Sec. 163. Interest

I.R.C. § 163(a) General Rule —

There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.

I.R.C. § 163(b) Installment Purchases Where Interest Charge Is Not Separately Stated

I.R.C. § 163(b)(1) General Rule —

If personal property or educational services are purchased under a contract—

I.R.C. § 163(b)(1)(A) —

which provides that payment of part or all of the purchase price is to be made in installments, and

I.R.C. § 163(b)(1)(B) —

in which carrying charges are separately stated but the interest charge cannot be ascertained,

then the payments made during the taxable year under the contract shall be treated for purposes of this section as if they included interest equal to 6 percent of the average unpaid balance under the contract during the taxable year. For purposes of the preceding sentence, the average unpaid balance is the sum of the unpaid balance outstanding on the first day of each month beginning during the taxable year, divided by 12. For purposes of this paragraph, the term “educational services” means any service (including lodging) which is purchased from an educational organization described in section 170(b)(1)(A)(ii) and which is provided for a student of such organization.

I.R.C. § 163(b)(2) Limitation —

In the case of any contract to which paragraph (1) applies, the amount treated as interest for any taxable year shall not exceed the aggregate carrying charges which are properly attributable to such taxable year.

I.R.C. § 163(c) Redeemable Ground Rents —

For purposes of this subtitle, any annual or periodic rental under a redeemable ground rent (excluding amounts in redemption thereof) shall be treated as interest on an indebtedness secured by a mortgage.

I.R.C. § 163(d) Limitation On Investment Interest

I.R.C. § 163(d)(1) In General —

In the case of a taxpayer other than a corporation, the amount allowed as a deduction under this chapter for investment interest for any taxable year shall not exceed the net investment income of the taxpayer for the taxable year.

I.R.C. § 163(d)(2) Carryforward Of Disallowed Interest —

The amount not allowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as investment interest paid or accrued by the taxpayer in the succeeding taxable year.

I.R.C. § 163(d)(3) Investment Interest —

For purposes of this subsection—

I.R.C. § 163(d)(3)(A) In General —

The term “investment interest” means any interest allowable as a deduction under this chapter (determined without regard to paragraph (1)) which is paid or accrued on indebtedness properly allocable to property held for investment.

I.R.C. § 163(d)(3)(B) Exceptions —

The term “investment interest” shall not include—

I.R.C. § 163(d)(3)(B)(i) —

any qualified residence interest (as defined in subsection (h)(3)), or

I.R.C. § 163(d)(3)(B)(ii) —

any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer.

I.R.C. § 163(d)(3)(C) Personal Property Used In Short Sale —

For purposes of this paragraph, the term “interest" includes any amount allowable as a deduction in connection with personal property used in a short sale.

I.R.C. § 163(d)(4) Net Investment Income —

For purposes of this subsection—

I.R.C. § 163(d)(4)(A) In General —

The term “net investment income” means the excess of—

I.R.C. § 163(d)(4)(A)(i) —

investment income, over

I.R.C. § 163(d)(4)(A)(ii) —

investment expenses.

I.R.C. § 163(d)(4)(B) Investment Income —

The term “investment income” means the sum of—

I.R.C. § 163(d)(4)(B)(i) —

gross income from property held for investment (other than any gain taken into account under clause (ii)(I)),

I.R.C. § 163(d)(4)(B)(ii) —

the excess (if any) of—

I.R.C. § 163(d)(4)(B)(ii)(I) —

the net gain attributable to the disposition of property held for investment, over

I.R.C. § 163(d)(4)(B)(ii)(II) —

the net capital gain determined by only taking into account gains and losses from dispositions of property held for investment, plus

I.R.C. § 163(d)(4)(B)(iii) —

so much of the net capital gain referred to in clause (ii)(II) (or, if lesser, the net gain referred to in clause (ii)(I)) as the taxpayer elects to take into account under this clause.

Such term shall include qualified dividend income (as defined in section 1(h)(11)(B)) only to the extent the taxpayer elects to treat such income as investment income for purposes of this subsection.

I.R.C. § 163(d)(4)(C) Investment Expenses —

The term “investment expenses” means the deductions allowed under this chapter (other than for interest) which are directly connected with the production of investment income.

I.R.C. § 163(d)(4)(D) Income And Expenses From Passive Activities —

Investment income and investment expenses shall not include any income or expenses taken into account under section 469 in computing income or loss from a passive activity.

I.R.C. § 163(d)(5) Property Held For Investment —

For purposes of this subsection—

I.R.C. § 163(d)(5)(A) In General —

The term “property held for investment” shall include—

I.R.C. § 163(d)(5)(A)(i) —

any property which produces income of a type described in section 469(e)(1), and

I.R.C. § 163(d)(5)(A)(ii) —

any interest held by a taxpayer in an activity involving the conduct of a trade or business—

I.R.C. § 163(d)(5)(A)(ii)(I) —

which is not a passive activity, and

I.R.C. § 163(d)(5)(A)(ii)(II) —

with respect to which the taxpayer does not materially participate.

I.R.C. § 163(d)(5)(B) Investment Expenses —

In the case of property described in subparagraph (A)(i), expenses shall be allocated to such property in the same manner as under section 469.

I.R.C. § 163(d)(5)(C) Terms —

For purposes of this paragraph, the terms “activity”, “passive activity”, and “materially participate” have the meanings given such terms by section 469.

I.R.C. § 163(e) Original Issue Discount

I.R.C. § 163(e)(1) In General —

The portion of the original issue discount with respect to any debt instrument which is allowable as a deduction to the issuer for any taxable year shall be equal to the aggregate daily portions of the original issue discount for days during such taxable year.

I.R.C. § 163(e)(2) Definitions And Special Rules —

For purposes of this subsection—

I.R.C. § 163(e)(2)(A) Debt Instrument —

The term “debt instrument” has the meaning given such term by section 1275(a)(1).

I.R.C. § 163(e)(2)(B) Daily Portions —

The daily portion of the original issue discount for any day shall be determined under section 1272(a) (without regard to paragraph (7) thereof and without regard to section 1273(a)(3)).

I.R.C. § 163(e)(2)(C) Short-Term Obligations —

In the case of an obligor of a short-term obligation (as defined in section 1283(a)(1)(A)) who uses the cash receipts and disbursements method of accounting, the original issue discount (and any other interest payable) on such obligation shall be deductible only when paid.

I.R.C. § 163(e)(3) Special Rule For Original Issue Discount On Obligation Held By Related Foreign Person

I.R.C. § 163(e)(3)(A) In General —

If any debt instrument having original issue discount is held by a related foreign person, any portion of such original issue discount shall not be allowable as a deduction to the issuer until paid. The preceding sentence shall not apply to the extent that the original issue discount is effectively connected with the conduct by such foreign related person of a trade or business within the United States unless such original issue discount is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States.

I.R.C. § 163(e)(3)(B) Special Rule For Certain Foreign Entities

I.R.C. § 163(e)(3)(B)(i) In General —

In the case of any debt instrument having original issue discount which is held by a related foreign person which is a controlled foreign corporation (as defined in section 957) or a passive foreign investment company (as defined in section 1297), a deduction shall be allowable to the issuer with respect to such original issue discount for any taxable year before the taxable year in which paid only to the extent such original issue discount is includible (determined without regard to properly allocable deductions and qualified deficits under section 952(c)(1)(B)) during such prior taxable year in the gross income of a United States person who owns (within the meaning of section 958(a)) stock in such corporation.

I.R.C. § 163(e)(3)(B)(ii) Secretarial Authority —

The Secretary may by regulation exempt transactions from the application of clause (i), including any transaction which is entered into by a payor in the ordinary course of a trade or business in which the payor is predominantly engaged.

I.R.C. § 163(e)(3)(C) Related Foreign Person —

For purposes of subparagraph (A), the term “related foreign person” means any person—

I.R.C. § 163(e)(3)(C)(i) —

who is not a United States person, and

I.R.C. § 163(e)(3)(C)(ii) —

who is related (within the meaning of section 267(b)) to the issuer.

I.R.C. § 163(e)(4) Exception —

This subsection shall not apply to any debt instrument described in section 1272(a)(2)(D) (relating to loans between natural persons).

I.R.C. § 163(e)(5) Special Rules For Original Issue Discount On Certain High Yield Obligations

I.R.C. § 163(e)(5)(A) In General —

In the case of an applicable high yield discount obligation issued by a corporation—

I.R.C. § 163(e)(5)(A)(i) —

no deduction shall be allowed under this chapter for the disqualified portion of the original issue discount on such obligation, and

I.R.C. § 163(e)(5)(A)(ii) —

the remainder of such original issue discount shall not be allowable as a deduction until paid.

For purposes of this paragraph rules similar to the rules of subsection (i)(3)(B) shall apply in determining the amount of the original issue discount and when the original issue discount is paid.

I.R.C. § 163(e)(5)(B) Disqualified Portion Treated As Stock Distribution For Purposes Of Dividend Received Deduction

I.R.C. § 163(e)(5)(B)(i) In General —

Solely for purposes of sections 243, 245, 246, and 246A, the dividend equivalent portion of any amount includible in gross income of a corporation under section 1272(a) in respect of an applicable high yield discount obligation shall be treated as a dividend received by such corporation from the corporation issuing such obligation.

I.R.C. § 163(e)(5)(B)(ii) Dividend Equivalent Portion —

For purposes of clause (i), the dividend equivalent portion of any amount includible in gross income under section 1272(a) in respect of an applicable high yield discount obligation is the portion of the amount so includible—

I.R.C. § 163(e)(5)(B)(ii)(I) —

which is attributable to the disqualified portion of the original issue discount on such obligation, and

I.R.C. § 163(e)(5)(B)(ii)(II) —

which would have been treated as a dividend if it had been a distribution made by the issuing corporation with respect to stock in such corporation.

I.R.C. § 163(e)(5)(C) Disqualified Portion

I.R.C. § 163(e)(5)(C)(i) In General —

For purposes of this paragraph, the disqualified portion of the original issue discount on any applicable high yield discount obligation is the lesser of—

I.R.C. § 163(e)(5)(C)(i)(I) —

the amount of such original issue discount, or

I.R.C. § 163(e)(5)(C)(i)(II) —

the portion of the total return on such obligation which bears the same ratio to such total return as the disqualified yield on such obligation bears to the yield to maturity on such obligation.

I.R.C. § 163(e)(5)(C)(ii) Definitions —

For purposes of clause (i), the term “disqualified yield” means the excess of the yield to maturity on the obligation over the sum referred to in subsection (i)(1)(B) plus 1 percentage point, and the term “total return” is the amount which would have been the original issue discount on the obligation if interest described in the parenthetical in section 1273(a)(2) were included in the stated redemption price at maturity.

I.R.C. § 163(e)(5)(D) Exception For S Corporations —

This paragraph shall not apply to any obligation issued by any corporation for any period for which such corporation is an S corporation.

I.R.C. § 163(e)(5)(E) Effect On Earnings And Profits —

This paragraph shall not apply for purposes of determining earnings and profits; except that, for purposes of determining the dividend equivalent portion of any amount includible in gross income under section 1272(a) in respect of an applicable high yield discount obligation, no reduction shall be made for any amount attributable to the disqualified portion of any original issue discount on such obligation.

I.R.C. § 163(e)(5)(F) Suspension Of Application Of Paragraph

I.R.C. § 163(e)(5)(F)(i) Temporary Suspension —

This paragraph shall not apply to any applicable high yield discount obligation issued during the period beginning on September 1, 2008, and ending on December 31, 2009, in exchange (including an exchange resulting from a modification of the debt instrument) for an obligation which is not an applicable high yield discount obligation and the issuer (or obligor) of which is the same as the issuer (or obligor) of such applicable high yield discount obligation. The preceding sentence shall not apply to any obligation the interest on which is interest described in section 871(h)(4) (without regard to subparagraph (D) thereof) or to any obligation issued to a related person (within the meaning of section 108(e)(4)).

I.R.C. § 163(e)(5)(F)(ii) Successive Application —

Any obligation to which clause (i) applies shall not be treated as an applicable high yield discount obligation for purposes of applying this subparagraph to any other obligation issued in exchange for such obligation.

I.R.C. § 163(e)(5)(F)(iii) Secretarial Authority To Suspend Application —

The Secretary may apply this paragraph with respect to debt instruments issued in periods following the period described in clause (i) if the Secretary determines that such application is appropriate in light of distressed conditions in the debt capital markets.

I.R.C. § 163(e)(5)(G) Cross Reference —

For definition of applicable high yield discount obligation, see subsection (i).

I.R.C. § 163(e)(6) Cross References —

For provision relating to deduction of original issue discount on tax-exempt obligation, see section 1288.

For special rules in the case of the borrower under certain loans for personal use, see section 1275(b).

I.R.C. § 163(f) Denial Of Deduction For Interest On Certain Obligations Not In Registered Form

I.R.C. § 163(f)(1) In General —

Nothing in subsection (a) or in any other provision of law shall be construed to provide a deduction for interest on any registration-required obligation unless such obligation is in registered form.

I.R.C. § 163(f)(2) Registration-Required Obligation —

For purposes of this section—

I.R.C. § 163(f)(2)(A) In General —

The term “registration-required obligation” means any obligation (including any obligation issued by a governmental entity) other than an obligation which—

I.R.C. § 163(f)(2)(A)(i) —

is issued by a natural person,

I.R.C. § 163(f)(2)(A)(ii) —

is not of a type offered to the public, or

I.R.C. § 163(f)(2)(A)(iii) —

has a maturity (at issue) of not more than 1 year.

I.R.C. § 163(f)(2)(B) Authority To Include Other Obligations —

Clauses (ii) and (iii) of subparagraph (A) shall not apply to any obligation if—

I.R.C. § 163(f)(2)(B)(i) —

such obligation is of a type which the Secretary has determined by regulations to be used frequently in avoiding Federal taxes, and

I.R.C. § 163(f)(2)(B)(ii) —

such obligation is issued after the date on which the regulations referred to in clause (i) take effect.

I.R.C. § 163(f)(3) Book Entries Permitted, Etc. —

For purposes of this subsection, rules similar to the rules of section 149(a)(3) shall apply, except that a dematerialized book entry system or other book entry system specified by the Secretary shall be treated as a book entry system described in such section.

I.R.C. § 163(g) Reduction Of Deduction Where Section 25 Credit Taken —

The amount of the deduction under this section for interest paid or accrued during any taxable year on indebtedness with respect to which a mortgage credit certificate has been issued under section 25 shall be reduced by the amount of the credit allowable with respect to such interest under section 25 (determined without regard to section 26).

I.R.C. § 163(h) Disallowance Of Deduction For Personal Interest

I.R.C. § 163(h)(1) In General —

In the case of a taxpayer other than a corporation, no deduction shall be allowed under this chapter for personal interest paid or accrued during the taxable year.

I.R.C. § 163(h)(2) Personal Interest —

For purposes of this subsection, the term “personal interest” means any interest allowable as a deduction under this chapter other than—

I.R.C. § 163(h)(2)(A) —

interest paid or accrued on indebtedness properly allocable to a trade or business (other than the trade or business of performing services as an employee),

I.R.C. § 163(h)(2)(B) —

any investment interest (within the meaning of subsection (d)),

I.R.C. § 163(h)(2)(C) —

any interest which is taken into account under section 469 in computing income or loss from a passive activity of the taxpayer,

I.R.C. § 163(h)(2)(D) —

any qualified residence interest (within the meaning of paragraph (3)),

I.R.C. § 163(h)(2)(E) —

any interest payable under section 6601 on any unpaid portion of the tax imposed by section 2001 for the period during which an extension of time for payment of such tax is in effect under section 6163, and

I.R.C. § 163(h)(2)(F) —

any interest allowable as a deduction under section 221 (relating to interest on educational loans).

I.R.C. § 163(h)(3) Qualified Residence Interest —

For purposes of this subsection—

I.R.C. § 163(h)(3)(A) In General —

The term “qualified residence interest” means any interest which is paid or accrued during the taxable year on—

I.R.C. § 163(h)(3)(A)(i) —

acquisition indebtedness with respect to any qualified residence of the taxpayer, or

I.R.C. § 163(h)(3)(A)(ii) —

home equity indebtedness with respect to any qualified residence of the taxpayer.

For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued.

I.R.C. § 163(h)(3)(B) Acquisition Indebtedness

I.R.C. § 163(h)(3)(B)(i) In General —

The term “acquisition indebtedness” means any indebtedness which—

I.R.C. § 163(h)(3)(B)(i)(I) —

is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and

I.R.C. § 163(h)(3)(B)(i)(II) —

is secured by such residence.

Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

I.R.C. § 163(h)(3)(B)(ii) $1,000,000 Limitation —

The aggregate amount treated as acquisition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate return).

I.R.C. § 163(h)(3)(C) Home Equity Indebtedness

I.R.C. § 163(h)(3)(C)(i) In General —

The term “home equity indebtedness” means any indebtedness (other than acquisition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not exceed—

I.R.C. § 163(h)(3)(C)(i)(I) —

the fair market value of such qualified residence, reduced by

I.R.C. § 163(h)(3)(C)(i)(II) —

the amount of acquisition indebtedness with respect to such residence.

I.R.C. § 163(h)(3)(C)(ii) Limitation —

The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual).

I.R.C. § 163(h)(3)(D) Treatment Of Indebtedness Incurred On Or Before October 13, 1987

I.R.C. § 163(h)(3)(D)(i) In General —

In the case of any pre-October 13, 1987, indebtedness—

I.R.C. § 163(h)(3)(D)(i)(I) —

such indebtedness shall be treated as acquisition indebtedness, and

I.R.C. § 163(h)(3)(D)(i)(II) —

the limitation of subparagraph (B)(ii) shall not apply.

I.R.C. § 163(h)(3)(D)(ii) Reduction In $1,000,000 Limitation —

The limitation of subparagraph (B)(ii) shall be reduced (but not below zero) by the aggregate amount of outstanding pre-October 13, 1987, indebtedness.

I.R.C. § 163(h)(3)(D)(iii) Pre-October 13, 1987, Indebtedness —

The term “pre-October 13, 1987, indebtedness” means—

I.R.C. § 163(h)(3)(D)(iii)(I) —

any indebtedness which was incurred on or before October 13, 1987, and which was secured by a qualified residence on October 13, 1987, and at all times thereafter before the interest is paid or accrued, or

I.R.C. § 163(h)(3)(D)(iii)(II) —

any indebtedness which is secured by the qualified residence and was incurred after October 13, 1987, to refinance indebtedness described in subclause (I) (or refinanced indebtedness meeting the requirements of this subclause) to the extent (immediately after the refinancing) the principal amount of the indebtedness resulting from the refinancing does not exceed the principal amount of the refinanced indebtedness (immediately before the refinancing).

I.R.C. § 163(h)(3)(D)(iv) Limitation On Period Of Refinancing —

Subclause (II) of clause (iii) shall not apply to any indebtedness after—

I.R.C. § 163(h)(3)(D)(iv)(I) —

the expiration of the term of the indebtedness described in clause (iii)(I), or

I.R.C. § 163(h)(3)(D)(iv)(II) —

if the principal of the indebtedness described in clause (iii)(I) is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such 1st refinancing).

I.R.C. § 163(h)(3)(E) Mortgage Insurance Premiums Treated As Interest

I.R.C. § 163(h)(3)(E)(i) In General —

Premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness with respect to a qualified residence of the taxpayer shall be treated for purposes of this section as interest which is qualified residence interest.

I.R.C. § 163(h)(3)(E)(ii) Phaseout —

The amount otherwise treated as interest under clause (i) shall be reduced (but not below zero) by 10 percent of such amount for each $1,000 ($500 in the case of a married individual filing a separate return) (or fraction thereof) that the taxpayer's adjusted gross income for the taxable year exceeds $100,000 ($50,000 in the case of a married individual filing a separate return).

I.R.C. § 163(h)(3)(E)(iii) Limitation —

Clause (i) shall not apply with respect to any mortgage insurance contracts issued before January 1, 2007.

I.R.C. § 163(h)(3)(E)(iv) Termination —

Clause (i) shall not apply to amounts—

I.R.C. § 163(h)(3)(E)(iv)(I) —

paid or accrued after December 31, 2021, or

I.R.C. § 163(h)(3)(E)(iv)(II) —

properly allocable to any period after such date.

I.R.C. § 163(h)(3)(F) Special Rules For Taxable Years 2018 Through 2025

I.R.C. § 163(h)(3)(F)(i) In General —

In the case of taxable years beginning after December 31, 2017, and before January 1, 2026—

I.R.C. § 163(h)(3)(F)(i)(I) Disallowance Of Home Equity Indebtedness Interest —

Subparagraph (A)(ii) shall not apply.

I.R.C. § 163(h)(3)(F)(i)(II) Limitation On Acquisition Indebtedness —

Subparagraph (B)(ii) shall be applied by substituting “$750,000 ($375,000” for “$1,000,000 ($500,000”.

I.R.C. § 163(h)(3)(F)(i)(III) Treatment Of Indebtedness Incurred On Or Before December 15, 2017 —

Subclause (II) shall not apply to any indebtedness incurred on or before December 15, 2017, and, in applying such subclause to any indebtedness incurred after such date, the limitation under such subclause shall be reduced (but not below zero) by the amount of any indebtedness incurred on or before December 15, 2017, which is treated as acquisition indebtedness for purposes of this subsection for the taxable year.

I.R.C. § 163(h)(3)(F)(i)(IV) Binding Contract Exception —

In the case of a taxpayer who enters into a written binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and who purchases such residence before April 1, 2018, subclause (III) shall be applied by substituting “April 1, 2018” for “December 15, 2017”.

I.R.C. § 163(h)(3)(F)(ii) Treatment Of Limitation in Taxable Years After December 31, 2025 —

In the case of taxable years beginning after December 31, 2025, the limitation under subparagraph (B)(ii) shall be applied to the aggregate amount of indebtedness of the taxpayer described in subparagraph (B)(i) without regard to the taxable year in which the indebtedness was incurred.

I.R.C. § 163(h)(3)(F)(iii) Treatment Of Refinancings Of Indebtedness

I.R.C. § 163(h)(3)(F)(iii)(I) In General —

In the case of any indebtedness which is incurred to refinance indebtedness, such refinanced indebtedness shall be treated for purposes of clause (i)(III) as incurred on the date that the original indebtedness was incurred to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

I.R.C. § 163(h)(3)(F)(iii)(II) Limitation On Period Of Refinancing —

Subclause (I) shall not apply to any indebtedness after the expiration of the term of the original indebtedness or, if the principal of such original indebtedness is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such 1st refinancing).

I.R.C. § 163(h)(3)(F)(iv) Coordination With Exclusion Of Income From Discharge Of Indebtedness —

Section 108(h)(2) shall be applied without regard to this subparagraph.

I.R.C. § 163(h)(4) Other Definitions And Special Rules —

For purposes of this subsection—

I.R.C. § 163(h)(4)(A) Qualified Residence

I.R.C. § 163(h)(4)(A)(i) In General —

The term “qualified residence” means—

I.R.C. § 163(h)(4)(A)(i)(I) —

the principal residence (within the meaning of section 121) of the taxpayer, and

I.R.C. § 163(h)(4)(A)(i)(II) —

1 other residence of the taxpayer which is selected by the taxpayer for purposes of this subsection for the taxable year and which is used by the taxpayer as a residence (within the meaning of section 280A(d)(1)).

I.R.C. § 163(h)(4)(A)(ii) Married Individuals Filing Separate Returns —

If a married couple does not file a joint return for the taxable year—

I.R.C. § 163(h)(4)(A)(ii)(I) —

such couple shall be treated as 1 taxpayer for purposes of clause (i), and

I.R.C. § 163(h)(4)(A)(ii)(II) —

each individual shall be entitled to take into account 1 residence unless both individuals consent in writing to 1 individual taking into account the principal residence and 1 other residence.

I.R.C. § 163(h)(4)(A)(iii) Residence Not Rented —

For purposes of clause (i)(II), notwithstanding section 280A(d)(1), if the taxpayer does not rent a dwelling unit at any time during a taxable year, such unit may be treated as a residence for such taxable year.

I.R.C. § 163(h)(4)(B) Special Rule For Cooperative Housing Corporations —

Any indebtedness secured by stock held by the taxpayer as a tenant-stockholder (as defined in section 216) in a cooperative housing corporation (as so defined) shall be treated as secured by the house or apartment which the taxpayer is entitled to occupy as such a tenant-stockholder. If stock described in the preceding sentence may not be used to secure indebtedness, indebtedness shall be treated as so secured if the taxpayer establishes to the satisfaction of the Secretary that such indebtedness was incurred to acquire such stock.

I.R.C. § 163(h)(4)(C) Unenforceable Security Interests —

Indebtedness shall not fail to be treated as secured by any property solely because, under any applicable State or local homestead or other debtor protection law in effect on August 16, 1986, the security interest is ineffective or the enforceability of the security interest is restricted.

I.R.C. § 163(h)(4)(D) Special Rules For Estates And Trusts —

For purposes of determining whether any interest paid or accrued by an estate or trust is qualified residence interest, any residence held by such estate or trust shall be treated as a qualified residence of such estate or trust if such estate or trust establishes that such residence is a qualified residence of a beneficiary who has a present interest in such estate or trust or an interest in the residuary of such estate or trust.

I.R.C. § 163(h)(4)(E) Qualified Mortgage Insurance —

The term “qualified mortgage insurance” means—

I.R.C. § 163(h)(4)(E)(i) —

mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and

I.R.C. § 163(h)(4)(E)(ii) —

private mortgage insurance (as defined by section 2 of the Homeowners Protection Act of 1998 (12 U.S.C. 4901), as in effect on the date of the enactment of this subparagraph).

I.R.C. § 163(h)(4)(F) Special Rules For Prepaid Qualified Mortgage Insurance —

Any amount paid by the taxpayer for qualified mortgage insurance that is properly allocable to any mortgage the payment of which extends to periods that are after the close of the taxable year in which such amount is paid shall be chargeable to capital account and shall be treated as paid in such periods to which so allocated. No deduction shall be allowed for the unamortized balance of such account if such mortgage is satisfied before the end of its term. The preceding sentences shall not apply to amounts paid for qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service.

I.R.C. § 163(i) Applicable High Yield Discount Obligation

I.R.C. § 163(i)(1) In General —

For purposes of this section, the term “applicable high yield discount obligation” means any debt instrument if—

I.R.C. § 163(i)(1)(A) —

the maturity date of such instrument is more than 5 years from the date of issue,

I.R.C. § 163(i)(1)(B) —

the yield to maturity on such instrument equals or exceeds the sum of—

I.R.C. § 163(i)(1)(B)(i) —

the applicable Federal rate in effect under section 1274(d) for the calendar month in which the obligation is issued, plus

I.R.C. § 163(i)(1)(B)(ii) —

5 percentage points, and

I.R.C. § 163(i)(1)(C) —

such instrument has significant original issue discount.

For purposes of subparagraph (B)(i), the Secretary may by regulation (i) permit a rate to be used with respect to any debt instrument which is higher than the applicable Federal rate if the taxpayer establishes to the satisfaction of the Secretary that such higher rate is based on the same principles as the applicable Federal rate and is appropriate for the term of the instrument, or (ii) permit, on a temporary basis, a rate to be used with respect to any debt instrument which is higher than the applicable Federal rate if the Secretary determines that such rate is appropriate in light of distressed conditions in the debt capital markets.

I.R.C. § 163(i)(2) Significant Original Issue Discount —

For purposes of paragraph (1)(C), a debt instrument shall be treated as having significant original issue discount if—

I.R.C. § 163(i)(2)(A) —

the aggregate amount which would be includible in gross income with respect to such instrument for periods before the close of any accrual period (as defined in section 1272(a)(5)) ending after the date 5 years after the date of issue, exceeds—

I.R.C. § 163(i)(2)(B) —

the sum of—

I.R.C. § 163(i)(2)(B)(i) —

the aggregate amount of interest to be paid under the instrument before the close of such accrual period, and

I.R.C. § 163(i)(2)(B)(ii) —

the product of the issue price of such instrument (as defined in sections 1273(b) and 1274(a)) and its yield to maturity.

I.R.C. § 163(i)(3) Special Rules —

For purposes of determining whether a debt instrument is an applicable high yield discount obligation—

I.R.C. § 163(i)(3)(A) —

any payment under the instrument shall be assumed to be made on the last day permitted under the instrument, and

I.R.C. § 163(i)(3)(B) —

any payment to be made in the form of another obligation of the issuer (or a related person within the meaning of section 453(f)(1)) shall be assumed to be made when such obligation is required to be paid in cash or in property other than such obligation.

Except for purposes of paragraph (1)(B), any reference to an obligation in subparagraph (B) of this paragraph shall be treated as including a reference to stock.

I.R.C. § 163(i)(4) Debt Instrument —

For purposes of this subsection, the term “debt instrument” means any instrument which is a debt instrument as defined in section 1275(a).

I.R.C. § 163(i)(5) Regulations —

The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subsection and subsection (e)(5), including—

I.R.C. § 163(i)(5)(A) —

regulations providing for modifications to the provisions of this subsection and subsection (e)(5) in the case of varying rates of interest, put or call options, indefinite maturities, contingent payments, assumptions of debt instruments, conversion rights, or other circumstances where such modifications are appropriate to carry out the purposes of this subsection and subsection (e)(5), and

I.R.C. § 163(i)(5)(B) —

regulations to prevent avoidance of the purposes of this subsection and subsection (e)(5) through the use of issuers other than C corporations, agreements to borrow amounts due under the debt instrument, or other arrangements.

I.R.C. § 163(j) Limitation On Business Interest

I.R.C. § 163(j)(1) In General —

The amount allowed as a deduction under this chapter for any taxable year for business interest shall not exceed the sum of—

I.R.C. § 163(j)(1)(A) —

the business interest income of such taxpayer for such taxable year,

I.R.C. § 163(j)(1)(B) —

30 percent of the adjusted taxable income of such taxpayer for such taxable year, plus

I.R.C. § 163(j)(1)(C) —

the floor plan financing interest of such taxpayer for such taxable year.

The amount determined under subparagraph (B) shall not be less than zero.

I.R.C. § 163(j)(2) Carryforward Of Disallowed Business Interest —

The amount of any business interest not allowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as business interest paid or accrued in the succeeding taxable year.

I.R.C. § 163(j)(3) Exemption For Certain Small Businesses —

In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year, paragraph (1) shall not apply to such taxpayer for such taxable year. In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if such taxpayer were a corporation or partnership.

I.R.C. § 163(j)(4) Application To Partnerships, Etc.

I.R.C. § 163(j)(4)(A) In General —

In the case of any partnership—

I.R.C. § 163(j)(4)(A)(i) —

this subsection shall be applied at the partnership level and any deduction for business interest shall be taken into account in determining the non-separately stated taxable income or loss of the partnership, and

I.R.C. § 163(j)(4)(A)(ii) —

the adjusted taxable income of each partner of such partnership—

I.R.C. § 163(j)(4)(A)(ii)(I) —

shall be determined without regard to such partner's distributive share of any items of income, gain, deduction, or loss of such partnership, and

I.R.C. § 163(j)(4)(A)(ii)(II) —

shall be increased by such partner's distributive share of such partnership's excess taxable income.

For purposes of clause (ii)(II), a partner's distributive share of partnership excess taxable income shall be determined in the same manner as the partner's distributive share of nonseparately stated taxable income or loss of the partnership.

I.R.C. § 163(j)(4)(B) Special Rules For Carryforwards

I.R.C. § 163(j)(4)(B)(i) In General —

The amount of any business interest not allowed as a deduction to a partnership for any taxable year by reason of paragraph (1) for any taxable year—

I.R.C. § 163(j)(4)(B)(i)(I) —

shall not be treated under paragraph (2) as business interest paid or accrued by the partnership in the succeeding taxable year, and

I.R.C. § 163(j)(4)(B)(i)(II) —

shall, subject to clause (ii), be treated as excess business interest which is allocated to each partner in the same manner as the nonseparately stated taxable income or loss of the partnership.

I.R.C. § 163(j)(4)(B)(ii) Treatment Of Excess Business Interest Allocated To Partners —

If a partner is allocated any excess business interest from a partnership under clause (i) for any taxable year—

I.R.C. § 163(j)(4)(B)(ii)(I) —

such excess business interest shall be treated as business interest paid or accrued by the partner in the next succeeding taxable year in which the partner is allocated excess taxable income from such partnership, but only to the extent of such excess taxable income, and

I.R.C. § 163(j)(4)(B)(ii)(II) —

any portion of such excess business interest remaining after the application of subclause (I) shall, subject to the limitations of subclause (I), be treated as business interest paid or accrued in succeeding taxable years.

For purposes of applying this paragraph, excess taxable income allocated to a partner from a partnership for any taxable year shall not be taken into account under paragraph (1)(A) with respect to any business interest other than excess business interest from the partnership until all such excess business interest for such taxable year and all preceding taxable years has been treated as paid or accrued under clause (ii).

I.R.C. § 163(j)(4)(B)(iii) Basis Adjustments

I.R.C. § 163(j)(4)(B)(iii)(I) In General —

The adjusted basis of a partner in a partnership interest shall be reduced (but not below zero) by the amount of excess business interest allocated to the partner under clause (i)(II).

I.R.C. § 163(j)(4)(B)(iii)(II) Special Rule For Dispositions —

If a partner disposes of a partnership interest, the adjusted basis of the partner in the partnership interest shall be increased immediately before the disposition by the amount of the excess (if any) of the amount of the basis reduction under subclause (I) over the portion of any excess business interest allocated to the partner under clause (i)(II) which has previously been treated under clause (ii) as business interest paid or accrued by the partner. The preceding sentence shall also apply to transfers of the partnership interest (including by reason of death) in a transaction in which gain is not recognized in whole or in part. No deduction shall be allowed to the transferor or transferee under this chapter for any excess business interest resulting in a basis increase under this subclause.

I.R.C. § 163(j)(4)(C) Excess Taxable Income —

The term “excess taxable income” means, with respect to any partnership, the amount which bears the same ratio to the partnership's adjusted taxable income as—

I.R.C. § 163(j)(4)(C)(i) —

the excess (if any) of—

I.R.C. § 163(j)(4)(C)(i)(I) —

the amount determined for the partnership under paragraph (1)(B), over

I.R.C. § 163(j)(4)(C)(i)(II) —

the amount (if any) by which the business interest of the partnership, reduced by the floor plan financing interest, exceeds the business interest income of the partnership, bears to

I.R.C. § 163(j)(4)(C)(ii) —

the amount determined for the partnership under paragraph (1)(B).

I.R.C. § 163(j)(4)(D) Application To S Corporations —

Rules similar to the rules of subparagraphs (A) and (C) shall apply with respect to any S corporation and its shareholders.

I.R.C. § 163(j)(5) Business Interest —

For purposes of this subsection, the term “business interest” means any interest paid or accrued on indebtedness properly allocable to a trade or business. Such term shall not include investment interest (within the meaning of subsection (d)).

I.R.C. § 163(j)(6) Business Interest Income —

For purposes of this subsection, the term “business interest income” means the amount of interest includible in the gross income of the taxpayer for the taxable year which is properly allocable to a trade or business. Such term shall not include investment income (within the meaning of subsection (d)).

I.R.C. § 163(j)(7) Trade or Business —

For purposes of this subsection—

I.R.C. § 163(j)(7)(A) In General —

The term “trade or business” shall not include—

I.R.C. § 163(j)(7)(A)(i) —

the trade or business of performing services as an employee,

I.R.C. § 163(j)(7)(A)(ii) —

any electing real property trade or business,

I.R.C. § 163(j)(7)(A)(iii) —

any electing farming business, or

I.R.C. § 163(j)(7)(A)(iv) —

the trade or business of the furnishing or sale of—

I.R.C. § 163(j)(7)(A)(iv)(I) —

electrical energy, water, or sewage disposal services,

I.R.C. § 163(j)(7)(A)(iv)(II) —

gas or steam through a local distribution system, or

I.R.C. § 163(j)(7)(A)(iv)(III) —

transportation of gas or steam by pipeline,

if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, by a public service or public utility commission or other similar body of any State or political subdivision thereof, or by the governing or ratemaking body of an electric cooperative.

I.R.C. § 163(j)(7)(B) Electing Real Property Trade Or Business —

For purposes of this paragraph, the term “electing real property trade or business” means any trade or business which is described in section 469(c)(7)(C) and which makes an election under this subparagraph. Any such election shall be made at such time and in such manner as the Secretary shall prescribe, and, once made, shall be irrevocable.

I.R.C. § 163(j)(7)(C) Electing Farming Business —

For purposes of this paragraph, the term “electing farming business” means—

I.R.C. § 163(j)(7)(C)(i) —

a farming business (as defined in section 263A(e)(4)) which makes an election under this subparagraph, or

I.R.C. § 163(j)(7)(C)(ii) —

any trade or business of a specified agricultural or horticultural cooperative (as defined in section 199A(g)(2))¹ with respect to which the cooperative makes an election under this subparagraph.

1 See References in Text note below.

Any such election shall be made at such time and in such manner as the Secretary shall prescribe, and, once made, shall be irrevocable.

I.R.C. § 163(j)(8) Adjusted Taxable Income —

For purposes of this subsection, the term “adjusted taxable income” means the taxable income of the taxpayer—

I.R.C. § 163(j)(8)(A) —

computed without regard to—

I.R.C. § 163(j)(8)(A)(i) —

any item of income, gain, deduction, or loss which is not properly allocable to a trade or business,

I.R.C. § 163(j)(8)(A)(ii) —

any business interest or business interest income,

I.R.C. § 163(j)(8)(A)(iii) —

the amount of any net operating loss deduction under section 172,

I.R.C. § 163(j)(8)(A)(iv) —

the amount of any deduction allowed under section 199A, and

I.R.C. § 163(j)(8)(A)(v) —

in the case of taxable years beginning before January 1, 2022, any deduction allowable for depreciation, amortization, or depletion, and

I.R.C. § 163(j)(8)(B) —

computed with such other adjustments as provided by the Secretary.

I.R.C. § 163(j)(9) Floor Plan Financing Interest Defined —

For purposes of this subsection—

I.R.C. § 163(j)(9)(A) In General —

The term “floor plan financing interest” means interest paid or accrued on floor plan financing indebtedness.

I.R.C. § 163(j)(9)(B) Floor Plan Financing Indebtedness —

The term “floor plan financing indebtedness” means indebtedness—

I.R.C. § 163(j)(9)(B)(i) —

used to finance the acquisition of motor vehicles held for sale or lease, and

I.R.C. § 163(j)(9)(B)(ii) —

secured by the inventory so acquired.

I.R.C. § 163(j)(9)(C) Motor Vehicle —

The term “motor vehicle” means a motor vehicle that is any of the following:

I.R.C. § 163(j)(9)(C)(i) —

Any self-propelled vehicle designed for transporting persons or property on a public street, highway, or road.

I.R.C. § 163(j)(9)(C)(ii) —

A boat.

I.R.C. § 163(j)(9)(C)(iii) —

Farm machinery or equipment.

I.R.C. § 163(j)(10) Special Rule For Taxable Years Beginning In 2019 And 2020

I.R.C. § 163(j)(10)(A) In General

I.R.C. § 163(j)(10)(A)(i) In General —

Except as provided in clause (ii) or (iii), in the case of any taxable year beginning in 2019 or 2020, paragraph (1)(B) shall be applied by substituting “50 percent” for “30 percent”.

I.R.C. § 163(j)(10)(A)(ii) Special Rule For Partnerships —

In the case of a partnership

I.R.C. § 163(j)(10)(A)(ii)(I) —

clause (i) shall not apply to any taxable year beginning in 2019, but

I.R.C. § 163(j)(10)(A)(ii)(II) —

unless a partner elects not to have this subclause apply, in the case of any excess business interest of the partnership for any taxable year beginning in 2019 which is allocated to the partner under paragraph (4)(B)(i)(II)

I.R.C. § 163(j)(10)(A)(ii)(II)(aa) —

50 percent of such excess business interest shall be treated as business interest which, notwithstanding paragraph (4)(B)(ii), is paid or accrued by the partner in the partner's first taxable year beginning in 2020 and which is not subject to the limits of paragraph (1), and

I.R.C. § 163(j)(10)(A)(ii)(II)(bb) —

50 percent of such excess business interest shall be subject to the limitations of paragraph (4)(B)(ii) in the same manner as any other excess business interest so allocated.

I.R.C. § 163(j)(10)(A)(iii) Election Out —

A taxpayer may elect, at such time and in such manner as the Secretary may prescribe, not to have clause (i) apply to any taxable year. Such an election, once made, may be revoked only with the consent of the Secretary. In the case of a partnership, any such election shall be made by the partner ship and may be made only for taxable years beginning in 2020.

I.R.C. § 163(j)(10)(B) Election To Use 2019 Adjusted Taxable Income For Taxable Years Beginning In 2020

I.R.C. § 163(j)(10)(B)(i) In General —

Subject to clause (ii), in the case of any taxable year beginning in 2020, the taxpayer may elect to apply this subsection by substituting the adjusted taxable income of the taxpayer for the last taxable year beginning in 2019 for the adjusted taxable income for such taxable year. In the case of a partnership, any such election shall be made by the partnership.

I.R.C. § 163(j)(10)(B)(ii) Special Rule For Short Taxable Years —

If an election is made under clause (i) for a taxable year which is a short taxable year, the adjusted taxable income for the taxpayer's last taxable year beginning in 2019 which is substituted under clause (i) shall be equal to the amount which bears the same ratio to such adjusted taxable income determined with out regard to this clause as the number of months in the short taxable year bears to 12.

I.R.C. § 163(j)(11) Cross References

I.R.C. § 163(j)(11)(A) —

For requirement that an electing real property trade or business use the alternative depreciation system, see section 168(g)(1)(F).

I.R.C. § 163(j)(11)(B) —

For requirement that an electing farming business use the alternative depreciation system, see section 168(g)(1)(G).

I.R.C. § 163(k) Section 6166 Interest —

No deduction shall be allowed under this section for any interest payable under section 6601 on any unpaid portion of the tax imposed by section 2001 for the period during which an extension of time for payment of such tax is in effect under section 6166.

I.R.C. § 163(l) Disallowance Of Deduction On Certain Debt Instruments Of Corporations

I.R.C. § 163(l)(1) In General —

No deduction shall be allowed under this chapter for any interest paid or accrued on a disqualified debt instrument.

I.R.C. § 163(l)(2) Disqualified Debt Instrument —

For purposes of this subsection, the term “disqualified debt instrument” means any indebtedness of a corporation which is payable in equity of the issuer or a related party or equity held by the issuer (or any related party) in any other person.

I.R.C. § 163(l)(3) Special Rules For Amounts Payable In Equity —

For purposes of paragraph (2), indebtedness shall be treated as payable in equity of the issuer or any other person only if—

I.R.C. § 163(l)(3)(A) —

a substantial amount of the principal or interest is required to be paid or converted, or at the option of the issuer or a related party is payable in, or convertible into, such equity,

I.R.C. § 163(l)(3)(B) —

a substantial amount of the principal or interest is required to be determined, or at the option of the issuer or a related party is determined, by reference to the value of such equity, or

I.R.C. § 163(l)(3)(C) —

the indebtedness is part of an arrangement which is reasonably expected to result in a transaction described in subparagraph (A) or (B).

For purposes of this paragraph, principal or interest shall be treated as required to be so paid, converted, or determined if it may be required at the option of the holder or a related party and there is a substantial certainty the option will be exercised.

I.R.C. § 163(l)(4) Capitalization Allowed With Respect To Equity Of Persons Other Than Issuer And Related Parties —

If the disqualified debt instrument of a corporation is payable in equity held by the issuer (or any related party) in any other person (other than a related party), the basis of such equity shall be increased by the amount not allowed as a deduction by reason of paragraph (1) with respect to the instrument.

I.R.C. § 163(l)(5) Exception For Certain Instruments Issued By Dealers In Securities —

For purposes of this subsection, the term “disqualified debt instrument” does not include indebtedness issued by a dealer in securities (or a related party) which is payable in, or by reference to, equity (other than equity of the issuer or a related party) held by such dealer in its capacity as a dealer in securities. For purposes of this paragraph, the term “dealer in securities” has the meaning given such term by section 475.

I.R.C. § 163(l)(6) Related Party —

For purposes of this subsection, a person is a related party with respect to another person if such person bears a relationship to such other person described in section 267(b) or 707(b).

I.R.C. § 163(l)(7) Regulations —

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations preventing avoidance of this subsection through the use of an issuer other than a corporation.

I.R.C. § 163(m) Interest On Unpaid Taxes Attributable To Nondisclosed Reportable Transactions —

No deduction shall be allowed under this chapter for any interest paid or accrued under section 6601 on any underpayment of tax which is attributable to the portion of any reportable transaction understatement (as defined in section 6662A(b)) with respect to which the requirement of section 6664(d)(2)(A) ¹ is not met.

1 See References in Text note below.

I.R.C. § 163(n) Cross References

I.R.C. § 163(n)(1) —

For disallowance of certain amounts paid in connection with insurance, endowment, or annuity contracts, see section 264.

I.R.C. § 163(n)(2) —

For disallowance of deduction for interest relating to tax-exempt income, see section 265(a)(2).

I.R.C. § 163(n)(3) —

For disallowance of deduction for carrying charges chargeable to capital account, see section 266.

I.R.C. § 163(n)(4) —

For disallowance of interest with respect to transactions between related taxpayers, see section 267.

I.R.C. § 163(n)(5) —

For treatment of redeemable ground rents and real property held subject to liabilities under redeemable ground rents, see section 1055.

(Aug. 16, 1954, ch. 736, 68A Stat. 46; Apr. 10, 1963, Pub. L. 88-9, Sec. 1(a), (c), 77 Stat. 6, 7; Feb. 26, 1964, Pub. L. 88-272, title II, Sec. 224(c), 78 Stat. 79; Dec. 30, 1969, Pub. L. 91-172, title II, Sec. 221(a), 83 Stat. 574; Dec. 10, 1971, Pub. L. 92-178, title III, Sec. 304(a)(2), (b)(2), (d), 85 Stat. 523, 524; Oct. 4, 1976, Pub. L. 94-455, title II, Sec. 205(c)(3), 209(a), title XIX, Sec. 1901(b)(3)(K), (8)(C), 1906(b)(13)(A), 90 Stat. 1535, 1542, 1793, 1794, 1834; Sept. 3, 1982, Pub. L. 97-248, title II, Sec. 231(b), title III, Sec. 310(b)(2), 96 Stat. 498, 596; Oct. 19, 1982, Pub. L. 97-354, Sec. 5(a)(18), 96 Stat. 1693; July 18, 1984,Pub. L. 98-369, div. A, title I, Sec. 42(a)(3), 56(b), 127(f), 128(c), title VI, Sec. 612(c), 98 Stat. 556, 574, 652, 654, 911; Oct. 22, 1986, Pub. L. 99-514, title V, Sec. 511(a), (b), title IX, Sec. 902(e)(1), title XIII, Sec. 1301(j)(3), title XVIII, Sec. 1803(a)(4), 1810(e)(1), 100 Stat. 2244, 2246, 2382, 2657, 2793, 2825; Dec. 22, 1987, Pub. L. 100-203, title X, Sec. 10102(a), (b), 10212(b), 101 Stat. 1330-384, 1330-386, 1330-406; Nov. 10, 1988, Pub. L. 100-647, title I, Sec. 1005(c)(1)-(9), (12), 1006(u)(1), 1009(b)(6), title II, Sec. 2004(b)(1), 102 Stat. 3390-3392, 3427, 3449, 3598; Dec. 19, 1989, Pub. L. 101-239, title VII, Sec. 7202(a), (b), 7210(a), 103 Stat. 2330, 2331, 2339; Nov. 5, 1990, Pub. L. 101-508, title XI, Sec. 11701(b), (c), 104 Stat. 1388-507; Aug. 10, 1993, Pub. L. 103-66, title XIII, Sec. 13206(d), 13228; Aug. 20, 1996, Pub. L. 104-188, title I, Sec. 1703(n)(4), 1704(f)(2), 110 Stat. 1755; Pub. L. 105-34, title III, V, X, XVI, Sec. 312(d)(1), 503(b)(2), 1005(a), 1604(g)(1), Aug. 5, 1997, 111 Stat 788; Pub. L. 105-277, title IV, Sec. 4003(a), Oct. 21, 1998, 112 Stat 2681; Pub. L. 106-170, title V, Sec. 544, Dec. 17, 1999, 113 Stat 1860; Pub. L. 108-27, title III, Sec. 302(b), May 28, 2003, 117 Stat. 752; Pub. L. 108-357, title VIII, Sec. 838(a), 841(a), 845, Oct. 22, 2004, 118 Stat. 1418; Pub. L. 109-135, title IV, Sec. 403(a)(15), Dec. 21, 2005, 119 Stat. 2577; Pub. L. 109-222, title V, Sec. 501, May 17, 2006, 120 Stat. 345; Pub. L. 109-432, div. A, title IV, Sec. 419, Dec. 20, 2006, 120 Stat. 2922; Pub. L. 110-142, Sec. 3(a), Dec. 20, 2007, 121 Stat. 1803; Pub. L. 111-5, div. B, title I, Sec. 1232, Feb. 17, 2009, 123 Stat. 115; Pub. L. 111-147, Sec. 502(a), (c), Mar. 18, 2010, 124 Stat. 71; Pub. L. 111-312, title VII, Sec. 759, Dec. 17, 2010, 124 Stat. 3296; Pub. L. 112-240, title II, Sec. 204, Jan. 2, 2013, 126 Stat. 2313; Pub. L. 113-295, Div. A, title I, Sec. 104(a), title II, Sec. 220(h), 221(a)(25)(A), Dec. 19, 2014, 128 Stat. 4010; Pub. L. 114-113, Div. Q, title I, Sec. 152(a); Pub. L. 115-97, title I, Sec. 11043(a), 13301(a), Dec. 22, 2017; Pub. L. 115-123, Div. D, title I, Sec. 40202(a), Feb. 9, 2018, 132 Stat. 64; Pub. L. 115-141, Div. U, title IV, Secs. 401(a)(48), (b)(12), (c)(1)(C), (3)(B), Mar. 23, 2018, 132 Stat. 348; Pub. L. 116-94, Div. Q, title I, Sec. 102(a), Dec. 20, 2019; Pub. L. 116-136, Div. A, title II, Sec. 2306(a), Mar. 27, 2020; Pub. L. 116-260, Div. EE, title I, Sec. 133(a), Dec. 27, 2020, 134 Stat. 1182.)

BACKGROUND NOTES

AMENDMENTS

2020 — Subsec. (h)(3)(E)(iv)(I). Pub. L. 116-260, Div. EE, Sec. 133(a), amended subclause (I) by substituting “December 31, 2021” for “December 31, 2020”.

Subsec. (j). Pub. L. 116-136, Sec. 2306(a), amended subsec. (j) by redesignating par. (10) as par. (11), and adding a new par. (10).

2019 — Subsec. (h)(3)(E)(iv)(I). Pub. L. 116-94, Div. Q, Sec. 102(a), amended by substituting “December 31, 2020” for “December 31, 2017”.

2018 - Subsec. (d)(4). Pub. L. 115-141, Div. U, Sec. 401(b)(12), amended par. (4) by striking subpar. (E). Before amendment, subpar. (E) read as follows:

“(E) Reduction In Investment Income During Phase-In Of Passive Loss Rules

“Investment income of the taxpayer for any taxable year shall be reduced by the amount of the passive activity loss to which section 469(a) does not apply for such taxable year by reason of section 469(m). The preceding sentence shall not apply to any portion of such passive activity loss which is attributable to a rental real estate activity with respect to which the taxpayer actively participates (within the meaning of section 469(i)(6)) during such taxable year.”

Subsec. (e)(1). Pub. L. 115-141, Div. U, Sec. 401(c)(1)(C), amended par. (1) by substituting “The portion of the original issue discount with respect to any debt instrument which is” for “In the case of any debt instrument issued after July 1, 1982, the portion of the original issue discount with respect to such debt instrument which is”.

Subsec. (e)(4). Pub. L. 115-141, Div. U, Sec. 401(c)(3)(B), amended par. (4). Before amendment, par. (4) read as follows:

“(4) Exceptions

“This subsection shall not apply to any debt instrument described in—

“(A) subparagraph (D) of section 1272(a)(2) (relating to obligations issued by natural persons before March 2, 1984), and

“(B) subparagraph (E) of section 1272(a)(2) (relating to loans between natural persons).

Subsec. (e)(5)(C)(ii). Pub. L. 115-141, Div. U, Sec. 401(a)(48), amended clause (ii) by inserting “in” before “subsection (i)(1)(B)”.

Subsec. (h)(3)((E)(iv). Pub. L. 115-123, Sec. 40202(a), amended subclause (I) by substituting “December 31, 2017” for “December 31, 2016.”

2017 - Subsec. (h)(3). Pub. L. 115-97, Sec. 11043(a), amended par. (3) by adding new subpar. (F).

Subsec. (j). Pub. L. 115-97, Sec. 13301(a), amended subsec. (j). Before amendment, subsec. (j) read as follows:

‘‘(j) LIMITATION OF DEDUCTION FOR INTEREST ON CERTAIN INDEBTEDNESS

‘‘(1) Limitation

‘‘(A) In General

“If this subsection applies to any corporation for any taxable year, no deduction shall be allowed under this chapter for disqualified interest paid or accrued by such corporation during such taxable year. The amount disallowed under the preceding sentence shall not exceed the corporation's excess interest expense for the taxable year.

‘‘(B) Disallowed Amount Carried To Succeeding Taxable Year.—Any amount disallowed under subparagraph (A) for any taxable year shall be treated as disqualified interest paid or accrued in the succeeding taxable year (and clause (ii) of paragraph (2)(A) shall not apply for purposes of applying this subsection to the amount so treated).

‘‘(2) Corporations To Which Subsection Applies

“(A) In General.—This subsection shall apply to any corporation for any taxable year if—

“(i) such corporation has excess interest expense for such taxable year, and

‘‘(ii) the ratio of debt to equity of such corporation as of the close of such taxable year (or on any other day during the taxable year as the Secretary may by regulations prescribe) exceeds 1.5 to 1.

“(B) Excess Interest Expense

‘‘(i) In General.—For purposes of this subsection, the term excess interest expense means the excess (if any) of—

“(I) the corporation's net interest expense, over

“(II) the sum of 50 percent of the adjusted taxable income of the corporation plus any excess limitation carryforward under clause ii).

‘‘(ii) Excess Limitation Carryfoward.—If a corporation has an excess limitation for any taxable year, the amount of such excess limitation shall be an excess limitation carryforward to the 1st succeeding taxable year and to the 2nd and 3rd succeeding taxable years to the extent not previously taken into account under this clause. The amount of such a carryforward taken into account for any such succeeding taxable year shall not exceed the excess interest expense for such succeeding taxable year (determined without regard to the carryforward from the taxable year of such excess limitation).

‘‘(iii) Excess Limitation.—For purposes of clause (ii), the term ‘excess limitation' means the excess (if any) of—

‘‘(I) 50 percent of the adjusted taxable income of the corporation, over

‘‘(II) the corporation's net interest expense.

‘‘(C) Ratio Of Debt TO Equity.—For purposes of this paragraph, the term ‘ratio of debt to equity' means the ratio which the total indebtedness of the corporation bears to the sum of its money and all other assets reduced (but not below zero) by such total indebtedness. For purposes of the preceding sentence—

“(i) the amount taken into account with respect to any asset shall be the adjusted basis thereof for purposes of determining gain,

‘‘(ii) the amount taken into account with respect to any indebtedness with original issue discount shall be its issue price plus the portion of the original issue discount previously accrued as determined under the rules of section 1272 (determined without regard to subsection (a)(7) or (b)(4) thereof), and

‘‘(iii) there shall be such other adjustments as the Secretary may by regulations prescribe.

‘‘(3) Disqualified Interest

‘‘(A) any interest paid or accrued by the taxpayer (directly or indirectly) to a related person if no tax is imposed by this subtitle with respect to such interest,

‘‘(B) any interest paid or accrued by the taxpayer with respect to any indebtedness to a person who is not a related person if—

‘‘(i) there is a disqualified guarantee of such indebtedness, and

‘‘(ii) no gross basis tax is imposed by this subtitle with respect to such interest, and

‘‘(C) and interest paid or accrued (directly or indirectly) by a taxable REIT subsidiary (as defined in section 856(l)) of a real estate investment trust to such trust.

‘‘(4) Related Person.—For purposes of this subsection—

‘‘(A) In General.—Except as provided in subparagraph (B), the term “related person” means any person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer.

‘‘(B) Special Rule For Certain Partnerships

‘‘(i) In General.—Any interest paid or accrued to a partnership which (without regard to this subparagraph) is a related person shall not be treated as paid or accrued to a related person if less than 10 percent of the profits and capital interests in such partnership are held by persons with respect to whom no tax is imposed by this subtitle on such interest. The preceding sentence shall not apply to any interest allocable to any partner in such partnership who is a related person to the taxpayer.

‘‘(ii) Special Rule Where Treaty Reduction.—If any treaty between the United States and any foreign country reduces the rate of tax imposed by this subtitle on a partner's share of any interest paid or accrued to a partnership, such partner's interests in such partnership shall, for purposes of clause (i), be treated as held in part by a tax-exempt person and in part by a taxable person under rules similar to the rules of paragraph (5)(B).

‘‘(5) Special Rules For Determining Whether Interest Is Subject To Tax

‘‘(A) Treatment Of Pass-Thru Entities.—In the case of any interest paid or accrued to a partnership, the determination of whether any tax is imposed by this subtitle on such interest shall be made at the partner level. Rules similar to the rules of the preceding sentence shall apply in the case of any pass-thru entity other than a partnership and in the case of tiered partnerships and other entities.

‘‘(B) Interest Treated As Tax-Exempt To Extent Of Treaty Reduction.—If any treaty between the United States and any foreign country reduces the rate of tax imposed by this subtitle on any interest paid or accrued by the taxpayer, such interest shall be treated as interest on which no tax is imposed by this subtitle to the extent of the same proportion of such interest as—

‘‘(i) the rate of tax imposed without regard to such treaty, reduced by the rate of tax imposed under the treaty, bears to

‘‘(6) Other Definitions And Special Rules.—For purposes of this subsection—

‘‘(A) Adjusted Taxable Income.—The term ‘adjusted taxable income' means the taxable income of the taxpayer—

‘‘(i) computed without regard to—

‘‘(I) any deduction allowable under this chapter for the net interest expense,

‘‘(II) the amount of any net operating loss deduction under section 172,

‘‘(III) any deduction allowable under section 199, and

‘‘(IV) any deduction allowable for depreciation, amortization, or depletion, and

‘‘(i) used to finance the acquisition of motor vehicles held for sale or lease, and

“(B) Net Interest Expense.—The term ‘net interest expense' means the excess (if any) of—

“(i) the interest paid or accrued by the taxpayer during the taxable year, over

“(ii) the amount of interest includible in the gross income of such taxpayer for such taxable year.

“The Secretary may by regulations provide for adjustments in determining the amount of net interest expense.

“(C) Treatment Of Affiliated Group.—All members of the same affiliated group (within the meaning of section 1504(a)) shall be treated as 1 taxpayer.

“(D) Disqualified Guarantee

“(i) In General.—Except as provided in clause (ii), the term ‘disqualified guarantee' means any guarantee by a related person which is—

“(I) an organization exempt from taxation under this subtitle, or

“(II) a foreign person.

“(ii) Exceptions.—The term “disqualified guarantee” shall not include a guarantee—

“(I) in any circumstances identified by the Secretary by regulation, where the interest on the indebtedness would have been subject to a net basis tax if the interest had been paid to the guarantor, or

“(II) if the taxpayer owns a controlling interest in the guarantor.

“For purposes of subclause (II), except as provided in regulations, the term ‘a controlling interest' means direct or indirect ownership of at least 80 percent of the total voting power and value of all classes of stock of a corporation, or 80 percent of the profit and capital interests in any other entity. For purposes of the preceding sentence, the rules of paragraphs (1) and (5) of section 267(c) shall apply; except that such rules shall also apply to interest in entities other than corporations.

“(iii) Guarantee Except as provided in regulations, the term “guarantee” includes any arrangement under which a person (directly or indirectly through an entity or otherwise) assures, on a conditional or unconditional basis, the payment of another person's obligation under any indebtedness.

“(E) Gross Basis And Net Basis Taxation

“(i) Gross Basis Tax.—The term ‘gross basis tax' means any tax imposed by this subtitle which is determined by reference to the gross amount of any item of income without any reduction for any deduction allowed by this subtitle.

“(ii) Net Basis Tax.—The term ‘net basis tax' means any tax imposed by this subtitle which is not a gross basis tax.

“(7) Coordination With Passive Loss Rules, Etc.—This subsection shall be applied before sections 465 and 469.

“(8) Treatment Of Corporate Partners.—Except to the extent provided by regulations, in applying this subsection to a corporation which owns (directly or indirectly) an interest in a partnership—

“(A) such corporation's distributive share of interest income paid or accrued to such partnership shall be treated as interest income paid or accrued to such corporation,

“(B) such corporation's distributive share of interest paid or accrued by such partnership shall be treated as interest paid or accrued by such corporation, and

“(C) such corporation's share of the liabilities of such partnership shall be treated as liabilities of such corporation.

“(9) Regulations.—The Secretary shall prescribe such regulations as may be appropriate to carry out the purposes of this subsection, including—

“(A) such regulations as may be appropriate to prevent the avoidance of the purposes of this subsection,

“(B) regulations providing such adjustments in the case of corporations which are members of an affiliated group as may be appropriate to carry out the purposes of this subsection,

“(C) regulations for the coordination of this subsection with section 884, and

“(D) regulations providing for the reallocation of shares of partnership indebtedness, or distributive shares of the partnership's interest income or interest expense.”

2015 - Subsec. (h)(3)(E)(iv)(I). Pub. L. 114-113, Div. Q, Sec. 152(a), amended subclause (I) by substituting “December 31, 2016” for “December 31, 2014”.

2014 - Subsec. (d)(6). Pub. L. 113-295, Div. A, Sec. 221(a)(25)(A)(i), amended subsec. (d) by striking par. (6). Before being struck, it read as follows:

“(6) Phase-In Of Disallowance.—In the case of any taxable year beginning in calendar years 1987 through 1990—

“(A) In General.—The amount of interest paid or accrued during any such taxable year which is disallowed under this subsection shall not exceed the sum of—

“(i) the amount which would be disallowed under this subsection if—

“(I) paragraph (1) were applied by substituting “the sum of the ceiling amount and the net investment income” for “the net investment income”, and

“(II) paragraphs (4)(E) and (5)(A)(ii) did not apply, and

“(ii) the applicable percentage of the excess of—

“(I) the amount which (without regard to this paragraph) is not allowable as a deduction under this subsection for the taxable year, over

“(II) the amount described in clause (i).

“The preceding sentence shall not apply to any interest treated as paid or accrued during the taxable year under paragraph (2).

“(B) Applicable Percentage.—For purposes of this paragraph, the applicable percentage shall be determined in accordance with the following table:

 

     In the case of taxable                    The applicable
      years beginning in:                      percentage is:

          1987....................................   35
          1988....................................   60
          1989....................................   80
          1990....................................   90

“(C) Ceiling Amount.—For purposes of this paragraph, the term “ceiling amount” means—

“(i) $10,000 in the case of a taxpayer not described in clause (ii) or (iii),

“(ii) $5,000 in the case of a married individual filing a separate return, and

“(iii) zero in the case of a trust.”

Subsec. (h)(3)(E)(iv)(I). Pub. L. 113-295, Div. A, Sec. 104(a), amended subclause (I) by substituting “December 31, 2014” for “December 31, 2013”.

Subsec. (h)(4)(F). Pub. L. 113-295, Div. A, Sec. 220(h), amended subpar. (F) by substituting “Department of Veterans Affairs and Rural Housing Service” for “Veterans Administration or the Rural Housing Administration”.

Subsec. (h)(5). Pub. L. 113-295, Div. A, Sec. 221(a)(25)(A)(ii), amended subsec. (h) by striking par. (5). Before being struck, it read as follows:

“(5) Phase-In Of Limitation.—In the case of any taxable year beginning in calendar years 1987 through 1990, the amount of interest with respect to which a deduction is disallowed under this subsection shall be equal to the applicable percentage (within the meaning of subsection (d)(6)(B)) of the amount which (but for this paragraph) would have been so disallowed.”

2013 - Subsec. (h)(3)(E)(iv)(I). Pub. L. 112-240, Sec. 204(a), amended subclause (I) by substituting “December 31, 2013” for “December 31, 2011”.

Subsec. (h)(4)(E)(i). Pub. L. 112-240, Sec. 204(b), amended clause (i) by substituting “Department of Veterans Affairs” for “Veterans Administration” and by substituting “Rural Housing Service” for “Rural Housing Administration”.

2010 - Subsec. (h)(3)(E)(iv). Pub. L. 111-312, Sec. 759(a), amended clause (iv) by substituting “December 31, 2011” for “December 31, 2010”.

Subsec. (f)(2)(A). Pub. L. 111-147, Sec. 502(a)(2)(B), amended subpar. (A) by inserting “or” at the end of clause (ii), by substituting a period for the “, or” at the end of clause (iii), and by striking clause (iv). Before being struck, clause (iv) read as follows:

“(iv) is described in subparagraph (B).”

Subsec. (f)(2)(B)-(C). Pub. L. 111-147, Sec. 502(a)(1), amended par. (2) by striking subpar. (B) and redesignating subpar. (C) as subpar. (B). Before being struck, subpar. (B) read as follows:

“(B) Certain Obligations Not Included.—An obligation is described in this subparagraph if—

“(i) there are arrangements reasonably designed to ensure that such obligation will be sold (or resold in connection with the original issue) only to a person who is not a United States person, and

“(ii) in the case of an obligation not in registered form--

“ (I) interest on such obligation is payable only outside the United States and its possessions, and

“(II) on the face of such obligation there is a statement that any United States person who holds such obligation will be subject to limitations under the United States income tax laws.”

Subsec. (f)(2)(B). Pub. L. 111-147, Sec. 502(a)(2)(C)(i), amended subpar. (B), as redesignated, by striking “, and subparagraph (B)” in the matter preceding clause (i).

Subsec. (f)(2)(B)(i). Pub. L. 111-147, Sec. 502(a)(2)(C)(ii), amended clause (i) of subpar. (B), as redesignated. Before amendment, it read as follows:

“(i) in the case of—(I) subparagraph (A), such obligation is of a type which the Secretary has determined by regulations to be used frequently in avoiding Federal taxes, or

“(II) subparagraph (B), such obligation is of a type specified by the Secretary in regulations, and”.

Subsec. (f)(3). Pub. L. 111-147, Sec. 502(c), amended par. (3) by inserting “, except that a dematerialized book entry system or other book entry system specified by the Secretary shall be treated as a book entry system described in such section” before the period at the end.

2009 - Subsec. (e)(5)(F)-(G). Pub. L. 111-5, Div. B, Sec. 1232(a), amended par. (5) by redesignating subpar. (F) as subpar. (G) and by adding a new subpar. (F).

Subsec. (i)(1). Pub. L. 111-5, Div. B, Sec. 1232(b), amended the last sentence of par. (1) by inserting “(i)” before “regulation” and by inserting “, or (ii) permit, on a temporary basis, a rate to be used with respect to any debt instrument which is higher than the applicable Federal rate if the Secretary determines that such rate is appropriate in light of distressed conditions in the debt capital markets” before the period at the end.

2007 - Subsec. (h)(3)(E)(iv)(I). Pub. L. 110-142, Sec. 3(a), amended subclause (I) by substituting “December 31, 2010” for “December 31, 2007”.

2006 - Subsec.(h)(3)(E). Pub. L. 109-432, Sec. 419(a), amended par. (3) by adding subpar. (E).

Subsec. (h)(4)(E)-(F). Pub. L. 109-432, Sec. 419(b), amended par. (4) by adding subpar. (E) and (F).

Subsec. (j)(8)-(9). Pub. L. 109-222, Sec. 501(a), redesignated par. (8) as par. (9) and added a new par. (8).

Subsec. (j)(9). Pub. L. 109-222, Sec. 501(b), amended par. (9), as redesignated, by striking “and” at the end of subpar. (B); by substituting “, and" for the period at the end of subpar. (C); and by adding subpar. (D).

2005 - Subsec. (a)(j)(6)(i). Pub. L. 109-135, Sec. 403(a)(15), amended clause (i) by striking “and” at the end of subclause (II), by redesignating subclause (III) as subclause (IV), and by adding new subclause (III).

2004 - Subsec. (e)(3)(B)-(C). Pub. L. 108-357, Sec. 841(a), amended par. (3) by redesignating subpar. (B) as subpar. (C) and added subpar. (B).

Subsec. (l)(2). Pub. L. 108-357, Sec. 845(a), amended par. (2) by inserting “or equity held by the issuer (or any related party) in any other person” after “or a related party”.

Subsec. (l)(3). Pub. L. 108-357, Sec. 845(d), amended par. (3) by substituting “or any other person” for “or a related party”.

Subsec. (l)(4)-(6). Pub. L. 108-357, Sec. 845(b), amended subsec. (l) by redesignating par. (4) and (5) as par. (5) and (6), respectively, and by adding par. (4).

Subsec. (l)(5)-(7). Pub. L. 108-357, Sec. 845(c), amended subsec. (l) by redesignating par. (5) and (6), as previously redesignated, as par. (6) and (7), respectively and by adding par. (5).

Subsec. (m)-(n). Pub. L. 108-357, Sec. 838(a), redesignated subsec. (m) as subsec. (n) and added subsec. (m).

2003 - Subsec. (d)(4)(B). Pub. L. 108-27, Sec. 302(b), amended subpar. (B) by adding the flush sentence at the end.

1999 - Subsec. (j)(3). Pub. L. 106-170, Sec. 544, amended par. (3) by striking “and” at the end of subpar. (A), by substituting “, and” for the period at the end, and by adding subpar. (C).

1998 - Subsec. (h)(2). Pub. L. 105-277, Sec. 4003(a)(1), amended subpar. (D) by striking “and” at the end; amended subpar. (E) by substituting “, and” for the period at the end; and added subpar. (F).

1997 - Subsec. (h)(2)(E). Pub. L. 105-34, Sec. 503(b)(2)(B), amended subpar. (E) by striking “or 6166 or under section 6166A (as in effect before its repeal by the Economic Recovery Tax Act of 1981)." at the end of the last sentence.

Subsec. (h)(4)(A)(i)(I). Pub. L. 105-34, Sec. 312(d)(1), substituted “section 121” for “section 1034”.

Subsec. (j)(2)(B)(iii). Pub. L. 105-34, Sec. 1604(g)(1), substituted “clause (ii)” for “clause (I)”.

Subsec. (k). Pub. L. 105-34, Sec. 503(b)(2)(A), redesignated subsec. (k) as section (l) and added a new subsec. (k).

Subsec. (l). Pub. L. 105-34, Sec. 1005(a), redesignated subsec. (l), as redesignated by Act. 503(b)(2)(A), as subsec. (m), and added a new subsec. (l).

1996 - Subsec. (j)(1)(B). Pub. L. 104-188, Sec. 1704(f)(2)(A) added before the period text in parenthesis.

Subsec. (j)(6)(E)(ii). Pub. L. 104-188, Sec. 1703(n)(4) substituted “which is” for “which is a”.

Subsec. (j)(7) and (8). Pub. L. 104-188, Sec. 1704(f)(2)(B) redesignated par. (7) as par. (8), and added new par. (7) after par. (6).

1993 - Subsec. (d)(4)(B). Pub. L. 103-66, Sec. 13206(d)(1), amended subpar. (B). Before amendment, it read as follows:

“(B) Investment income

“The term “investment income" means the sum of--

“(i) gross income (other than gain taken into account under clause (ii)) from property held for investment, and

“(ii) any net gain attributable to the disposition of property held for investment.”

Subsec. (j). Pub. L. 103-66, Sec. 13228(c)(2), amended the heading for subsec. (j). Before amendment it read as follows:

“(j) LIMITATION OF DEDUCTION FOR INTEREST ON CERTAIN INDEBTEDNESS. -- “.

Subsec. (j)(3). Pub. L. 103-66, Sec. 13228(a), amended par. (3). Before amendment it read as follows:

“(3) DISQUALIFIED INTEREST. -- For purposes of this subsection --

“(A) IN GENERAL. -- Except as provided in subparagraph (B), the term ‘disqualified interest’ means any interest paid or accrued by the taxpayer (directly or indirectly) to a related person if no tax is imposed by this subtitle with respect to such interest.

“(B) EXCEPTION FOR CERTAIN EXISTING INDEBTEDNESS. -- The term ‘disqualified interest’ does not include any interest paid or accrued under indebtedness with a fixed term --

“(i) which was issued on or before July 10, 1989, or

“(ii) which was issued after such date pursuant to a written binding contract in effect on such date and all times thereafter before such indebtedness was issued.”

Subsec. (j)(5)(B). Pub. L. 103-66, Sec. 13228(c)(1), amended subpar. (B) by striking “to a related person” after “by the taxpayer,”.

Subsec. (j)(6). Pub. L. 103-66, Sec. 13228(b), amended par. (6) by adding subpar. (D) and (E).

1990 - Subsec. (e)(5)(A). Pub. L. 101-508, Sec. 11701(b)(1), amended last sentence generally. Prior to amendment, last sentence read as follows: ‘For purposes of clause (ii), rules similar to the rules of subsection (i)(3)(B) shall apply in determining the time when the original issue discount is paid.’

Subsec. (i)(3). Pub. L. 101-508, Sec. 11701(b)(2)(B), inserted sentence at end.

Subsec. (i)(3)(B). Pub. L. 101-508, Sec. 11701(b)(2)(A), struck out ‘(or stock)’ after ‘obligation’ wherever appearing.

Subsec. (j)(2)(A)(ii). Pub. L. 101-508, Sec. 11701(c)(2), substituted ‘or on any other day’ for ‘and on such other days’.

Subsec. (j)(2)(C). Pub. L. 101-508, Sec. 11701(c)(1), substituted ‘reduced (but not below zero) by such’ for ‘less such’ in introductory provisions.

1989 - Subsec. (e)(5), (6). Pub. L. 101-239, Sec. 7202(a), added par. (5) and redesignated former par. (5) as (6).

Subsec. (i). Pub. L. 101-239, Sec. 7202(b), added subsec. (i). Former subsec. (i) redesignated (j).

Subsec. (j). Pub. L. 101-239, Sec. 7210(a), added subsec. (j). Former subsec. (j) redesignated (k).

Pub. L. 101-239, Sec. 7202(b), redesignated subsec. (i) as (j).

Subsec. (k). Pub. L. 101-239, Sec. 7210(a), redesignated subsec. (j) as (k).

1988 - Subsec. (d)(3)(A). Pub. L. 100-647, Sec. 1005(c)(1), substituted ‘properly allocable to’ for ‘incurred or continued to purchase or carry’.

Subsec. (d)(4)(B). Pub. L. 100-647, Sec. 1005(c)(2), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: ‘The term ‘investment income’ means the sum of -

‘(i) gross income (other than gain described in clause (ii)) from property held for investment, and

‘(ii) any net gain attributable to the disposition of property held for investment, but only to the extent such amounts are not derived from the conduct of a trade or business.’

Subsec. (d)(6)(A). Pub. L. 100-647, Sec. 1005(c)(3), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: ‘The amount of interest disallowed under this subsection for any such taxable year shall be equal to the sum of -

‘(i) the applicable percentage of the amount which (without regard to this paragraph) is not allowed as a deduction under this subsection for the taxable year to the extent such amount does not exceed the ceiling amount,

‘(ii) the amount which (without regard to this paragraph) is not allowed as a deduction under this subsection in excess of the ceiling amount, plus

‘(iii) the amount of any carryforward to such taxable year under paragraph (2) with respect to which a deduction was disallowed under this subsection for a preceding taxable year.

For purposes of this subparagraph, the amount under clause (i) or (ii) shall be computed without regard to the amount described in clause (iii).'

Subsec. (e)(2)(B). Pub. L. 100-647, Sec. 1006(u)(1), substituted ‘paragraph (7)’ for ‘paragraph (6)’.

Subsec. (h)(2)(A). Pub. L. 100-647, Sec. 1005(c)(4), substituted ‘properly allocable to’ for ‘incurred or continued in connection with the conduct of’.

Subsec. (h)(2)(E). Pub. L. 100-647, Sec. 1005(c)(12), inserted ‘or under section 6166A (as in effect before its repeal by the Economic Recovery Tax Act of 1981)’ before period at end.

Subsec. (h)(3)(C). Pub. L. 100-647, Sec. 1005(c)(5), effective as if enacted immediately before enactment of Pub. L. 100-203 (see 1987 Amendment note below), amended subpar. (C) generally. Prior to amendment, subpar. (C) read as follows: ‘The amount under subparagraph (B)(ii)(I) at any time after August 16, 1986, shall not be less than the outstanding aggregate principal amount (as of such time) of indebtedness which was incurred on or before August 16, 1986, and which was secured by the qualified residence on August 16, 1986.’

Subsec. (h)(4). Pub. L. 100-647, Sec. 1005(c)(6)(A), effective as if enacted immediately before enactment of Pub. L. 100-203 (redesignating par. (5) as (4), see 1987 Amendment note below), amended heading by substituting ‘Other definitions and special rules - For purposes of this subsection - ‘ for ‘Other definitions and special rules’.

Subsec. (h)(4)(A). Pub. L. 100-647, Sec. 1005(c)(6)(B)(i), (7), effective as if enacted immediately before enactment of Pub. L. 100-203 (redesignating par. (5) as (4), see 1987 Amendment note below), amended subpar. (A) by striking out ‘For purposes of this subsection - ‘ after ‘Qualified residence’ in introductory provisions, ‘used or’ after ‘Residence not’ in cl. (iii) heading, and ‘or use’ after ‘does not rent’ in cl. (iii) text.

Subsec. (h)(4)(B). Pub. L. 100-647, Sec. 1005(c)(6)(B)(ii), effective as if enacted immediately before enactment of Pub. L. 100-203 (redesignating par. (5) as (4), see 1987 Amendment note below), amended subpar. (B) by substituting ‘Any’ for ‘For purposes of this paragraph, any’.

Subsec. (h)(4)(C), (D). Pub. L. 100-647, Sec. 1005(c)(8), effective as if enacted immediately before enactment of Pub. L. 100-203 (redesignating par. (5) as (4), see 1987 Amendment note below), par. (4) added subpars. (C) and (D).

Subsec. (h)(5). Pub. L. 100-647, Sec. 2004(b)(1), redesignated par. (6) as (5).

Subsec. (h)(6). Pub. L. 100-647, Sec. 2004(b)(1), redesignated par. (6) as (5).

Pub. L. 100-647, Sec. 1005(c)(9), substituted ‘but for this paragraph’ for ‘but for this subsection’.

Subsec. (i)(2). Pub. L. 100-647, Sec. 1009(b)(6), made technical correction to directory language of Pub. L. 99-514, Sec. 902(e)(1), see 1986 Amendment note below.

1987 - Subsec. (d)(4)(E). Pub. L. 100-203, Sec. 10212(b), substituted ‘section 469(m)’ for ‘section 469(l)’.

Subsec. (h)(3). Pub. L. 100-203, Sec. 10102(a), amended par. (3) generally. Prior to amendment (see 1988 Amendment note above), par. (3) read as follows: ‘For purposes of this subsection -

‘(A) In general. - The term ‘qualified residence interest’ means interest which is paid or accrued during the taxable year on indebtedness which is secured by any property which (at the time such interest is paid or accrued) is a qualified residence of the taxpayer.

‘(B) Limitation on amount of interest. - The term ‘qualified residence interest’ shall not include any interest paid or accrued on indebtedness secured by any qualified residence which is allocable to that portion of the principal amount of such indebtedness which, when added to the outstanding aggregate principal amount of all other indebtedness previously incurred and secured by such qualified residence, exceeds the lesser of -

‘(i) the fair market value of such qualified residence, or

‘(ii) the sum of -

‘(I) the taxpayer's basis in such qualified residence (adjusted only by the cost of any improvements to such residence), plus

‘(II) the aggregate amount of qualified indebtedness of the taxpayer with respect to such qualified residence.

‘(C) Cost not less than balance of indebtedness incurred on or before August 16, 1986. -

‘(i) In general. - The amount under subparagraph (B)(ii)(I) at any time after August 16, 1986, shall not be less than the outstanding principal amount (as of such time) of indebtedness -

‘(I) which was incurred on or before August 16, 1986, and which was secured by the qualified residence on August 16, 1986, or

‘(II) which is secured by the qualified residence and was incurred after August 16, 1986, to refinance indebtedness described in subclause (I) (or refinanced indebtedness meeting the requirements of this subclause) to the extent (immediately after the refinancing) the principal amount of the indebtedness resulting from the refinancing does not exceed the principal amount of the refinanced indebtedness (immediately before the refinancing).

‘(ii) Limitation on period of refinancing. - Subclause (II) of clause (i) shall not apply to any indebtedness after -

‘(I) the expiration of the term of the indebtedness described in clause (i)(I), or

‘(II) if the principal of the indebtedness described in clause (i)(I) is not amortized over its term, the expiration of the term of the 1st refinancing of such indebtedness (or if earlier, the date which is 30 years after the date of such refinancing).

‘(D) Time for determination. - Except as provided in regulations, any determination under subparagraph (B) shall be made as of the time the indebtedness is incurred.’

Subsec. (h)(4), (5). Pub. L. 100-203, Sec. 10102(b), redesignated par. (5) as (4) and struck out former par. (4) which defined ‘qualified indebtedness’ for purposes of this subsection.

1986 - Subsec. (d). Pub. L. 99-514, Sec. 511(a), substituted ‘Limitation on investment interest’ for ‘Limitation on interest on investment indebtedness’ in heading, and amended text generally, revising and restating as pars. (1) to (6) provisions of former pars. (1) to (7).

Subsec. (e)(2)(C). Pub. L. 99-514, Sec. 1803(a)(4), added subpar. (C).

Subsec. (e)(3)(A). Pub. L. 99-514, Sec. 1810(e)(1)(A), inserted ‘The preceding sentence shall not apply to the extent that the original issue discount is effectively connected with the conduct by such foreign related person of a trade or business within the United States unless such original issue discount is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States.’

Subsec. (e)(5). Pub. L. 99-514, Sec. 1810(e)(1)(B), redesignated par. (4), relating to cross references, as (5).

Subsec. (f)(3). Pub. L. 99-514, Sec. 1301(j)(3), substituted ‘section 149(a)(3)’ for ‘section 103(j)(3)’.

Subsec. (h). Pub. L. 99-514, Sec. 511(b), added subsec. (h). Former subsec. (h) redesignated (i).

Subsec. (i)(2). Pub. L. 99-514, Sec. 902(e)(1), as amended by Pub. L. 100-647, Sec. 1009(b)(6), substituted ‘section 265(a)(2)’ for ‘section 265(2)’.

Pub. L. 99-514, Sec. 511(b), redesignated former subsec. (h) as (i).

1984 - Subsec. (d)(3)(D). Pub. L. 98-369, Sec. 56(b), designated existing provisions as cl. (i) and added cl. (ii).

Subsec. (e)(1). Pub. L. 98-369, Sec. 42(a)(3), substituted ‘debt instrument’ for ‘bond’ in two places and struck out ‘by an issuer (other than a natural person)’ before ‘, the portion of the original issue’.

Subsec. (e)(2). Pub. L. 98-369, Sec. 42(a)(3), substituted provisions relating to debt instruments for provisions relating to bonds.

Subsec. (e)(3). Pub. L. 98-369, Sec. 128(c), added par. (3) relating to special rule for original issue discount on obligation held by related foreign person. Former par. (3), relating to exceptions, redesignated (4).

Pub. L. 98-369, Sec. 42(a)(3), added par. (3) relating to exceptions.

Subsec. (e)(4). Pub. L. 98-369, Sec. 128(c), redesignated par. (3), relating to exceptions, as (4).

Pub. L. 98-369, Sec. 42(a)(3), added par. (4) relating to cross references.

Subsec. (f)(2)(C)(i). Pub. L. 98-369, Sec. 127(f), redesignated existing provision as subcl. (I), and in subcl. (I) as so redesignated, inserted reference to subpar. (A) and substituted ‘or’ for ‘and’, and added subcl. (II).

Subsecs. (g), (h). Pub. L. 98-369, Sec. 612(c), added subsec. (g) and redesignated former subsec. (g) as (h).

1982 - Subsec. (d)(4). Pub. L. 97-354 redesignated subpar. (D) as (B). Former subpars. (B) and (C), relating to partnerships and shareholders of electing small business corporations, respectively, were struck out.

Subsec. (e). Pub. L. 97-248, Sec. 231(b), added subsec. (e) relating to original issue discount. Former subsec. (e), setting forth cross references, redesignated (f).

Pub. L. 97-248, Sec. 231(b), redesignated former subsec. (e), setting forth cross references, as (f).

Subsec. (f). Pub. L. 97-248, Sec. 310(b)(2), added subsec. (f) relating to the requirement that obligations be in registered form to be tax-exempt. Former subsec. (f), setting forth cross references, redesignated (g).

Subsec. (g). Pub. L. 97-248, Sec. 310(b)(2), redesignated former subsec. (f), setting forth cross references, as (g).

1976 - Subsec. (b)(1). Pub. L. 94-455, Sec. 1901(b)(8)(C), substituted ‘organization described in section 170(b)(1)(A)(ii) and which is provided for a student of such organization’ for ‘institution (as defined in section 151(e)(4)) and which is provided for a student of such institution’.

Subsec. (d)(1). Pub. L. 94-455, Sec. 209(a)(1), among other changes, substituted in subpar. (A) ‘$10,000’ for ‘$25,000’ and ‘$5,000’ for ‘$12,500’, struck out subpar. (C) relating to the excess of net long-term capital gain over short-term capital loss and subpar. (D) relating to the excess of investment interest over amounts in subpar. (A), and in provisions following lettered paragraphs substituted ‘$10,000’ for ‘$25,000’ and struck out provisions relating to the determination of the amount referred to in subpar. (C).

Subsec. (d)(2). Pub. L. 94-455, Sec. 209(a)(1), among other changes, struck out provisions relating to the limitation on the amount of interest allowable by this par. and to reduction of disallowed investment interest for capital gain deduction purposes.

Subsec. (d)(3)(A). Pub. L. 94-455, Sec. 209(a)(2), inserted provision relating to determination of the amount of net investment income where taxpayer has investment interest for taxable year to which this subsection applies.

Subsec. (d)(3)(B)(iii). Pub. L. 94-455, Sec. 205(c)(3), 1901(b)(3)(K), substituted ‘1250, and 1254’ for ‘and 1250’, and ‘ordinary income’ for ‘gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231’. Section 205(c)(3) of Pub. L. 94-455, which directed the amendment of subsec. (d)(3)(A)(iii), was executed by amending subsec. (d)(3)(B)(iii) to reflect the probable intent of Congress.

Subsec. (d)(3)(E). Pub. L. 94-455, Sec. 209(a)(3), substituted ‘limitation in paragraph (1)’ for ‘limitations in paragraphs (1) and (2)(A)’.

Subsec. (d)(4)(B), (C). Pub. L. 94-455, Sec. 1906(b)(13)(A), struck out ‘or his delegate’ after ‘Secretary’.

Subsec. (d)(5). Pub. L. 94-455, Sec. 209(a)(4), (5), redesignated par. (6) as (5) and inserted provision relating to the application of this paragraph after Dec. 31, 1975, on an allocation basis rather than a specific item basis. Former par. (5), relating to capital gains treatment of investment interest, was struck out.

Pub. L. 94-455, Sec. 1901(b)(3)(K), directed the amendment of par. (5) by substituting ‘ordinary income’ for ‘gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231’, such par. (5) having been struck out by Pub. L. 94-455, Sec. 209(a)(4).

Subsec. (d)(6). Pub. L. 94-455, Sec. 209(a)(4), 1906(b)(13)(A), redesignated par. (7) as (6) and struck out in provision following subpar. (B) ‘or his delegate’ after ‘Secretary’. Former par. (6) redesignated (5).

Subsec. (d)(7). Pub. L. 94-455, Sec. 209(a)(6), added par. (7). Former par. (7) redesignated (6).

1971 - Subsec. (d)(1)(B). Pub. L. 92-178, Sec. 304(b)(2), inserted ‘the amount (if any) by which the deductions allowable under this section (determined without regard to this subsection) and sections 162, 164(a)(1) or (2), or 212 attributable to property of the taxpayer subject to a net lease exceeds the rental income produced by such property for the property year, plus’ after ‘plus’.

Subsec. (d)(3)(C). Pub. L. 92-178, Sec. 304(d), inserted reference to section 162.

Subsec. (d)(4)(A)(i). Pub. L. 92-178, Sec. 304(a)(2)(A), inserted ‘of the lessor’ after ‘deductions’ and ‘(other than rents and reimbursed amounts with respect to such property)’ after ‘section 162’.

Subsec. (d)(7). Pub. L. 92-178, Sec. 304(a)(2)(B), added par. (7).

1969 - Subsecs. (d), (e). Pub. L. 91-172 added subsec. (d). Former subsec. (d) redesignated (e).

1964 - Subsec. (b)(1). Pub. L. 88-272 included the purchase of educational services, and defined ‘educational services’.

1963 - Subsecs. (c), (d). Pub. L. 88-9, Sec. 1(a), (c), added subsec. (c), redesignated former subsec. (c) as (d) and added par. (5).

EFFECTIVE DATE OF 2020 AMENDMENTS

Amendment by Pub. L. 116-260, Div. EE, Sec. 133(a), effective for amounts paid or accrued after December 31, 2020.

Amendments by Pub. L. 116-136, Sec. 2306(a), effective for taxable years beginning after December 31, 2018.

EFFECTIVE DATE OF 2019 AMENDMENT

Amendment by Pub. L. 116-94, Div. Q, Sec. 102(a), effective for amounts paid or accrued after December 31, 2017.

EFFECTIVE DATE OF 2018 AMENDMENTS

Amendments by Pub. L. No. 115-141, Div. U, Sec. 401(a)(48), (b)(12), effective on the date of the enactment of this Act [Enacted: Mar. 23, 2018].

Amendment by Pub. L. No. 115-141, Div. U, Sec. 401(c)(1)(C), effective for debt instruments issued on or after July 2, 1982.

Amendment by Pub. L. No. 115-141, Div. U, Sec. 401(c)(3)(B), effective for obligations issued on or after March 2, 1984.

Sec. 401(e) of Pub. L. 115-141, Div. U, provided the following savings provision:

“(e) General Savings Provision With Respect To Deadwood Provisions.—If—

“(1) any provision amended or repealed by the amendments made by subsection (b) or (d) applied to—

“(A) any transaction occurring before the date of the enactment of this Act,

“(B) any property acquired before such date of enactment, or

“(C) any item of income, loss, deduction, or credit taken into account before such date of enactment, and

“(2) the treatment of such transaction, property, or item under such provision would (without regard to the amendments or repeals made by such subsection) affect the liability for tax for periods ending after such date of enactment,

“nothing in the amendments or repeals made by this section shall be construed to affect the treatment of such transaction, property, or item for purposes of determining liability for tax for periods ending after such date of enactment.”

Amendment by Pub. L. 115-123, Sec. 40202(a), effective for amounts paid or accrued after December 31, 2016.

EFFECTIVE DATE OF 2017 AMENDMENT

Amendment by Pub. L. 115-97, Sec. 11043(a), effective for taxable years beginning after December 31, 2017.

Amendment by Pub. L. 115-97, Sec. 13301(a), effective for taxable years beginning after December 31, 2017.

EFFECTIVE DATE OF 2015 AMENDMENT

Amendment by Pub. L. 114-113, Div. Q, Sec. 152(a), effective for amounts paid or accrued after December 31, 2014.

EFFECTIVE DATE OF 2014 AMENDMENTS

Amendment by Pub. L. 113-295, Div. A, Sec. 104(a), effective for amounts paid or accrued after December 31, 2013.

Amendment by Pub. L. 113-295, Div. A, Sec. 220(h), effective on the date of the enactment of this Act [Enacted: Dec. 19, 2014].

Amendments by Pub. L. 113-295, Div. A, Sec. 221(a)(25), effective on the date of the enactment of this Act [Enacted: Dec. 19, 2014.

Section 221(b)(2) of Pub. L. 113-295, Div. A, provided the following Savings Provision:

“(2) SAVINGS PROVISION.—If—

“(A) any provision amended or repealed by the amendments made by this section applied to—

“(i) any transaction occurring before the date of the enactment of this Act [Enacted: Dec. 19, 2014],

“(ii) any property acquired before such date of enactment, or

“(iii) any item of income, loss, deduction, or credit taken into account before such date of enactment, and

“(B) the treatment of such transaction, property, or item under such provision would (without regard to the amendments or repeals made by this section) affect the liability for tax for periods ending after date of enactment, nothing in the amendments or repeals made by this section shall be construed to affect the treatment of such transaction, property, or item for purposes of determining liability for tax for periods ending after such date of enactment.”

EFFECTIVE DATE OF 2013 AMENDMENT

Amendments by Sec. 204 of Pub. L. 112-240 effective for amounts paid or accrued after December 31, 2011.

EFFECTIVE DATE OF 2010 AMENDMENTS

Amendment by Sec. 759 of Pub. L. 111-312 effective for amounts paid or accrued after December 31, 2010.

Amendments by Sec. 502 of Pub. L. 111-5 effective for obligations issued after the date which is 2 years after the date of the enactment of this Act [Enacted: Mar. 18, 2010].

EFFECTIVE DATE OF 2009 AMENDMENTS

Amendment by Sec. 1232(a) of Pub. L. 111-5, Div. B, effective for obligations issued after August 31, 2008, in taxable years ending after such date.

Amendment by Sec. 1232(b) of Pub. L. 111-5, Div. B, effective for obligations issued after December 31, 2009, in taxable years ending after such date.

EFFECTIVE DATE OF 2007 AMENDMENT

Amendment by Sec. 3(a) of Pub. L. 110-142 effective for amounts paid or accrued after December 31, 2007.

EFFECTIVE DATE OF 2006 AMENDMENTS

Amendments by Sec. 419 of Pub. L. 109-432 effective for amounts paid or accrued after December 31, 2006.

Amendments by Sec. 501 of Pub. L. 109-222 effective for taxable years beginning on or after the date of the enactment of this Act [Enacted: May 17, 2006].

EFFECTIVE DATE OF 2005 AMENDMENTS

Amendments by Sec. 403(a)(15) of Pub. L. 109-135 effective as if included in the provisions of the American Jobs Creation Act of 2004 [Pub. L. 108-357, Sec. 102] to which they relate.

EFFECTIVE DATE OF 2004 AMENDMENTS

Amendments by Sec. 838(a) of Pub. L. 108-357 effective for transactions in taxable years beginning after the date of the enactment of this Act [Enacted: Oct. 22, 2004].

Amendments by Sec. 841(a) of Pub. L. 108-357 effective for payments accrued on or after the date of the enactment of this Act [Enacted: Oct. 22, 2004].

Amendments by Sec. 845 of Pub. L. 108-357 effective for debt instruments issued after October 3, 2004.

EFFECTIVE DATE OF 2003 AMENDMENT

Amendment by Sec. 302 of Pub. L. 108-27 effective for taxable years beginning after December 31, 2002.

Section 302(f)(2) of Pub. L. 108-27, as amended by Pub. L. 108-311, Sec. 402(a)(6), provided that:

“(2) PASS-THRU ENTITIES.--In the case of a pass-thru entity described in subparagraph (A), (B), (C), (D), (E), or (F) of section 1(h)(10) of the Internal Revenue Act of 1986, as amended by this Act, the amendments made by this section shall apply to taxable years ending after December 31, 2002; except that dividends received by such an entity on or before such date shall not be treated as qualified dividend income (as defined in section 1(h)(11)(B) of the Internal Revenue Code of 1986, as added by this Act).”

Sec. 303 (Sunset of Title) of Pub. L. 108-27, as amended by Sec. 102 of Pub. L. 109-222 and Sec. 102 of Pub. L. 111-312, and struck by Pub. L. 112-240, Sec. 102(a) (effective for taxable years beginning after Dec. 31, 2012) provided that: “All provisions of, and amendments made by, this title shall not apply to taxable years beginning after December 31, 2012, and the Internal Revenue Code of 1986 shall be applied and administered to such years as if such provisions and amendments had never been enacted.”

EFFECTIVE DATE OF 1999 AMENDMENTS

Amendments by Sec. 544 of Pub. L. 106-170 effective for taxable years beginning after December 31, 2000.

EFFECTIVE DATE OF 1998 AMENDMENTS

Amendments by Sec. 4003(a)(1) of Pub. L. 105-277 effective as if included in the provisions of the Taxpayer Relief Act of 1997 to which they relate.

EFFECTIVE DATE OF 1997 AMENDMENTS

Amendments by Sec. 312(d)(1) of Pub. L. 105-34 effective for sales and exchanges after May 6, 1997. Special rules provided in Sec. 312(d)[e] are set out in section 121.

Amendments by Sec. 503 of Pub. L. 105-34 effective for estates of decedents dying after December 31, 1997. Sec. 503(d)(2) provided the following election:

“(2) Election.--In the case of the estate of any decedent dying before January 1, 1998, with respect to which there is an election under section 6166 of the Internal Revenue Code of 1986, the executor of the estate may elect to have the amendments made by this section apply with respect to installments due after the effective date of the election; except that the 2-percent portion of such installments shall be equal to the amount which would be the 4-percent portion of such installments without regard to such election. Such an election shall be made before January 1, 1999 in the manner prescribed by the Secretary of the Treasury and, once made, is irrevocable.”

Amendments by Sec. 1005(a) of Pub. L. 105-34 effective for disqualified debt instruments issued after June 8, 1997. Sec. 1005(b)(2) provided the following transition rule:

“(2) Transition rule.--The amendment made by this section shall not apply to any instrument issued after June 8, 1997, if such instrument is--

(A) issued pursuant to a written agreement which was binding on such date and at all times thereafter,

(B) described in a ruling request submitted to the Internal Revenue Service on or before such date, or

(C) described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission required solely by reason of the issuance.”

EFFECTIVE DATE OF 1996 AMENDMENTS

Section 1704(f)(2)(C) of Pub. L. 104-188 provided that amendments ‘apply as if included in the amendments made by section 7210(a) of the Revenue Reconciliation Act of 1989’.

Section 1703(o) of Pub. L. 104-188 provided that: ‘any amendment made in this section shall take effect as if included in the provision of the Revenue Reconciliation Act of 1993 to which such amendment relates.’

EFFECTIVE DATE OF 1993 AMENDMENTS

Amendment by Pub. L. 103-66, Sec. 13206(d)(1), effective for taxable years beginning after December 31, 1992.

Amendments by Pub. L. 103-66, Sec. 13228, effective for interest paid or accrued in taxable years beginning after December 31, 1993.

EFFECTIVE DATE OF 1990 AMENDMENT

Amendment by Pub. L. 101-508 effective, except as otherwise provided, as if included in the provision of the Revenue Reconciliation Act of 1989, Pub. L. 101-239, title VII, to which such amendment relates, see section 11701(n) of Pub. L. 101-508, set out as a note under section 42 of this title.

EFFECTIVE DATE OF 1989 AMENDMENT

Section 7202(c) of Pub. L. 101-239 provided that:

‘(1) In general. - Except as provided in paragraph (2), the amendments made by this section (amending this section) shall apply to instruments issued after July 10, 1989.

‘(2) Exceptions. -

‘(A) The amendments made by this section shall not apply to any instrument if -

‘(i) such instrument is issued in connection with an acquisition -

‘(I) which is made on or before July 10, 1989,

‘(II) for which there was a written binding contract in effect on July 10, 1989, and at all times thereafter before such acquisition, or

‘(III) for which a tender offer was filed with the Securities and Exchange Commission on or before July 10, 1989,

‘(ii) the term of such instrument is not greater than -

‘(I) the term specified in the written documents described in clause (iii), or

‘(II) if no term is determined under subclause (I), 10 years, and

‘(iii) the use of such instrument in connection with such acquisition (and the maximum amount of proceeds from such instrument) was determined on or before July 10, 1989, and such determination is evidenced by written documents -

‘(I) which were transmitted on or before July 10, 1989, between the issuer and any governmental regulatory bodies or prospective parties to the issuance or acquisition, and

‘(II) which are customarily used for the type of acquisition or financing involved.

‘(B) The amendments made by this section shall not apply to any instrument issued pursuant to the terms of a debt instrument issued on or before July 10, 1989, or described in subparagraph (A) or (D).

‘(C) The amendments made by this section shall not apply to any instrument issued to refinance an original issue discount debt instrument to which the amendments made by this section do not apply if -

‘(i) the maturity date of the refinancing instrument is not later than the maturity date of the refinanced instrument,

‘(ii) the issue price of the refinancing instrument does not exceed the adjusted issue price of the refinanced instrument,

‘(iii) the stated redemption price at maturity of the refinancing instrument is not greater than the stated redemption price at maturity of the refinanced instrument, and

‘(iv) the interest payments required under the refinancing instrument before maturity are not less than (and are paid not later than) the interest payments required under the refinanced instrument.

‘(D) The amendments made by this section shall not apply to instruments issued after July 10, 1989, pursuant to a reorganization plan in a title 11 or similar case (as defined in section 368(a)(3) of the Internal Revenue Code of 1986) if the amount of proceeds of such instruments, and the maturities of such instruments, do not exceed the amount or maturities specified in the last reorganization plan filed in such case on or before July 10, 1989.'

Section 7210(b) of Pub. L. 101-239 provided that:

‘(1) In general. - The amendment made by this section (amending this section) shall apply to interest paid or accrued in taxable years beginning after July 10, 1989.

‘(2) Special rule for demand loans, etc. - In the case of any demand loan (or other loan without a fixed term) which was outstanding on July 10, 1989, interest on such loan to the extent attributable to periods before September 1, 1989, shall not be treated as disqualified interest for purposes of section 163(j) of the Internal Revenue Code of 1986 (as added by subsection (a)).'

EFFECTIVE DATE OF 1988 AMENDMENT

Section 1005(c)(13) of Pub. L. 100-647 provided that: ‘For purposes of applying the amendments made by this subsection (amending this section and sections 467, 1255, and 7872 of this title) and the amendments made by section 10102 of the Revenue Act of 1987 (section 10102 of Pub. L. 100-203, amending this section), the provisions of this subsection shall be treated as having been enacted immediately before the enactment of the Revenue Act of 1987.'

Amendment by sections 1006(u)(1) and 1009(b)(6) of Pub. L. 100-647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which such amendment relates, see section 1019(a) of Pub. L. 100-647, set out as a note under section 1 of this title.

Amendment by section 2004(b)(1) of Pub. L. 100-647 effective, except as otherwise provided, as if included in the provisions of the Revenue Act of 1987, Pub. L. 100-203, title X, to which such amendment relates, see section 2004(u) of Pub. L. 100-647, set out as a note under section 56 of this title.

EFFECTIVE DATE OF 1987 AMENDMENT

Section 10102(c) of Pub. L. 100-203 provided that: ‘The amendments made by this section (amending this section) shall apply to taxable years beginning after December 31, 1987.’

Amendment by section 10212(b) of Pub. L. 100-203 effective as if included in the amendments made by section 501 of the Tax Reform Act of 1986, Pub. L. 99-514, see section 10212(c) ofPub. L. 100-203, set out as a note under section 58 of this title.

EFFECTIVE DATE OF 1986 AMENDMENT

Section 511(e) of Pub. L. 99-514 provided that: ‘The amendments made by this section (amending this section and sections 467, 703, 1255, 1363, and 7872 of this title) shall apply to taxable years beginning after December 31, 1986.’

Amendment by section 902(e)(1) of Pub. L. 99-514 applicable to taxable years ending after Dec. 31, 1986, with certain exceptions and qualifications, see section 902(f) of Pub. L. 99-514, set out as a note under section 265 of this title.

Amendment by section 1301(j)(3) of Pub. L. 99-514 applicable to bonds issued after Aug. 15, 1986, except as otherwise provided, see sections 1311 to 1318 of Pub. L. 99-514, set out as an Effective Date; Transitional Rules note under section 141 of this title.

Amendment by sections 1803(a)(4) and 1810(e)(1) of Pub. L. 99-514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98-369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99-514, set out as a note under section 48 of this title.

EFFECTIVE DATE OF 1984 AMENDMENT

Amendment by section 42(a)(3) of Pub. L. 98-369 applicable to taxable years ending after July 18, 1984, see section 44 of Pub. L. 98-369, set out as an Effective Date note under section 1271 of this title.

Section 56(d) of Pub. L. 98-369 provided that: ‘The amendments made by this section (amending this section and sections 263 and 265 of this title) shall apply to short sales after the date of enactment of this Act (July 18, 1984) in taxable years ending after such date.’

Amendment by section 127(f) of Pub. L. 98-369 applicable to interest received after July 18, 1984, with respect to obligations issued after such date, in taxable years ending after such date, see section 127(g)(1) of Pub. L. 98-369, set out as a note under section 871 of this title.

Amendment by section 128(c) of Pub. L. 98-369 applicable to obligations issued after June 9, 1984, see section 128(d)(2) ofPub. L. 98-369, set out as a note under section 871 of this title.

Amendment by section 612(c) of Pub. L. 98-369 applicable to interest paid or accrued after Dec. 31, 1984, on indebtedness incurred after Dec. 31, 1984, see section 612(g) of Pub. L. 98-369, set out as an Effective Date note under section 25 of this title.

EFFECTIVE DATE OF 1982 AMENDMENTS

Amendment by Pub. L. 97-354 applicable to taxable years beginning after Dec. 31, 1982, see section 6(a) of Pub. L. 97-354, set out as an Effective Date note under section 1361 of this title.

Amendment by Pub. L. 97-248 applicable to obligations issued after Dec. 31, 1982, with exceptions for certain warrants, see section 310(d) of Pub. L. 97-248, set out as a note under section 103 of this title.

EFFECTIVE DATE OF 1976 AMENDMENT

Amendment by section 205(c)(3) of Pub. L. 94-455 applicable with respect to taxable years ending after Dec. 31, 1975, see section 205(e) of Pub. L. 94-455, set out as an Effective Date note under section 1254 of this title.

Section 209(b) of Pub. L. 94-455, as amended byPub. L. 99-514, Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:

‘(1) In general. - Except as provided in paragraph (2), the amendments made by subsection (a) (amending this section) shall apply to taxable years beginning after December 31, 1975.

‘(2) Indebtedness incurred before September 11, 1975. - In the case of indebtedness attributable to a specific item of property which -

‘(A) is for a specified term, and

‘(B) was incurred before September 11, 1975, or is incurred after September 10, 1975, pursuant to a written contract or commitment which on September 11, 1975, and at all times thereafter before the incurring of such indebtedness, is binding on the taxpayer, the amendments made by this section shall not apply, but section 163(d) of the Internal Revenue Code of 1986 (formerly I.R.C. 1954) (as in effect before the enactment of this Act (Oct. 4, 1976)) shall apply. For purposes of the preceding sentence, so much of the net investment income (as defined in section 163(d)(3)(A) of such Code) for any taxable year as is not taken into account under section 163(d) of such Code, as amended by this Act, by reason of the last sentence of section 163(d)(3)(A) of such Code, shall be taken into account for purposes of applying such section as in effect before the date of enactment of this Act (Oct. 4, 1976) with respect to interest on indebtedness referred to in the preceding sentence.'

Amendment by section 1901(b)(8)(C), (3)(K) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as a note under section 2 of this title.

EFFECTIVE DATE OF 1971 AMENDMENT

Section 304(e) of Pub. L. 92-178 provided that: ‘The amendments made by this section to section 57 of the Internal Revenue Code of 1954 shall apply to taxable years beginning after December 31, 1969. The amendments made by this section to section 163 of such Code shall apply to taxable years beginning after December 31, 1971.'

EFFECTIVE DATE OF 1969 AMENDMENT

Section 221(b) of Pub. L. 91-172 provided that: ‘The amendments made by this section (amending this section) shall apply to taxable years beginning after December 31, 1971.’

EFFECTIVE DATE OF 1964 AMENDMENT

Section 224(d) of Pub. L. 88-272 provided that: ‘The amendments made by subsections (a) (enacting section 483 of this title) and (b) (amending the analysis preceding section 481 of this title) shall apply to payments made after December 31, 1963, on account of sales or exchanges of property occurring after June 30, 1963, other than any sale or exchange made pursuant to a binding written contract (including an irrevocable written option) entered into before July 1, 1963. The amendments made by subsection (c) (amending this section) shall apply to payments made during taxable years beginning after December 31, 1963.’

EFFECTIVE DATE OF 1963 AMENDMENT

Subsec. (c) effective as of Jan. 1, 1962, and applicable with respect to taxable years ending on or after such date, see section 2 of Pub. L. 88-9, set out as an Effective Date note under section 1055 of this title.

APPLICATION OF SUBSECTION (h) TO TAXABLE YEARS BEGINNING IN 1987

Section 1005(c)(14) of Pub. L. 100-647 provided that:

‘(A) For purposes of applying section 163(h) of the 1986 Code to any taxable year beginning during 1987, if, incident to a divorce or legal separation -

‘(i) an individual acquires the interest of a spouse or former spouse in a qualified residence in a transfer to which section 1041 of the 1986 Code applies, and

‘(ii) such individual incurs indebtedness which is secured by such qualified residence, the amount determined under paragraph (3)(B)(ii)(I) of section 163(h) of the 1986 Code (as in effect before the amendments made by the Revenue Act of 1987 (Pub. L. 100-203, title X)) with respect to such qualified residence shall be increased by the amount determined under subparagraph (B).

‘(B) The amount determined under this subparagraph shall be equal to the excess (if any) of -

‘(i) the lesser of the amount of the indebtedness described in subparagraph (A)(ii), or the fair market value of the spouse's or former spouse's interest in the qualified residence as of the time of the transfer, over

‘(ii) the basis of the spouse or former spouse in such interest in such residence (adjusted only by the cost of any improvements to such residence).’

STUDY OF EARNINGS STRIPPING PROVISIONS

Section 424 of Pub. L. 108-357 provided that:

“(a) IN GENERAL- The Secretary of the Treasury or the Secretary's delegate shall conduct a study of the effectiveness of the provisions of the Internal Revenue Code of 1986 applicable to earnings stripping, including a study of--

“(1) the effectiveness of section 163(j) of such Code in preventing the shifting of income outside the United States,

“(2) whether any deficiencies of such provisions place United States-based businesses at a competitive disadvantage relative to foreign-based businesses,

“(3) the impact of earnings stripping activities on the United States tax base,

“(4) whether laws of foreign countries facilitate stripping of earnings out of the United States, and

“(5) whether changes to the earning stripping rules would affect jobs in the United States.

“(b) REPORT- Not later than June 30, 2005, the Secretary shall submit to the Congress a report of the study conducted under this section, including specific recommendations as to how to improve the provisions of such Code applicable to earnings stripping.”

PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989

For provisions directing that if any amendments made by subtitle A or subtitle C of title XI (Sec. 1101-1147 and 1171-1177) or title XVIII (Sec. 1800-1899A) of Pub. L. 99-514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99-514, as amended, set out as a note under section 401 of this title.

TRANSITIONAL RULE FOR TREATMENT OF CERTAIN INCOME FROM S CORPORATIONS

Section 1066 of Pub. L. 98-369, as amended by Pub. L. 99-514, Sec. 2, Oct. 22, 1986, 100 Stat. 2095, provided that:

‘(a) In General. - If -

‘(1) a corporation had an election in effect under subchapter S of the Internal Revenue Code of 1986 (formerly I.R.C. 1954) for the taxable years of such corporation beginning in 1982, 1983, and 1984, and

‘(2) a shareholder of such corporation makes an election to have this section apply, then any qualified income which such shareholder takes into account by reason of holding stock in such corporation for any taxable year of such corporation beginning in 1983 or 1984 shall be treated for purposes of section 163(d) of the Internal Revenue Code of 1986 as such income would have been treated but for the enactment of the Subchapter S Revision Act of 1982 (Pub. L. 97-354, see Tables for classification).

‘(b) Qualified Income. - For purposes of subsection (a), the term ‘qualified income’ means any income other than income which is attributable to personal services performed by the shareholder for the corporation.

‘(c) Election. - The election under subsection (a)(2) shall be made at such time and in such manner as the Secretary of the Treasury or his delegate may by regulations prescribe.’

TRANSITIONAL RULE

For provision that, for purposes of amendments by section 231(b) of Pub. L. 97-248, any evidence of indebtedness issued pursuant to a written commitment which was binding on July 1, 1982, and at all times thereafter be treated as issued on July 1, 1982, see section 231(e) of Pub. L. 97-248, set out as a note under section 1232A of this title.

Sec. 163. Interest

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