The 2017 Tax Act (known as the “Tax Cuts and Jobs Act”) created substantial limitations on the ability of US taxpayers to deduct interest expense, most notably in Section 163(j) of the Tax Code. Accordingly, if expenses incurred in connection with borrowing transactions can be characterized as business expenses instead of interest expense, the borrower will be less likely to run up against those limitations. In a recent audit memorandum, the US Internal Revenue Service provided guidance on when “unused commitment fees” can be treated as deductible business expenses. Mark Leeds and Brennan Young, both tax practitioners with the New York office of Mayer Brown, examine this guidance and provide their thoughts and insights on how borrowers can structure the costs of borrowings as tax deductible expenses, instead of interest.
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