On February 19, 2016, the Internal Revenue Service (IRS) released a 30-plus-page practice unit regarding interest expense of a foreign corporation engaged in a U.S. trade or business. As is the case with all practice units, the IRS cautions that practice units are not official pronouncements of law or directives and cannot be used, cited or relied upon as such. Even so, the IRS generally acknowledges that practice units provide a general discussion of a concept, process or transaction. This can be helpful from a taxpayer’s perspective. This is especially true for interest expense allocation calculations under Treasury Regulation § 1.882-5, one of the more complicated calculations for taxpayers to make.
The practice unit begins with a graph that illustrates possible circumstances where the interest expense allocation process described in the practice unit can apply. The practice unit then breaks down the four steps for determining interest expense allocations. The four steps are:
- Determine the amount of U.S. assets.
- Determine the amount of U.S. booked liabilities.
- Determine what elections the taxpayer has made to compute the interest expense deduction.
- Calculate the allocable interest expense to the U.S. trade or business.