Page 310 - TaxAdviser_2022

INTEREST INCOME & EXPENSE

For purposes of this subsection, the
Due to the availability of this practical term “business interest income” means
the amount of interest includible in
expedient and the fact that most business- the gross income of the taxpayer for
to-business receivables are collected within the taxable year which is properly allo-
one year, most entities have elected not cable to a trade or business. Such term
shall not include investment income
to go through the necessary analysis to (within the meaning of subsection
allocate the contract price. (d)). [emphasis added]

As a stand-alone term, “interest” is
not defined by this section. Although
the entity transfers a promised good Referring to the Basis for Conclusion the word’s meaning may seem self-
or service to a customer and when paragraph BC234, the group noted that: explanatory, or perhaps a minor point, the
the customer pays for that good or definition becomes important because of
service will be one year or less. As described in this Basis paragraph, the new categorical structure created by
the rationale for assessing significance the revised Sec. 163(j)(1). To be success-
Under this practical expedient, firms at the contract level was to reduce ful, any strategy to reclassify revenue as
do not need to adjust the transaction the burden for entities. That is, it business interest income would have to
price for any significant financing if the was for practical reasons rather than be able to withstand any scrutiny given
customer pays for the good or service conceptual reasons. The staff is not to the categorization during an IRS ex-
within one year. This option is intended aware of any guidance in the standard amination. The IRS has defined interest
to simplify the reporting process. It is that would preclude an entity from by stating that “interest on indebtedness
important to note that while firms may deciding to account for a financing means compensation for the use or
10
choose the practical expedient, they are component that is not significant. forebearance of money.” Although this
not required to do so. definition was presented in the context
Businesses should not opt for the Thus, firms are permitted to ignore of a withholding rule, in the absence of a
practical expedient if they wish to pursue financing components that fall below the definition specific to this Code section, it
the strategy being discussed here to raise significant threshold — but they do not is likely the only relevant guidance.
the Sec. 163(j) interest deduction ceiling, have to. This is another instance where, Taxpayers using the reclassification
because, for this approach to work, it is as in the case of the practical expedient, strategy under discussion here should
necessary to separately identify business FASB appears to offer preparers means verify that the amount reclassified as
interest income. of simplifying the reporting process. For business interest income satisfies this
purposes of using the reclassification definition. Although no specific guid-
The size of the financing strategy being discussed here, how- ance on this point could be identified,
component ever, it should not be an issue whether the above definition of “interest” seems
One other issue that should be some or all the financing component is compatible with the identification of a
mentioned is whether the financing deemed insignificant. financing component through an analysis
component can be accounted for under Topic 606. The timing of inter-
separately if it is small. The guidance The IRS and interest income est income recognition for tax purposes
refers to “a significant financing For the suggested strategy for increas- would generally follow recognition in the
component.” It is possible that in some ing the interest limitation to work, the audited financial statements. 11
cases a financing component exists but reclassified revenue would need to satisfy A final tax consideration is whether
that there may be some doubt about relevant tax definitions of “business inter- changing the calculation under Topic
its significance. The FASB/IASB Joint est income” and, more broadly, “interest 606 — rejecting the practical expedient if
Transition Resource Group for Revenue income.” Sec. 163(j)(6) defines business already in place — would be considered
Recognition addressed this question. interest income as follows: an accounting method change. Sec. 446

10. Rev. Rul. 72-458; Deputy v. DuPont, 308 U.S. 458 (1940). 11. Regs. Sec. 1.451-3(a)(11).

30 June 2022 The Tax Adviser