What's New

The IRS has created a page on IRS.gov for information about Form 8926 and its instructions, at www.irs.gov/form8926. Information about any future developments affecting Form 8926 (such as legislation enacted after we release it) will be posted on that page.

General Instructions

Purpose of Form

Corporations use Form 8926 to figure the amount of any corporate interest expense deduction disallowed by section 163(j). A corporation's interest expense deduction may be disallowed if it paid or accrued disqualified interest during the tax year. However, if at least one of the following statements is true, disqualified interest paid or accrued in the current tax year will not be disallowed by section 163(j).

  • The corporation's debt to equity ratio at the end of the tax year does not exceed 1.5 to 1.

  • The corporation does not have any excess interest expense for the tax year.

Corporations also use Form 8926 to figure the amount of any interest expense deduction disallowed by section 163(j) for a previous tax year that is allowed for the current tax year. If the corporation's debt to equity ratio does not exceed 1.5 to 1, disqualified interest previously disallowed by section 163(j) may be allowed to the extent it exceeds the corporation's excess interest expense for the tax year.

Who Must File

A corporation (other than an S corporation) must file Form 8926 if it paid or accrued disqualified interest during the current tax year or had a carryforward of disqualified interest from a previous tax year.

Disqualified Interest

Disqualified interest is:

  • Interest paid or accrued (directly or indirectly) to a related person not subject to U.S. income tax on the interest,

  • Interest paid or accrued on indebtedness held by an unrelated person if there is a disqualified guarantee of the indebtedness and the interest is not subject to a U.S. gross basis income tax (a tax figured on the gross amount of an item of income without reduction for any allowed deduction), and

  • Interest paid or accrued (directly or indirectly) to a taxable real estate investment trust (as defined in section 856(l)) by a subsidiary of the trust.

Also, any disqualified interest disallowed as a deduction by section 163(j) in a tax year is carried forward and treated as disqualified interest paid or accrued in the next tax year.

Related Person

A related person is a person who is related to the corporation under sections 267(b) or 707(b)(1). For this purpose, the attribution rules of section 267(c) apply. In determining whether persons are related, the substance of ownership, rather than its form, controls.

You determine relatedness as of the date on which an item of interest expense accrues. Consequently, changes in the relationship between the payor corporation and the payee after the accrual date are irrelevant.

Partnerships.   A partnership is not a related person if less than 10% of the profits and capital interest in the partnership are held by partners not subject to U.S. income tax on the interest. However, the partners may be related persons.

  If a treaty between the United States and a foreign country reduces the rate of income tax imposed on a partner's share of any interest paid or accrued to a partnership, that partner's interests in the partnership are treated as held in part by a person subject to and in part by a person not subject to U.S. income tax on the interest.

  In this situation, figure the interest treated as held by a partner not subject to U.S. income tax by multiplying the interest by:
  • The rate of tax imposed without regard to the treaty, reduced by the rate of tax imposed by the treaty, divided by

  • The rate of tax imposed without regard to the treaty.

Pass-Through Entities

In the case of any interest paid or accrued to a partnership, the determination of whether any tax is subject to U.S. income tax is made at the partner level. A similar rule applies in the case of other pass-through entities and in the case of tiered partnerships and other entities.

Treaties

If a treaty between the United States and a foreign country reduces the rate of income tax imposed on the interest paid or accrued to a person, the interest is treated as paid or accrued in part to a person subject to and in part to a person not subject to U.S. income tax on the interest.

In this situation, figure the interest treated as paid or accrued to a person not subject to U.S. income tax on the interest by multiplying the interest by:

  • The rate of tax imposed without regard to the treaty, reduced by the rate of tax imposed by the treaty, divided by

  • The rate of tax imposed without regard to the treaty.

Disqualified Guarantee

A 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.

A disqualified guarantee is generally a guarantee by a related person that is a tax-exempt organization or a foreign person, unless the corporation owns a controlling interest in the tax-exempt organization or foreign person. However, an additional exception may be provided by regulations. For details, see section 163(j)(6)(D)(ii)(I).

For this purpose, a controlling interest is direct or indirect ownership of at least 80% of the total voting power and value of all classes of stock of a corporation, or 80% of the profit and capital interests in any other entity. For this purpose, the rules of paragraphs (1) and (5) of section 267(c) apply to both corporations and entities other than corporations.

Affiliated Groups

All members of an affiliated group (described in section 1504(a)) are treated as one corporation.

Ratio of Debt to Equity

A corporation's ratio of debt to equity is the ratio of the total indebtedness that the corporation bears to the sum of its money and the adjusted basis of all other assets reduced (but not below zero) by the total indebtedness. For this purpose, use the adjusted basis that would be used to determine gain. Also, for indebtedness with original issue discount (OID), use its issue price plus the portion of the OID previously accrued as determined under the rules of section 1272 (determined without regard to section 1272(a)(7) or (b)(4)).

Indebtedness.   Debt is determined in accordance with generally applicable tax principles. Thus, in general, a contingent liability for financial accounting purposes that has not accrued for tax purposes will not be treated as a liability for purposes of section 163(j).

Net Interest Expense

A corporation's net interest expense is the excess (if any) of:

  • The interest paid or accrued by the corporation during the tax year, over

  • The interest includible in the gross income of the corporation for the tax year.

Excess Interest Expense

A corporation's excess interest expense is the excess (if any) of:

  • The corporation's net interest expense, over

  • The sum of 50% of the adjusted taxable income of the corporation plus any excess limitation carryforward.

A corporation's excess limitation is the excess (if any) of:

  • 50% of the adjusted taxable income of the corporation, over

  • The corporation's net interest expense.

Any excess limitation in a tax year is treated as an excess limitation carryforward to the first following tax year and, if unused in that tax year, similarly carried forward to the second and third following tax years. However, the carryforward that can be used in each of the following tax years cannot exceed the excess interest expense for that tax year (figured without the use of any excess limitation carryforward).

Corporate Partners

If a corporation owns (directly or indirectly) an interest in a partnership, the following rules apply.

  • The corporation's distributive share of interest income paid or accrued to the partnership is treated as interest income paid or accrued to the corporation.

  • The corporation's distributive share of interest paid or accrued by the partnership is treated as interest paid or accrued by the corporation.

  • The corporation's share of the liabilities of the partnership is treated as liabilities of the corporation.

Passive Activity and At-Risk Rules

Section 163(j) is applied before the passive activity and at-risk rules.

Other Interest Limitations

Other sections limiting the deductibility of interest, such as sections 267(a)(3) and 163(e)(3), apply before section 163(j).


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