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

Instructions for Form 8926

Department of the Treasury
Internal Revenue Service

(Rev. December 2011)

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

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.

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.

Who Must File

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.

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.

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

Dec 16, 2011

Cat. No. 51518B

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).

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.

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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. For more information, see Ratio
of Debt to Equity, earlier.

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.
Enter the results as a decimal
(rounded to five decimal places).
Example 1. Corporation A is a
calendar year corporation. At the end of
2011, Corporation A’s money totaled
$300,500. The adjusted basis of the
corporation’s other assets totaled
$574,500. Corporation A’s total
indebtedness at the end of 2011 is
$525,000. The debt to equity ratio for
Corporation A is 1.50000.
Example 1:
Money . . . . . . . . . . . . . .
Plus: Adjusted basis of all
other assets . . . . . . . . . .
Total . . . . . . . . . . . . . . .
Minus: Total indebtedness
Corporation A’s equity . . .

.

$300,500

.
.

574,500
$875,000
525,000
$350,000

.

Calculation of Corporation A’s debt to equity
ratio:
Corporation A’s total
indebtedness . . . . . . . . . .
$525,000
Divided by: Corporation A’s
equity . . . . . . . . . . . . . . .
350,000
Corporation A’s debt to
equity ratio (Form 8926, line
1f) . . . . . . . . . . . . . . . . . .
1.50000

Note. Since the debt to equity ratio
does not exceed 1.5 to 1, disqualified
interest paid or accrued in the current
tax year will not be disallowed by
section 163(j).
Example 2. Corporation B is a
calendar year corporation. At the end of
2011, Corporation B’s money totaled
$400,000. The adjusted basis of the
corporation’s other assets totaled
$599,950. Corporation B’s total
indebtedness at the end of 2011 is
$600,020. The debt to equity ratio for
Corporation B is 1.50031.

Example 2:
Money . . . . . . . . . . . . . .
Plus: Adjusted basis of all
other assets . . . . . . . . . .
Total . . . . . . . . . . . . . . .
Minus: Total indebtedness
Corporation B’s equity . . .

.

$400,000

.
.

599,950
$999,950
600,020
$399,930

.

Calculation of Corporation B’s debt to equity
ratio:
Corporation B’s total
indebtedness . . . . . . . . . .
$600,020
Divided by: Corporation B’s
equity . . . . . . . . . . . . . . .
399,930
Corporation B’s debt to
equity ratio (Form 8926, line
1f) . . . . . . . . . . . . . . . . . .
1.50031

Note. Since the debt to equity ratio
exceeds 1.5 to 1, disqualified interest
paid or accrued in the current tax year
will be disallowed by section 163(j) to
the extent of the corporation’s excess
interest expense for the tax year.

Line 1i
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.

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).
Attach to your return a separate
sheet showing:
• A list of each adjustment item and
the amount for each adjustment item,
and
• 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 7. Amount of
Interest Deduction
Disallowed Under
Section 163(j) for the
Current Tax Year and
Carried Forward to the
Next Tax Year
The amount entered on line 7 is the
amount of the corporation’s interest
deduction that is disallowed under
section 163(j) and carried forward to the
next tax year. If line 1f is greater than
1.5, subtract the smaller of line 4d or
line 5d from the interest the corporation
would have otherwise deducted on its
tax return. A corporation filing Form
1120 will reduce the amount reported
on page 1, line 18. A corporation filing
Form 1120-F will reduce the amount
reported on Schedule I (Form 1120-F),
line 24b. A corporation filing another tax
return will reduce the amount reported
on the appropriate interest deduction
line.
The corporation may be allowed by
section 163(j) to deduct the disallowed
amount in a subsequent year. If not, it
can be carried forward indefinitely.

Line 8c. Excess
Limitation Carryforward
to the Next Tax Year
If the corporation has an excess
limitation for any taxable year, the
amount of such excess limitation shall
be an excess limitation carryforward to
the first succeeding tax year and to the

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

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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 will be the
amount you will enter on line 4b of
Form 8926 in the following tax year.
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