Tennessee: Guidance Issued on Computing IRC section 163(j) Limitation

The Tennessee Department of Revenue recently issued guidance on computing the section 163(j) limitation for Tennessee corporate excise tax purposes. Recall, Tennessee conforms to the 163(j) limitations for the 2018 and 2019 tax years. For tax years beginning on or after January 1, 2020, Tennessee decouples from the federal limits. The notice observes that a federal consolidated group has a single 163(j) business interest expense limitation. For Tennessee excise tax purposes, each taxpayer generally is considered a separate and single business entity and is required to file its excise tax return on a separate entity basis. Therefore, for tax years beginning after December 31, 2017, but before January 1, 2020, Tennessee taxpayers that are members of a federal consolidated group should allocate the federal consolidated group’s allowed business interest expense deduction among the group members who had business interest expense during the tax year. The allocation will be made on a pro rata basis according to the amount of interest expense that each member paid to entities outside the federal consolidated group. The Department has also issued a worksheet to assist in the computation.  Interestingly, the notice provides that the Department is still reviewing the manner in which interest carryforwards can be used in subsequent tax years. Please contact John Harper at 615-744-2170 with questions on Notice #19-18.