USA Law and Practice Contributed by: Devon M Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
In contrast, corporate taxpayers may only offset capi - tal gains with capital losses and may carry unused capital losses back three years and forward five years. 2.5 Deduction of Interest In 2017, the USA passed legislation that limits the deductibility of business interest expense. Under these rules, a taxpayer’s interest expense for any year is limited to the sum of: • business interest income; plus • 30% of adjusted taxable income (which is generally equal to EBITDA under the One Big Beautiful Bill Act); plus • floor plan financing. Any interest disallowed can be carried forward indefi - nitely and deducted in subsequent years. While cer - tain taxpayers are exempt from this limitation (eg, cer - tain small taxpayers and real property businesses), it applies regardless of whether related-party debt is involved, regardless of whether the debt is incurred by a sole proprietor, a corporation or a pass-through entity and regardless of whether the taxpayer is thinly capitalised. Other rules also exist that have the potential to limit or deny interest deductions (eg, interest on certain applicable high-yield debt instruments). In addition to the foregoing rules, the USA has also introduced two “anti-hybrid” rules which, if applicable, generally deny US tax deductions in certain situations involving entities and payments of interest, royalties or dividends, if such entities or payments are treated differently under US and foreign tax laws and if such different treatment results in double taxation. Further - more, rules provided in tax regulations can rechar - acterise debt between related parties as a “stock or equity” instrument if such indebtedness is issued in certain related-party transactions (see 5.7 Restraints on Related-Party Borrowing ). These rules are specifi - cally designed to target earnings-stripping transac - tions. 2.6 Consolidated Tax Grouping The Code and tax regulations (and several US states) allow a group of US corporations to file a consolidated
federal income tax return, which effectively allows the profits of one group member to be offset by the losses of another group member. The consolidated return rules, which are mostly in the tax regulations, are very detailed and complex. Very generally, certain US entities classified as corpora - tions for US federal income tax purposes may elect to join in filing a consolidated return if they are members of an “affiliated group”. An affiliated group is generally one or more chains of corporations connected through stock ownership with a common parent corporation, which must satisfy certain detailed stock-ownership rules with respect to the subsidiary corporations (gen - erally requiring at least 80% ownership measured by voting power and value, but disregarding certain debt-like preferred stock). Sales, dividends and other intercompany transactions between group members are generally deferred until a transaction occurs with a non-member (or when a member leaves the group). Groups of corporations filing consolidated returns are subject to various special rules, such as: • rules on intercompany transactions; • loss disallowance rules; • loss-sharing rules; • several liability among members of the group with respect to federal income taxes; and • basis adjustments with respect to subsidiary mem - ber stock. Regarding losses, a consolidated group is required to determine its NOL on a consolidated basis. For this purpose, the separate income and loss of each mem - ber is determined without taking into account any sep - arate NOL deduction. Separate member income and losses are then aggregated and taken into account in determining the group’s NOL for that year – meaning that the positive net income of some members is net - ted against the NOLs of other members to determine whether, on a net basis, the group has an NOL. In addition to certain general anti-loss trafficking rules (see 2.4 Loss Relief ), certain loss disallowances apply only to consolidated groups. 2.7 Capital Gains For corporate taxpayers, gains from the disposition of capital assets are subject to regularly applicable tax
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