The U.S. Department of the Treasury and IRS have issued final and additional temporary regulations (Section 385 Final regulations) providing guidance on the treatment of related party debt. These regulations restrict the ability of corporations to strip income using intercompany debt, and re-characterize certain intercompany loans as equity for tax purposes.
In addition, the regulations require corporations claiming interest deductions on related party loans to comply with extensive documentation requirements for the loans. The documentation rules apply to relevant intercompany debt issued on or after January 1, 2018, and require taxpayer’s documentation to be prepared by the time the borrower’s federal income tax return is filed.
Other key provisions include:
- Certain exceptions for S corporations
- Exceptions for debt issued prior to April 2016
- Exclusions for debt issued by foreign entities
- and more…
The unpublished final regulations are available on the Federal Register website. These regulations are expected to be effective October 21, 2016, and we will provide a more in-depth analysis of these changes in the coming weeks.
If you would like to discuss how these changes will impact your business, please contact us.
