Disqualified Corporate Interest Expense Disallowed Under Section 163(j) and Related Information

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Instructions for Form 8926

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Instructions for Form 8926

Department of the Treasury
Internal Revenue Service

(December 2008)
Disqualified Corporate Interest Expense Disallowed Under Section 163(j)
and Related Information
Section references are to the Internal
Revenue Code unless otherwise noted.

of the corporation plus any excess
limitation carryforward.

General Instructions

The ratio of debt to equity is 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. In determining the
amount of the corporation’s assets,
noncash assets are taken into account
at their adjusted bases.

Debt to Equity

Purpose of Form
Corporations are allowed to claim
deductions for interest paid to related
persons not subject to tax on the
interest received, subject to the
limitations imposed by section 163(j), if
applicable. Corporations subject to this
rule may carry forward the disallowed
interest to a succeeding taxable year.

Who Must File
A corporation must file Form 8926 if it
has disqualified interest and has excess
interest for the year.
Corporations that do not have
excess interest expense (see Excess
Interest Expense below) or disqualified
interest (see Disqualified Interest
below) are not required to file this form.

Definitions
Except as otherwise indicated, the
following terms are defined as shown
below.

Disqualified Interest
Disqualified interest is:
1. Interest paid or accrued to a
related person if no tax is imposed with
respect to the interest,
2. Interest paid or accrued to an
unrelated person where a related
person not subject to tax has
guaranteed the debt and where no
gross basis tax has been imposed by
the United States on the interest, and
3. Interest paid or accrued by a
taxable Real Estate Investment Trust
(REIT) subsidiary to that REIT (as
defined in section 856(l)).

Excess Interest Expense
Excess interest expense means the
excess (if any) of the corporation’s net
interest expense over the sum of 50
percent of the adjusted taxable income

Also, for this purpose, the amount
taken into account with respect to any
indebtedness with original issue
discount (OID) shall be 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)(7)).
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).

Related Person
A related person is any person who is
related under sections 267(b) or
707(b)(1) to the taxpayer. 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. Any interest paid or
accrued to a partnership which 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 interest in the partnership are
held by persons with respect to whom
no tax is imposed by the United States
on the interest paid.
Cat. No. 51518B

Exception. This exception does not
apply to any interest allocable to any
partner in such partnership who is a
related person to the taxpayer.

Affiliated Groups
All members of the same affiliated
group (under section 1504(a)) shall be
treated as one corporation.
Corporations filing on behalf of an
affiliated group that have been following
the 1991 proposed regulations that
were never finalized should continue to
follow the proposed regulations when
filing the form. Corporations filing on
behalf of an affiliated group who have
not been following the proposed
regulations should use a method which
is reasonably consistent with section
163(j) when filing the form.
Disallowed interest. Any amount
disallowed for any taxable year shall be
treated as disqualified interest paid or
accrued in the succeeding taxable year.
See Line 5e on page 3 for further
information.

Treaties
If any treaty between the U.S. and any
foreign country reduces the rate of tax
imposed on a partner’s share of any
interest paid or accrued to a
partnership, that partner’s interests in
such partnership shall be treated as
held in part by a tax-exempt person and
in part by a taxable person.
In that situation, such an interest
shall be treated as tax-exempt 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 (ii) the rate of tax
imposed without regard to the treaty.
If any treaty between the United
States and a foreign country reduces
the rate of tax imposed on the interest
paid or accrued by the corporation, the
interest is treated as disqualified
interest to the extent of the amount of
the interest multiplied by the ratio that
the rate of tax imposed without regard
to the treaty reduced by the rate of tax
imposed by the treaty bears to the rate

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Instructions for Form 8926

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of tax imposed without regard to the
treaty.

Pass-Thru Entities
In the case of any interest paid or
accrued to a partnership, the
determination of whether any tax
imposed by the U.S. on such interest
shall be made at the partner level.
Other pass-thru entities other than a
partnership, tiered partnerships, and
other entities share the same rules.

Net Interest Expense
A corporation’s net interest expense is
defined as the excess (if any) of (a) the
interest paid or accrued by the
corporation during the taxable year over
(b) the amount of interest includible in
the gross income of the corporation for
that tax year.

Disqualified Guarantee
A guarantee is 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 any
guarantee by a related person which is
a tax-exempt organization or a foreign
person.
A disqualified guarantee, however,
does not include a guarantee 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 if the corporation owns a
controlling interest in the guarantor.
Controlling Interest. For this
purpose, 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 rules applicable to interest in
entities other than corporations, see
section 267(c)(1) and (5).
Gross basis and net basis taxation.
Gross basis tax means any tax which is
determined by reference to the gross
amount of any item of income without
any reduction for any deduction. A net
basis tax means any tax which is not a
gross basis tax.

Corporate Partners
With respect to corporations that own
(directly or indirectly) an interest in a
partnership,
• A 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,
• A corporation’s distributive share of
interest paid or accrued by such
partnership shall be treated as interest
paid or accrued by such corporation,
and
• A corporation’s share of the liabilities
of the partnership shall be treated as
the liabilities of the corporation.

Other Limitations on the
Deductibility of Interest
Other Code sections limiting the
deductibility of interest, such as
sections 267(a)(3) or 163(e)(3), apply
before section 163(j).

Line 1g
Is the corporation including as part of
its assets on line 1b stock described in
Regulations section 1.7874-1(d) that it
holds in a corporation to whom it paid
disqualified interest?
If yes, check “Yes” and enter the
adjusted basis of such stock.
Otherwise, check “No.”

Line 1h
Is the corporation including as part of
its assets on line 1b stock it holds in
foreign subsidiaries?
If yes, check “Yes” and enter the
adjusted basis of such stock.
Otherwise, check “No.”

Line 1i

Specific Instructions
Affiliated Group
Checkbox
A single form must be filed for all
members of an affiliated group as
defined in section 163(j)(6)(C),
including those that are not members of
the same consolidated group.
Corporations that rely on the debt to
equity safe harbor test. Corporations
that rely on the debt to equity safe
harbor test must complete lines 1a to
1j, as applicable. However,
corporations that do not rely on the safe
harbor test do not need to complete
these lines. For more information, see
Proposed Regulations 1.163(j)-1(b).

Line 1d
Enter the total amount of the
corporation’s indebtedness as of the
last day of the tax year. Enter all
indebtedness owed to related parties
and all indebtedness owed to third
parties. See Debt to Equity on page 1
for more information.

Line 1f. Debt to Equity
Ratio
Divide line 1d by line 1e.
Divide the total amount of the
corporation’s indebtedness as of the
last day of the tax year by the sum of
money and adjusted basis of all the
corporation’s other assets reduced by
the total indebtedness.

-2-

Is the corporation including as part of
its assets on line 1b tangible assets it
directly holds which are located in a
foreign country?
Enter all assets that are directly
owned by the corporation, including
assets held through a partnership or
trust.
Note. Partnerships and simple trusts
are treated as aggregates.
If yes, check “Yes” and enter the
adjusted basis of such tangible assets.
Otherwise, check “No.”

Line 1j
Is the corporation including as part of
its assets on line 1b any intangible
assets?
If yes, check “Yes” and enter the
adjusted basis of such intangible
assets. Otherwise, check “No.”

Line 2a
Enter the interest paid or accrued by
the corporation for the tax year.

Line 2b
Enter the amount of interest includible
in the gross income of the corporation
for the tax year.

Line 2c. Net Interest
Expense
Subtract line 2b from line 2a. If zero or
less, enter -0-.

Line 3a
Enter the corporation’s taxable income
(loss) before the application of section
163(j).

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Instructions for Form 8926

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Line 3b
Enter the corporation’s net interest
expense from line 2c. Enter this amount
on line 3b as a positive number. This
amount must be added back to the
corporation’s taxable income or loss to
determine its adjusted taxable income
under section 163(j)(6).

Line 3c
Enter the corporation’s net operating
loss, if any, under section 172. Enter
this amount on line 3c as a positive
number. This amount must be added
back to the corporation’s taxable
income or loss to determine its adjusted
taxable income under section 163(j)(6).

Line 3d
Enter the corporation’s domestic
production activities deduction from line
23 of Form 8903, Domestic Production
Activities Deduction. Enter this amount
on line 3d as a positive number. This
amount must be added back to the
corporation’s taxable income or loss to
determine its adjusted taxable income
under section 163(j)(6).

Line 3f
Enter any additional adjustments the
corporation has made to its taxable
income (loss) in arriving at its adjusted
taxable income under section 163(j)(6).
This would include any adjustments the
corporation is making as a result of
Proposed Regulations section
1.163(j)-2(f) to compute its adjusted
taxable income under section 163(j)(6).
Attach to your return a separate
sheet showing:
• A list of each adjustment item and
the amount for each adjustment item;
and
• Enter the total of all adjustments at
the bottom.
Enter the total of all adjustments on
line 3f.

Line 4b

the corporation’s first preceding tax
year and, to the extent not previously
taken into account in a prior tax year,
the second and third preceding tax
years.

Line 5e
Enter the amount disallowed as
disqualified interest paid or accrued in
the preceding taxable year which is
treated as paid or accrued in the
current tax year.

Line 5f. Total
Disqualified Interest for
the Tax Year
If the taxpayer is a domestic
corporation, subtract the disallowed
interest shown on line 5f from the
amount of interest expense the
corporation would have otherwise
entered on Form 1120, line 18. Attach
Form 8926 to Form 1120.
If the taxpayer is a foreign
corporation, include the disallowed
interest from Form 8926, line 5f, on
Schedule I (Form 1120-F), line 24b.
Attach Form 8926 to Schedule I (Form
1120-F).

Line 8a
Enter unused excess limitation
carryforward from the prior 2 tax years.

Line 8b. Excess
Limitation for the
Current Tax Year
Subtract line 2c from line 4a. If zero or
less, enter -0-. This is the excess
limitation carryforward created in the
current tax year.

Line 8c. Excess
limitation carryforward
to the next tax year
If the corporation has an excess
limitation for any taxable year, the

Enter the amount of any unused excess
limitation carried forward (if any) from

-3-

amount of such excess limitation shall
be an excess limitation carryforward to
the first succeeding tax year and to the
second and third succeeding tax years
to the extent not previously taken into
account in a prior tax year.
Add lines 8a and 8b. This is your
excess limitation carryforward to your
next tax year. Generally, this should be
the amount you will enter on line 4b of
Form 8926 in the following tax year.
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