ($170x × 30 percent). Because ABC's business interest expense ($80x) exceeds the section 163(j) limitation ($51x), ABC may only deduct $51x of business interest expense, and $29x is disallowed under section 163(j). Pursuant to § 1.163(j)-6(f)(2), FC is allocated $14.50x of excess business interest expense (50 percent × $29x) and $25.50x of deductible business interest expense (50 percent × $51x).
( 2 ) Deductible business interest expense. Under paragraph (c)(3) of this section, in order to determine the portion of FC's allocable deductible business interest expense ($25.50x) that is allocable ECI deductible BIE and the portion that is allocable non-ECI deductible BIE, the hypothetical partnership ECI deductible BIE and hypothetical partnership non-ECI deductible BIE must be determined. Under paragraph (c)(3)(iii)(A) of this section, FC's hypothetical partnership ECI deductible BIE with respect to ABC is $12x ($40x of FC's allocable share of ECI before taking into account interest expense × 30 percent). Under paragraph (c)(3)(iii)(B) of this section, FC's hypothetical partnership non-ECI deductible BIE with respect to ABC is $13.50x ($45x of FC's allocable share of income that is not ECI before taking into account interest expense × 30 percent). Under paragraph (c)(3)(i) of this section, allocable ECI deductible BIE is equal to the amounts described in paragraphs (c)(3)(ii)(A)( 1 )( i ) and (c)(3)(ii)(B)( 1 ) of this section and allocable non-ECI deductible BIE is equal to the amounts described in paragraphs (c)(3)(ii)(A)( 1 )( ii ) and (c)(3)(ii)(B)( 2 ) of this section. Under paragraph (c)(3)(ii)(A)( 1 ) of this section, FC's allocable deductible business interest expense ($25.50x) is allocated pro rata between hypothetical partnership ECI deductible BIE ($12x) and hypothetical partnership non-ECI deductible BIE ($13.50x). However, the amount allocated to hypothetical partnership ECI deductible BIE cannot exceed the lesser of hypothetical partnership ECI deductible BIE ($12x) or allocable ECI BIE ($16.29x), and the amount allocated to hypothetical partnership non-ECI deductible BIE cannot exceed the lesser of hypothetical partnership non-ECI deductible BIE ($13.50x) or allocable non-ECI BIE (total allocable business interest expense of $40x reduced by allocable ECI BIE of $16.29x, or $23.71x). The portion of FC's allocable deductible business interest expense from ABC ($25.50x) that is allocable ECI deductible BIE is 47.06 percent ($12x of hypothetical partnership ECI deductible BIE/$25.50x of total hypothetical partnership deductible BIE), or $12x. The portion of FC's allocable deductible business interest expense from ABC that is allocable non-ECI deductible BIE is 52.94 percent ($13.50x of hypothetical partnership ECI deductible BIE/$25.50x of total hypothetical partnership deductible BIE), or $13.50x. Because the full amount of FC's allocable deductible business interest expense ($25.50x) is allocable under paragraph (c)(3)(ii)(A)( 1 ) of this section, no portion is allocated under paragraph (c)(3)(ii)(B) of this section.
( 3 ) Excess business interest expense. Under paragraph (c)(2)(i) of this section, the portion of excess business interest expense allocated to FC from ABC pursuant to § 1.163(j)-6(f)(2)($14.50x) that is allocable ECI excess BIE is $4.29x ($16.29x of allocable ECI BIE−$12x allocable ECI deductible BIE). Under paragraph (c)(2)(ii) of this section, the portion of excess business interest expense allocated to FC from ABC pursuant to § 1.163(j)-6(f)(2) ($14.50x) that is allocable non-ECI excess BIE is $10.21x ($23.71x of allocable non-ECI BIE−$13.50x allocable non-ECI deductible BIE).
(E) Application of section 163(j) to FC. Under paragraph (b)(3) of this section, FC's business interest expense is $19.43x. Under § 1.163(j)-6(e)(1), FC's ATI is determined under § 1.163(j)-1(b)(1) without regard to FC's distributive share of any items of income, gain, deduction, or loss of ABC or DEF. Under paragraph (b)(2) of this section, FC's ATI is $56x ($56x of ECI of Business Y before taking into account interest expense). FC's section 163(j) limitation is $16.80x ($56x × 30 percent). Because the portion of FC's business interest expense determined under § 1.882-5 that is attributed to FC ($19.43x) exceeds the section 163(j) limitation ($16.80x), FC may only deduction $16.80x of business interest expense, and $2.63x is disallowed business interest expense carryforward. After taking into account FC's allocable share of deductible business interest expense, FC may deduct $36.30x ($16.80x from FC + $12x allocable ECI deductible BIE from ABC + $7.50x allocable ECI deductible BIE from DEF). FC also has $2.63x disallowed business interest expense carryforward characterized as ECI, $4.29x allocable ECI excess BIE from ABC, $10.21x allocable non-ECI excess BIE from ABC, and, under paragraph (e)(2) of this section, is deemed to have $3.79x allocable ECI excess BIE from DEF and $3.21x allocable non-ECI excess BIE from DEF.
(i) [Reserved]
(j) Applicability date. This section applies to taxable years beginning on or after [DATE 60 DAYS AFTER DATE OF PUBLICATION OF THE FINAL RULE IN THE FEDERAL REGISTER ]. However, taxpayers and their related parties, within the meaning of sections 267(b) and 707(b)(1), may choose to apply this section in its entirety for a taxable year beginning after December 31, 2017, so long as the taxpayers and their related parties also apply § 1.163(j)-7(a), (c) through (f), (g)(3) and (4), and (h) through (k) for the taxable year. For a taxable year beginning before November 13, 2020, taxpayers and their related parties may not choose to apply this section unless they also apply § 1.163(j)-7(b) and (g)(1) and (2) in accordance with the second sentence of § 1.163(j)-7(m)(1).