8926 Instructions for Form 8926

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Instructions for Form 8926

Department of the Treasury
Internal Revenue Service

(Rev. December 2018)

(Use with the December 2017 revision of Form 8926)
Disqualified Corporate Interest Expense Disallowed Under Section 163(j)
and Related Information

DRAFT AS OF
September 11, 2018
Section references are to the Internal Revenue
Code unless otherwise noted.

Future Developments

For the latest information about
developments related to Form 8926 and
its instructions, such as legislation
enacted after they were published, go to
IRS.gov/Form8926.

What’s New

Disqualified corporate interest expense. Public Law 115-97, repealed
the disqualified corporate interest
expense rules for tax years beginning
after 2017. Form 8926 and its
instructions will be obsolete for tax
years beginning after December 31,
2017. For disqualified corporate interest
expense disallowed under prior law for
tax years beginning before January 1,
2018, and Business Interest Expense
for tax years beginning January 1, 2018
and after, see Form 8990, Limitation on
Business Interest Expense Under
Section 163(j) and its instructions. See
new section 163(j) for more information.

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 which the
corporation has actually 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.

Aug 21, 2018

Who Must File

A corporation (other than an S
corporation) must complete and 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. A corporation must complete and
file Form 8926 even if it meets the
debt-to-equity safe harbor of section
163(j)(2)(A)(ii).

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
Cat. No. 51518B

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.

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.

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.

DRAFT AS OF
September 11, 2018
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.

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.

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.

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).

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.

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.

-2-

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
2017, 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 2017 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
350,000
equity . . . . . . . . . . . . .
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
2017, 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 2017 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

previous year which has been carried
forward to the current tax year.

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).

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

DRAFT AS OF
September 11, 2018
Calculation of Corporation B's debt-to-equity
ratio:
Corporation B's total
indebtedness . . . . . . . . .
$600,020
Divided by: Corporation B's
399,930
equity . . . . . . . . . . . . .
Corporation B's debt-to-equity
ratio (Form 8926,
1.50031
line 1f) . . . . . . . . . . . .

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 2a

Interest paid or accrued by the
corporation for the tax year includes any
disqualified interest disallowed under
section 163(j) in a previous year which
has been carried forward to the current
tax year.

Line 3b

Include only the allowable net interest
expense on line 3b to determine
adjusted taxable income. Do not include
the following interest on line 3b, unless
such amounts were deducted in
determining taxable income on line 3a.
1. Any interest that the corporation
paid or accrued but was not allowed to
claim as an interest expense deduction
under another code section.
2. Any disqualified interest
disallowed under section 163(j) in a

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

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

Lines 5a through 5c.

The amount of interest entered on
line 5a, 5b, or 5c is the disqualified
interest that was actually paid, deemed
paid, or accrued in the current tax year.
The amounts entered on line 5a, 5b, or
5c, however, should not include any
disqualified interest that was paid or
accrued in a prior tax year and carried
forward to the current tax year.

Line 7. Interest Deduction
Disallowed Under Section
163(j) 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 the debt-to-equity ratio
on line 1f is 1.5 or less, enter the smaller
of the excess interest expense from
line 4d or the disqualified interest
disallowed under section 163(j) from
prior years from line 5e. If the
debt-to-equity ratio on line 1f is greater
than 1.5, enter the smaller of the excess
interest expense from line 4d or the total
disqualified interest from line 5f. Any
interest expense disallowed under
section 163(j) should not be included as
a deduction in the current tax year.

-3-

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
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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