8706 / What is the result if a taxpayer has interest expenses that exceed net investment income for the tax year?
If a taxpayer has interest expenses that exceed his or her net investment income for the year, those expenses are considered excess interest and the deduction is disallowed. However, disallowed interest expenses from one year can be carried forward to the succeeding tax year.1
A taxpayer’s investment interest expenses that are disallowed because of the investment income limitation in one year will be treated as investment interest paid or accrued in the succeeding tax year.2 The IRS has issued guidance that provides it will not limit the carryover of a taxpayer’s disallowed investment interest to a succeeding tax year to the taxpayer’s taxable income for the tax year in which the interest is paid or accrued.3 Prior to the issuance of this guidance, several federal courts had held that no taxable income limitation existed on the amount of disallowed investment interest that could be carried over.4
1. IRC § 163(d)(2).
2. IRC § 163(d)(2).