I am writing on the behalf of the Organization for International Investment (OFII), which represents over 200 international companies with significant U.S. operations. Currently, there are 780 international businesses that employ over 187,000 Virginians within the Commonwealth.

Federal §163(j) was designed to limit business interest deductibility to 30% of a taxpayer’s adjusted taxable income plus floor plan financing interest. This restriction serves to prevent companies from overleveraging debt. The relevant percentage is determined on a consolidated group basis. In Virginia, taxpayers may also take an annual subtraction equal to 20 percent of their business interest disallowed as a deduction under Federal §163(j).

According to the “Guidelines Regarding the Business Interest Limitation,” released on November 25, the Virginia Department of Taxation notes that state affiliated groups may differ from federal consolidated groups and confirms that separate Virginia filers will need to calculate their 163(j) limitation on a separate entity basis. Taxpayers filing combined returns in Virginia will likewise need to compute the 163(j) limits as if the entities in the combined return filed separate federal returns.

I would ask that the department carefully consider how other separate filing states refer to the federal consolidated calculation and modify the proposed guidelines. Otherwise, Virginia could penalize taxpayers simply because of how they are structured, creating a potential distortion and disallowing ordinary interest expense that was not intended to be disallowed under §163(j). 

Companies do not necessarily structure their group financing on a separate company basis, so requiring a calculation of a §163(j) limitation on any other basis than a consolidated group approach may result in a distortive result, including a disallowance of interest on routine business transactions. 

The application of the §163(j) calculation can be difficult in states that require taxpayers to file on a separate company basis or as part of a group different from the taxpayer’s federal consolidated group. However, several states have explored this issue and determined that the appropriate approach was to start with a taxpayer’s federal consolidated §163(j) interest limitation. 

For instance, Pennsylvania requires taxpayers to file on a separate company basis but has provided guidance that a corporate taxpayer that files its federal return on a consolidated basis will not be expected to limit its separate company interest expense deduction for Pennsylvania purposes in a given tax period unless the federal consolidated group of which it is a member reports a §163(j) business interest limitation at the federal level for the same tax period.[1] Thus the determination of the §163(j)  interest limitation for a Pennsylvania separate company filing taxpayer is determined on a consolidated group basis to the extent the taxpayer files as a member of a federal consolidated return.  This approach is consistent with congressional intention. 

Likewise, New Jersey and Tennessee, two states that have historically required taxpayers to file on separate company basis, have issued similar guidance.[2] Massachusetts has also issued guidance providing for a separate company limitation in a combined group setting. This approach, in effect, allows a combined group computation because it allows an excess limitation of one member to be offset against a potential disallowance of another.[3] 

Since Virginia has decided to conform to §163(j), I urge you to consider adjusting the guidelines to an approach that starts with a taxpayer’s federal consolidated §163(j) interest limitation and not require the Virginia taxpayer to recompute the limitation at the state level.

 If you have questions, please contact Meredith Beeson, director of state affairs, at mbeeson@ofii.org or 202-770-5141.

Thank you.