N.Y. Comp. Codes R. & Regs. Tit. 20 §§ 3-4.7

Current through Register Vol. 46, No. 45, November 2, 2024

Section 3-4.7 - Attribution of interest deductions

(Tax Law, section 208(6) and (6-a))

(a) Unless the safe harbor reduction election has been made as required by section 3-4.8, gross investment income and gross other exempt income must be reduced by any interest deductions allowed in computing ENI that are directly or indirectly attributable to investment capital, gross investment income, or gross other exempt income as follows:

(1) Determine the total amount of interest deductions subject to direct and indirect attribution. The total amount of interest deductions subject to direct and indirect attribution is:

(i) the amount of interest deductions included in Federal taxable income after the IRC section 163(j) limitation; less

(ii) those Federal interest deductions required to be added back to Federal taxable income in computing ENI; plus

(iii) interest deductions attributable to interest income not includable in Federal taxable income but required to be included in ENI, to the extent such expenses are not deducted for Federal tax purposes; plus

(iv) in the case of a corporation organized outside the United States that is not treated as a domestic corporation for Federal purposes, interest deductions attributable to treaty income not included in Federal taxable income that would be treated as effectively connected if not for the treaty, to the extent such expenses are not deducted for Federal tax purposes; plus

(v) in the case of a corporation organized outside the United States that is not treated as a domestic corporation for Federal purposes, interest deductions attributable to income from any state or local bond that would be treated as effectively connected income if it was not excluded from gross income by IRC section 103(a), to the extent such expenses are not deducted for Federal tax purposes.

(2) Determine the total amount of interest deductions subject to direct and indirect attribution before the IRC section 163(j) limitation. If the interest deductions are not limited by IRC section 163(j) in the current year, this paragraph does not apply; proceed to paragraph (3) of this subdivision. Otherwise, determine the total amount of interest deductions subject to direct and indirect attribution before the IRC section 163(j) limitation by performing the same computation as required by paragraph (1) of this subdivision, except that in subparagraph (i) of paragraph (1) of this subdivision use the amount of interest deductions included in Federal taxable income prior to the IRC section 163(j) limitation.

(3) Determine the amount of interest deductions that can be directly traced.

(i) The corporation or combined group must determine the portion of total interest deductions subject to direct and indirect attribution that are directly traceable, whether in whole or in part, to gross investment income or investment capital, gross exempt CFC income, gross exempt cross-article dividends, gross exempt other unitary corporation dividends, and business capital or business income.

(ii) If the corporation or combined group determines that a particular interest deduction is directly attributable to more than one type of income or capital, the corporation or combined group may apportion that interest expense between or among the types of capital and income, using any method that reasonably determines the appropriate amount.

(iii) Examples of interest deductions that are traceable in whole or in part to gross exempt other unitary corporation dividends, gross exempt CFC income, gross exempt cross-article dividends, gross investment income or investment capital, or business income or business capital include:

(a) interest incurred to purchase or carry stock of corporations that generates such income or capital;

(b) interest incurred to purchase or carry investment capital (investment capital);

(c) interest incurred to purchase or build a manufacturing plant (business capital);

(d) interest incurred to purchase or carry the stock of a combined affiliate (business capital);

(e) interest incurred by a partnership to purchase or carry investment capital that is included in a corporate partner's distributive share of income or loss from that partnership (investment capital);

(f) an interest deduction the reimbursement of which, received in the form of a management fee paid by an entity not included in the combined group of the taxpayer, is included in ENI (business capital); or

(g) interest incurred to purchase or carry reverse repurchase agreements and securities borrowing agreements (business capital). The amount of such interest deductions that is subject to direct tracing is the interest expense associated with the sum of the average fair market value (FMV) of the repurchase agreements plus the average FMV of the securities lending agreements. However, this sum is limited to the sum of the average FMV of the reverse repurchase agreements plus the average FMV of the securities borrowing agreements. Note: If the sum of the average FMV of reverse repurchase agreements and securities borrowing agreements exceed the sum of the average FMV of repurchase agreements and securities lending agreements, then all such interest deductions are directly traceable to business capital. Otherwise, use the methodology in the example in clause (h) of this section to compute the amount of such interest deductions directly traceable to business capital.

(h) Example.

Average FMV of repurchase agreements and security lending agreements	$105
Average FMV of reverse repurchase agreements and security borrowing agreements	$100
Interest deductions for repurchase agreements and security lending agreements for the year	$2
Average cost of funds ($2/$105)	1.904%
Amount of $2 interest deduction directly traceable to reverse repurchase agreements and security borrowing agreements (business capital) ($100 x 1.904%)	$1.90

(iv) Special rules for corporations utilizing a carryforward of interest deductions previously limited by IRC section 163(j). For all tax years in which a carryforward of interest deductions limited by IRC section 163(j) is subsequently deductible for Federal tax purposes, the carryforward amount deducted in subsequent taxable years cannot be included in directly traced amounts. Instead, these amounts must be indirectly traced as required in paragraph (4) of this section.

(v) Special rules for corporations impacted by the IRC section 163(j) limitation in the current year. Corporations limited by IRC section 163(j) in the current year must directly trace the total amount of interest deductions subject to direct and indirect attribution prior to the IRC section 163(j) limitation. If such amount is greater than the corporation's or combined group's total amount of interest deductions subject to direct and indirect attribution after the IRC section 163(j) limitation as determined in paragraph (1) of this subdivision, then the amount of interest deductions directly traced to a specific category of income or capital is computed by multiplying the total interest deductions subject to direct and indirect attribution after the IRC section 163(j) limitation as determined in paragraph (1) of this subdivision by a fraction, the numerator of which is the portion of interest deductions subject to direct and indirect attribution prior to the IRC section 163(j) limitation that can be directly traced to a specific category of income or capital and the denominator of which is the interest deductions subject to direct and indirect attribution prior to the IRC section 163(j) that can be directly traced to all categories of income and capital. If the amount of interest deductions prior to the IRC section 163(j) limitation that can be directly traced is less than or equal to the total amount of interest deductions subject to direct and indirect attribution after such limitation, such directly traced amounts prior to the IRC section 163(j) limitation shall be the amount of interest deductions directly traced for purposes of this paragraph.

(4) Determine the amount of interest deductions to be indirectly traced. The amount of interest deductions subject to indirect attribution is the total amount of interest deductions subject to direct and indirect attribution after the IRC section 163(j) limitation minus the total amount of interest deductions directly traced pursuant to paragraph three of this subdivision.

(5) Perform indirect tracing.

(i) To determine the amount of interest deductions indirectly attributable to gross exempt cross-article dividends, the corporation or combined group must multiply the total amount of interest deductions subject to indirect attribution by a fraction, the numerator of which is the average value of the cross-article stock and the denominator of which is the total average value of all the assets. If, during the taxable year, the investment in cross-article stock generates both taxable net capital gains (capital gains in excess of capital losses) and gross exempt cross-article dividends, the numerator of the fraction above must be multiplied by a fraction, the numerator of which is gross exempt cross-article dividends and the denominator of which is total gross income from cross-article stock.

(ii) To determine the amount of interest deductions indirectly attributable to gross exempt other unitary corporation dividends, the corporation or combined group must multiply the total amount of interest deductions subject to indirect attribution by a fraction, the numerator of which is the average value of the other unitary corporation stock and the denominator of which is the total average value of all of the assets. If, during the taxable year, the investment in other unitary corporation stock generates both taxable income from business capital (e.g., net capital gains from business capital or 5% of global intangible low-taxed income) and gross exempt other unitary corporation dividends, the numerator of the fraction above must be multiplied by a fraction, the numerator of which is gross exempt other unitary corporation dividends and the denominator of which is total gross income from other unitary corporation stock.

(iii) To determine the amount of interest deductions indirectly attributable to gross exempt CFC income, the corporation or combined group must multiply the total amount of interest deductions subject to indirect attribution by a fraction, the numerator of which is the average value of the CFC stock and the denominator of which is the total average value of all assets. If, during the taxable year, the investment in CFC stock generates both taxable income from business capital (e.g., net capital gains from business capital or 5% of global intangible low-taxed income) and gross exempt CFC income, the numerator of the fraction above must be multiplied by a fraction, the numerator of which is gross exempt CFC income and the denominator of which is total gross income from CFC stock.

(iv) To determine the amount of interest deductions indirectly attributable to investment capital or gross investment income, the corporation or combined group must multiply the total amount of interest deductions subject to indirect attribution by a fraction, the numerator of which is the average value of the investment capital and the denominator of which is the total average value of all assets.

(v) The amount of interest deductions directly or indirectly attributable to gross investment income and investment capital, gross exempt CFC income, gross exempt cross-article dividends, and gross exempt other unitary corporation dividends is the sum of the amounts computed in subparagraphs (i) through (iv) of this paragraph.

(vi) For purposes of indirect attribution, it is possible that an asset may generate more than one type of income that requires the use of the indirect attribution formulas in this section. In the event that investment capital assets generate other exempt income, such assets are included only in the indirect attribution formula for investment capital or gross investment income. If an asset generates both exempt CFC income and exempt cross-article dividends, such asset shall be included in one indirect attribution formula, which shall be determined based on the majority of the income that such asset generates.

(b) In the case of a combined report, all computations must be done as if the combined group were a single corporation, after the elimination of all intercompany transactions and activity.

(c) A corporate partner using the aggregate method to determine its tax with respect to its interest in a partnership must include its distributive share of each partnership item of receipts, income, gain, loss and deduction and the corporation's proportionate part of each asset and liability from that partnership, after the elimination of all inter-entity transactions and activity, when computing income amounts and the attribution of interest deductions.

(d) For purposes of this section, only those assets and liabilities required to be included in the valuation of business and investment capital for purposes of computing the capital base tax are included.

(e) If the numerator of a fraction measured by income is zero and the denominator of a fraction measured by income is an amount greater than zero, the respective income fraction is zero.

(f) Examples. For purposes of these examples, assume the corporation does not have to make any adjustments to its Federal interest deductions as provided for in paragraph (1) of subdivision (a) of this section. As a result, the total amount of interest deductions subject to direct and indirect attribution is the amount of interest deductions included in Federal taxable income.

(1) Examples.

Example 1: Corporation A has $120,000 in interest expense for 2018 prior to applying the IRC section 163(j) limitation, of which $100,000 is directly traced as follows:

$ 20,000 directly attributable to gross exempt unitary corporation dividends

$ 30,000 directly attributable to gross exempt CFC income

$ 10,000 directly attributable to gross investment income or investment capital

$ 40,000 directly attributable to business income or business capital

Due to the IRC section 163(j) limitation, $50,000 of interest expense is deducted at the Federal level and is, therefore, the total amount of interest deductions subject to direct and indirect attribution. The remaining $70,000 of interest expense is carried forward to subsequent years.

Since the $100,000 of total interest deductions prior to the IRC section 163(j) limitation that is directly traceable is greater than the $50,000 of total interest deductions subject to direct and indirect attribution, the amount of interest deductions directly attributed to each specific category of income or capital is determined as follows:

$50,000 x $20,000/$100,000 = $10,000 directly attributable to gross exempt unitary corporation dividends

$50,000 x $30,000/$100,000 = $15,000 directly attributable to gross exempt CFC income

$50,000 x $10,000/$100,000 = $ 5,000 directly attributable to gross investment income or investment capital

$50,000 x $40,000/$100,000 = $20,000 directly attributable to business income or business capital

There are no interest deductions subject to indirect attribution for 2018.

The $70,000 of interest expense that is limited by IRC section 163(j) in 2018 and carried forward to subsequent years is subject to indirect attribution in the subsequent tax year(s) in which the interest expense becomes deductible for Federal tax purposes.

Example 2: Corporation B has $120,000 in interest expense for 2018 prior to applying the IRC section 163(j) limitation, of which $40,000 is directly traced as follows:

$ 8,000 directly attributable to gross exempt unitary corporation dividends

$ 17,000 directly attributable to gross exempt CFC income

$ 5,000 directly attributable to gross investment income or investment capital

$ 10,000 directly attributable to business income or business capital

Due to the IRC section 163(j) limitation, $50,000 of interest expense is deducted at the Federal level and is therefore the total amount of interest deductions subject to direct and indirect attribution. The remaining $70,000 of interest expense is carried forward to subsequent years. Since the $40,000 of total interest deductions prior to the IRC section 163(j) limitation that are directly traceable are less than the $50,000 of total interest deductions subject to direct and indirect attribution, the amount of interest deductions directly attributed to each specific category of income or capital is determined as follows:

$ 8,000 directly attributable to gross exempt unitary corporation dividends

$ 17,000 directly attributable to gross exempt CFC income

$ 5,000 directly attributable to gross investment income or investment capital

$ 10,000 directly attributable to business income or business capital

To determine the amount of interest deductions subject to indirect attribution, Corporation B must reduce the $50,000 of total interest deductions subject to direct and indirect attribution by the $40,000 of interest deductions directly traced above. The resulting $10,000 of interest deductions must be indirectly attributed. The $70,000 of interest expense that is limited by IRC section 163(j) in 2018 and carried forward to subsequent years must be indirectly attributed in the subsequent tax year(s) in which the interest expense becomes deductible for Federal tax purposes unless the 40% safe harbor election in section 3-4.8 of this Subpart is made and the taxpayer does not own exempt cross-article stock.

N.Y. Comp. Codes R. & Regs. Tit. 20 §§ 3-4.7

Adopted New York State Register December 27, 2023/Volume XLV, Issue 52, eff. 12/27/2023