26 U.S.C. § 163 — Interest

Page 741 TITLE 26—INTERNAL REVENUE CODE § 163 by Pub. L. 103–66, title XIII, § 13174(a)(2), Aug. 10, 1993, 107 Stat. 457. Pub. L. 101–239, title VII, § 7107(a)(2), Dec. 19, 1989, 103 Stat. 2306, provided that, in the case of any taxable year beginning in 1990 only amounts paid before Oct. 1, 1990, by the individual for insurance coverage for peri- ods before Oct. 1, 1990, would be taken into account in determining the amount deductible under subsec. (l) of this section with respect to such individual for such taxable year, and that for purposes of subsec. (l)(2)(A) of this section, the amount of the earned income de- scribed in such paragraph taken into account for such taxable year would be the amount which bears the same ratio to the total amount of such earned income as the number of months in such taxable year ending before Oct. 1, 1990, bears to the number of months in such taxable year, prior to repeal by Pub. L. 101–508, title XI, § 11410(b), Nov. 5, 1990, 104 Stat. 1388–479. BUSINESS USE OF AUTOMOBILES BY RURAL MAIL CARRIERS Pub. L. 100–647, title VI, § 6008, Nov. 10, 1988, 102 Stat. 3687, provided that in the case of any employee of the United States Postal Service who performed services involving the collection and delivery of mail on a rural route, such employee was permitted to compute the amount allowable as a deduction under this chapter for the use of an automobile in performing such services by using a standard mileage rate for all miles of such use equal to 150 percent of the basic standard rate, prior to repeal by Pub. L. 105–34, title XII, § 1203(b), Aug. 5, 1997, 111 Stat. 995. See subsec. (o) of this section. PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. LIVING EXPENSES OF MEMBERS OF CONGRESS WHILE AWAY FROM HOME; SENSE OF CONGRESS Pub. L. 97–51, § 139(a), Oct. 1, 1981, 95 Stat. 967, which expressed the sense of Congress that the dollar limits on tax deductions for living expenses of Members of Congress while away from home be the same as such limits for businessmen and other private citizens, was repealed by Pub. L. 97–216, title II, § 215(c), July 18, 1982, 96 Stat. 194. STATE LEGISLATORS’ TRAVEL EXPENSES AWAY FROM HOME Pub. L. 94–455, title VI, § 604, Oct. 4, 1976, 90 Stat. 1575, as amended by Pub. L. 95–30, title III, § 307, May 23, 1977, 91 Stat. 153; Pub. L. 95–258, § 2, Apr. 7, 1978, 92 Stat. 195; Pub. L. 96–167, § 3, Dec. 29, 1979, 93 Stat. 1275; Pub. L. 96–178, § 1, Jan. 2, 1980, 93 Stat. 1295; Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘(a) In GENERAL.—For purposes of section 162(a) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], in the case of any individual who was a State legislator at any time during any taxable year beginning before January 1, 1981, and who, for the taxable year, elects the application of this section, for any period during such a taxable year in which he was a State legislator— ‘‘(1) the place of residence of such individual within the legislative district which he represented shall be considered his home, and ‘‘(2) he shall be deemed to have expended for living expenses (in connection with his trade or business as a legislator) an amount equal to the sum of the amounts determined by multiplying each legislative day of such individual during the taxable year by the amount generally allowable with respect to such day to employees of the executive branch of the Federal Government for per diem while away from home but serving in the United States. ‘‘(b) LEGISLATIVE DAYS.—For purposes of subsection (a), a legislative day during any taxable year for any individual shall be any day during such year on which (1) the legislature was in session (including any day in which the legislature was not in session for a period of 4 consecutive days or less), or (2) the legislature was not in session but the physical presence of the indi- vidual was formally recorded at a meeting of a com- mittee of such legislature. ‘‘(c) LIMITATION.—The amount taken into account as living expenses attributable to a trade or business as a State legislator for any taxable year beginning before January 1, 1976, under an election made under this sec- tion shall not exceed the amount claimed for such pur- pose under a return (or amended return) filed before May 21, 1976. ‘‘(d) MAKING AND EFFECT OF ELECTION.—An election under this section shall be made at such time and in such manner as the Secretary of the Treasury or his delegate shall by regulations prescribe.’’ [Amendment of section 604 of Pub. L. 94–455 by sec- tion 1 of Pub. L. 96–178, which purported to substitute ‘‘January 1, 1979’’ for ‘‘January 1, 1978’’, was not exe- cuted because of the prior amendment by section 3(a)(2), (b) of Pub. L. 96–167 which substituted ‘‘January 1, 1981’’ for ‘‘January 1, 1978’’ in subsec. (a) and which struck out the last sentence of subsec. (d).] DENIAL OF DEDUCTION FOR AMOUNTS PAID OR IN- CURRED ON JUDGMENTS IN SUITS BROUGHT TO RE- COVER PRICE INCREASES IN PURCHASE OF NEW PRIN- CIPAL RESIDENCE No deductions to be allowed in computing taxable in- come for two-thirds of any amount paid or incurred on a judgment entered against any person in a suit brought under section 208(b) of Pub. L. 94–12, see sec- tion 208(c) of Pub. L. 94–12, title II, Mar. 29, 1975, 89 Stat. 35, set out as a note under section 44 of this title. DEDUCTIBILITY OF ACCRUED VACATION PAY Pub. L. 85–866, title I, § 97, Sept. 2, 1958, 72 Stat. 1672, as amended by Pub. L. 86–496, § 2, June 8, 1960, 74 Stat. 164; Pub. L. 88–153, Oct. 17, 1963, 77 Stat. 272; Pub. L. 88–554, § 1, Aug. 31, 1964, 78 Stat. 761; Pub. L. 89–692, Oct. 15, 1966, 80 Stat. 1025; Pub. L. 91–172, title IX, § 903, Dec. 30, 1969, 83 Stat. 711; Pub. L. 92–580, § 3, Oct. 27, 1972, 86 Stat. 1276, provided that deductions for accrued vaca- tion pay under this section would not be denied for any taxable year ending before Jan. 1, 1973, so long as the employee at the time of accrual of pay has performed the necessary qualifying service under an appropriate plan. INVESTIGATION OF, AND REPORTS ON, TREATMENT OF ENTERTAINMENT AND CERTAIN OTHER EXPENSES Pub. L. 86–564, title III, § 301, June 30, 1960, 74 Stat. 291, authorized the Joint Committee on Internal Rev- enue Taxation to investigate and report on the use of entertainment and certain other expense deductions to the 87th Congress and authorized the Secretary of the Treasury to report to the 87th Congress on the enforce- ment program of the Internal Revenue Service relating to such deductions. FILING OF CLAIMS FOR REFUNDS OF OVERPAYMENTS Extension of time for filing of claims for refunds or credit of overpayments of income tax resulting from application of this section, see section 96 of Pub. L. 85–866, set out as a note under section 6511 of this title. § 163. Interest (a) General rule There shall be allowed as a deduction all inter- est paid or accrued within the taxable year on indebtedness. Page 742 TITLE 26—INTERNAL REVENUE CODE § 163 (b) Installment purchases where interest charge is not separately stated (1) General rule If personal property or educational services are purchased under a contract— (A) which provides that payment of part or all of the purchase price is to be made in in- stallments, and (B) in which carrying charges are sepa- rately stated but the interest charge cannot be ascertained, then the payments made during the taxable year under the contract shall be treated for purposes of this section as if they included in- terest equal to 6 percent of the average unpaid balance under the contract during the taxable year. For purposes of the preceding sentence, the average unpaid balance is the sum of the unpaid balance outstanding on the first day of each month beginning during the taxable year, divided by 12. For purposes of this paragraph, the term ‘‘educational services’’ means any service (including lodging) which is purchased from an educational organization described in section 170(b)(1)(A)(ii) and which is provided for a student of such organization. (2) Limitation In the case of any contract to which para- graph (1) applies, the amount treated as inter- est for any taxable year shall not exceed the aggregate carrying charges which are properly attributable to such taxable year. (c) Redeemable ground rents For purposes of this subtitle, any annual or periodic rental under a redeemable ground rent (excluding amounts in redemption thereof) shall be treated as interest on an indebtedness se- cured by a mortgage. (d) Limitation on investment interest (1) In general In the case of a taxpayer other than a cor- poration, the amount allowed as a deduction under this chapter for investment interest for any taxable year shall not exceed the net in- vestment income of the taxpayer for the tax- able year. (2) Carryforward of disallowed interest The amount not allowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as investment interest paid or accrued by the taxpayer in the succeeding tax- able year. (3) Investment interest For purposes of this subsection— (A) In general The term ‘‘investment interest’’ means any interest allowable as a deduction under this chapter (determined without regard to paragraph (1)) which is paid or accrued on indebtedness properly allocable to property held for investment. (B) Exceptions The term ‘‘investment interest’’ shall not include— (i) any qualified residence interest (as defined in subsection (h)(3)), or (ii) any interest which is taken into ac- count under section 469 in computing in- come or loss from a passive activity of the taxpayer. (C) Personal property used in short sale For purposes of this paragraph, the term ‘‘interest’’ includes any amount allowable as a deduction in connection with personal property used in a short sale. (4) Net investment income For purposes of this subsection— (A) In general The term ‘‘net investment income’’ means the excess of— (i) investment income, over (ii) investment expenses. (B) Investment income The term ‘‘investment income’’ means the sum of— (i) gross income from property held for investment (other than any gain taken into account under clause (ii)(I)), (ii) the excess (if any) of— (I) the net gain attributable to the dis- position of property held for investment, over (II) the net capital gain determined by only taking into account gains and losses from dispositions of property held for investment, plus (iii) so much of the net capital gain re- ferred to in clause (ii)(II) (or, if lesser, the net gain referred to in clause (ii)(I)) as the taxpayer elects to take into account under this clause. Such term shall include qualified dividend income (as defined in section 1(h)(11)(B)) only to the extent the taxpayer elects to treat such income as investment income for purposes of this subsection. (C) Investment expenses The term ‘‘investment expenses’’ means the deductions allowed under this chapter (other than for interest) which are directly connected with the production of investment income. (D) Income and expenses from passive activi- ties Investment income and investment ex- penses shall not include any income or ex- penses taken into account under section 469 in computing income or loss from a passive activity. (5) Property held for investment For purposes of this subsection— (A) In general The term ‘‘property held for investment’’ shall include— (i) any property which produces income of a type described in section 469(e)(1), and (ii) any interest held by a taxpayer in an activity involving the conduct of a trade or business— (I) which is not a passive activity, and (II) with respect to which the taxpayer does not materially participate. Page 743 TITLE 26—INTERNAL REVENUE CODE § 163 (B) Investment expenses In the case of property described in sub- paragraph (A)(i), expenses shall be allocated to such property in the same manner as under section 469. (C) Terms For purposes of this paragraph, the terms ‘‘activity’’, ‘‘passive activity’’, and ‘‘materi- ally participate’’ have the meanings given such terms by section 469. (e) Original issue discount (1) In general The portion of the original issue discount with respect to any debt instrument which is allowable as a deduction to the issuer for any taxable year shall be equal to the aggregate daily portions of the original issue discount for days during such taxable year. (2) Definitions and special rules For purposes of this subsection— (A) Debt instrument The term ‘‘debt instrument’’ has the meaning given such term by section 1275(a)(1). (B) Daily portions The daily portion of the original issue dis- count for any day shall be determined under section 1272(a) (without regard to paragraph (7) thereof and without regard to section 1273(a)(3)). (C) Short-term obligations In the case of an obligor of a short-term obligation (as defined in section 1283(a)(1)(A)) who uses the cash receipts and disbursements method of accounting, the original issue discount (and any other inter- est payable) on such obligation shall be de- ductible only when paid. (3) Special rule for original issue discount on obligation held by related foreign person (A) In general If any debt instrument having original issue discount is held by a related foreign person, any portion of such original issue discount shall not be allowable as a deduc- tion to the issuer until paid. The preceding sentence shall not apply to the extent that the original issue discount is effectively con- nected with the conduct by such foreign re- lated person of a trade or business within the United States unless such original issue discount is exempt from taxation (or is sub- ject to a reduced rate of tax) pursuant to a treaty obligation of the United States. (B) Special rule for certain foreign entities (i) In general In the case of any debt instrument hav- ing original issue discount which is held by a related foreign person which is a con- trolled foreign corporation (as defined in section 957) or a passive foreign invest- ment company (as defined in section 1297), a deduction shall be allowable to the issuer with respect to such original issue discount for any taxable year before the taxable year in which paid only to the ex- tent such original issue discount is includ- ible (determined without regard to prop- erly allocable deductions and qualified deficits under section 952(c)(1)(B)) during such prior taxable year in the gross in- come of a United States person who owns (within the meaning of section 958(a)) stock in such corporation. (ii) Secretarial authority The Secretary may by regulation exempt transactions from the application of clause (i), including any transaction which is en- tered into by a payor in the ordinary course of a trade or business in which the payor is predominantly engaged. (C) Related foreign person For purposes of subparagraph (A), the term ‘‘related foreign person’’ means any person— (i) who is not a United States person, and (ii) who is related (within the meaning of section 267(b)) to the issuer. (4) Exception This subsection shall not apply to any debt instrument described in section 1272(a)(2)(D) (relating to loans between natural persons). (5) Special rules for original issue discount on certain high yield obligations (A) In general In the case of an applicable high yield dis- count obligation issued by a corporation— (i) no deduction shall be allowed under this chapter for the disqualified portion of the original issue discount on such obliga- tion, and (ii) the remainder of such original issue discount shall not be allowable as a deduc- tion until paid. For purposes of this paragraph, rules similar to the rules of subsection (i)(3)(B) shall apply in determining the amount of the original issue discount and when the origi- nal issue discount is paid. (B) Disqualified portion treated as stock dis- tribution for purposes of dividend re- ceived deduction (i) In general Solely for purposes of sections 243, 245, 246, and 246A, the dividend equivalent por- tion of any amount includible in gross in- come of a corporation under section 1272(a) in respect of an applicable high yield dis- count obligation shall be treated as a divi- dend received by such corporation from the corporation issuing such obligation. (ii) Dividend equivalent portion For purposes of clause (i), the dividend equivalent portion of any amount includ- ible in gross income under section 1272(a) in respect of an applicable high yield dis- count obligation is the portion of the amount so includible— (I) which is attributable to the dis- qualified portion of the original issue discount on such obligation, and Page 744 TITLE 26—INTERNAL REVENUE CODE § 163 (II) which would have been treated as a dividend if it had been a distribution made by the issuing corporation with re- spect to stock in such corporation. (C) Disqualified portion (i) In general For purposes of this paragraph, the dis- qualified portion of the original issue dis- count on any applicable high yield dis- count obligation is the lesser of— (I) the amount of such original issue discount, or (II) the portion of the total return on such obligation which bears the same ratio to such total return as the dis- qualified yield on such obligation bears to the yield to maturity on such obliga- tion. (ii) Definitions For purposes of clause (i), the term ‘‘dis- qualified yield’’ means the excess of the yield to maturity on the obligation over the sum referred to in subsection (i)(1)(B) plus 1 percentage point, and the term ‘‘total return’’ is the amount which would have been the original issue discount on the obligation if interest described in the parenthetical in section 1273(a)(2) were in- cluded in the stated redemption price at maturity. (D) Exception for S corporations This paragraph shall not apply to any obli- gation issued by any corporation for any pe- riod for which such corporation is an S cor- poration. (E) Effect on earnings and profits This paragraph shall not apply for pur- poses of determining earnings and profits; except that, for purposes of determining the dividend equivalent portion of any amount includible in gross income under section 1272(a) in respect of an applicable high yield discount obligation, no reduction shall be made for any amount attributable to the dis- qualified portion of any original issue dis- count on such obligation. (F) Suspension of application of paragraph (i) Temporary suspension This paragraph shall not apply to any applicable high yield discount obligation issued during the period beginning on Sep- tember 1, 2008, and ending on December 31, 2009, in exchange (including an exchange resulting from a modification of the debt instrument) for an obligation which is not an applicable high yield discount obliga- tion and the issuer (or obligor) of which is the same as the issuer (or obligor) of such applicable high yield discount obligation. The preceding sentence shall not apply to any obligation the interest on which is in- terest described in section 871(h)(4) (with- out regard to subparagraph (D) thereof) or to any obligation issued to a related per- son (within the meaning of section 108(e)(4)). (ii) Successive application Any obligation to which clause (i) ap- plies shall not be treated as an applicable high yield discount obligation for purposes of applying this subparagraph to any other obligation issued in exchange for such ob- ligation. (iii) Secretarial authority to suspend appli- cation The Secretary may apply this paragraph with respect to debt instruments issued in periods following the period described in clause (i) if the Secretary determines that such application is appropriate in light of distressed conditions in the debt capital markets. (G) Cross reference For definition of applicable high yield discount obligation, see subsection (i). (6) Cross references For provision relating to deduction of original issue discount on tax-exempt obligation, see section 1288. For special rules in the case of the borrower under certain loans for personal use, see section 1275(b). (f) Denial of deduction for interest on certain ob- ligations not in registered form (1) In general Nothing in subsection (a) or in any other provision of law shall be construed to provide a deduction for interest on any registration- required obligation unless such obligation is in registered form. (2) Registration-required obligation For purposes of this section— (A) In general The term ‘‘registration-required obliga- tion’’ means any obligation (including any obligation issued by a governmental entity) other than an obligation which— (i) is issued by a natural person, (ii) is not of a type offered to the public, or (iii) has a maturity (at issue) of not more than 1 year. (B) Authority to include other obligations Clauses (ii) and (iii) of subparagraph (A) shall not apply to any obligation if— (i) such obligation is of a type which the Secretary has determined by regulations to be used frequently in avoiding Federal taxes, and (ii) such obligation is issued after the date on which the regulations referred to in clause (i) take effect. (3) Book entries permitted, etc. For purposes of this subsection, rules simi- lar to the rules of section 149(a)(3) shall apply, except that a dematerialized book entry sys- tem or other book entry system specified by the Secretary shall be treated as a book entry system described in such section. (g) Reduction of deduction where section 25 credit taken The amount of the deduction under this sec- tion for interest paid or accrued during any tax- able year on indebtedness with respect to which Page 745 TITLE 26—INTERNAL REVENUE CODE § 163 a mortgage credit certificate has been issued under section 25 shall be reduced by the amount of the credit allowable with respect to such in- terest under section 25 (determined without re- gard to section 26). (h) Disallowance of deduction for personal inter- est (1) In general In the case of a taxpayer other than a cor- poration, no deduction shall be allowed under this chapter for personal interest paid or ac- crued during the taxable year. (2) Personal interest For purposes of this subsection, the term ‘‘personal interest’’ means any interest allow- able as a deduction under this chapter other than— (A) interest paid or accrued on indebted- ness properly allocable to a trade or business (other than the trade or business of per- forming services as an employee), (B) any investment interest (within the meaning of subsection (d)), (C) any interest which is taken into ac- count under section 469 in computing income or loss from a passive activity of the tax- payer, (D) any qualified residence interest (within the meaning of paragraph (3)), (E) any interest payable under section 6601 on any unpaid portion of the tax imposed by section 2001 for the period during which an extension of time for payment of such tax is in effect under section 6163, and (F) any interest allowable as a deduction under section 221 (relating to interest on educational loans). (3) Qualified residence interest For purposes of this subsection— (A) In general The term ‘‘qualified residence interest’’ means any interest which is paid or accrued during the taxable year on— (i) acquisition indebtedness with respect to any qualified residence of the taxpayer, or (ii) home equity indebtedness with re- spect to any qualified residence of the tax- payer. For purposes of the preceding sentence, the determination of whether any property is a qualified residence of the taxpayer shall be made as of the time the interest is accrued. (B) Acquisition indebtedness (i) In general The term ‘‘acquisition indebtedness’’ means any indebtedness which— (I) is incurred in acquiring, con- structing, or substantially improving any qualified residence of the taxpayer, and (II) is secured by such residence. Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness. (ii) $1,000,000 limitation The aggregate amount treated as acqui- sition indebtedness for any period shall not exceed $1,000,000 ($500,000 in the case of a married individual filing a separate re- turn). (C) Home equity indebtedness (i) In general The term ‘‘home equity indebtedness’’ means any indebtedness (other than acqui- sition indebtedness) secured by a qualified residence to the extent the aggregate amount of such indebtedness does not ex- ceed— (I) the fair market value of such quali- fied residence, reduced by (II) the amount of acquisition indebt- edness with respect to such residence. (ii) Limitation The aggregate amount treated as home equity indebtedness for any period shall not exceed $100,000 ($50,000 in the case of a separate return by a married individual). (D) Treatment of indebtedness incurred on or before October 13, 1987 (i) In general In the case of any pre-October 13, 1987, indebtedness— (I) such indebtedness shall be treated as acquisition indebtedness, and (II) the limitation of subparagraph (B)(ii) shall not apply. (ii) Reduction in $1,000,000 limitation The limitation of subparagraph (B)(ii) shall be reduced (but not below zero) by the aggregate amount of outstanding pre- October 13, 1987, indebtedness. (iii) Pre-October 13, 1987, indebtedness The term ‘‘pre-October 13, 1987, indebted- ness’’ means— (I) any indebtedness which was in- curred on or before October 13, 1987, and which was secured by a qualified resi- dence on October 13, 1987, and at all times thereafter before the interest is paid or accrued, or (II) any indebtedness which is secured by the qualified residence and was in- curred after October 13, 1987, to refinance indebtedness described in subclause (I) (or refinanced indebtedness meeting the requirements of this subclause) to the extent (immediately after the refi- nancing) the principal amount of the in- debtedness resulting from the refi- nancing does not exceed the principal amount of the refinanced indebtedness (immediately before the refinancing). (iv) Limitation on period of refinancing Subclause (II) of clause (iii) shall not apply to any indebtedness after— (I) the expiration of the term of the in- debtedness described in clause (iii)(I), or Page 746 TITLE 26—INTERNAL REVENUE CODE § 163 (II) if the principal of the indebtedness described in clause (iii)(I) is not amor- tized over its term, the expiration of the term of the 1st refinancing of such in- debtedness (or if earlier, the date which is 30 years after the date of such 1st refi- nancing). (E) Mortgage insurance premiums treated as interest (i) In general Premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acqui- sition indebtedness with respect to a quali- fied residence of the taxpayer shall be treated for purposes of this section as in- terest which is qualified residence inter- est. (ii) Phaseout The amount otherwise treated as inter- est under clause (i) shall be reduced (but not below zero) by 10 percent of such amount for each $1,000 ($500 in the case of a married individual filing a separate re- turn) (or fraction thereof) that the tax- payer’s adjusted gross income for the tax- able year exceeds $100,000 ($50,000 in the case of a married individual filing a sepa- rate return). (iii) Limitation Clause (i) shall not apply with respect to any mortgage insurance contracts issued before January 1, 2007. (iv) Termination Clause (i) shall not apply to amounts— (I) paid or accrued after December 31, 2021, or (II) properly allocable to any period after such date. (F) Special rules for taxable years 2018 through 2025 (i) In general In the case of taxable years beginning after December 31, 2017, and before Janu- ary 1, 2026— (I) Disallowance of home equity indebt- edness interest Subparagraph (A)(ii) shall not apply. (II) Limitation on acquisition indebted- ness Subparagraph (B)(ii) shall be applied by substituting ‘‘$750,000 ($375,000’’ for ‘‘$1,000,000 ($500,000’’. (III) Treatment of indebtedness incurred on or before December 15, 2017 Subclause (II) shall not apply to any indebtedness incurred on or before De- cember 15, 2017, and, in applying such subclause to any indebtedness incurred after such date, the limitation under such subclause shall be reduced (but not below zero) by the amount of any indebt- edness incurred on or before December 15, 2017, which is treated as acquisition indebtedness for purposes of this sub- section for the taxable year. (IV) Binding contract exception In the case of a taxpayer who enters into a written binding contract before December 15, 2017, to close on the pur- chase of a principal residence before Jan- uary 1, 2018, and who purchases such resi- dence before April 1, 2018, subclause (III) shall be applied by substituting ‘‘April 1, 2018’’ for ‘‘December 15, 2017’’. (ii) Treatment of limitation in taxable years after December 31, 2025 In the case of taxable years beginning after December 31, 2025, the limitation under subparagraph (B)(ii) shall be applied to the aggregate amount of indebtedness of the taxpayer described in subparagraph (B)(i) without regard to the taxable year in which the indebtedness was incurred. (iii) Treatment of refinancings of indebted- ness (I) In general In the case of any indebtedness which is incurred to refinance indebtedness, such refinanced indebtedness shall be treated for purposes of clause (i)(III) as incurred on the date that the original in- debtedness was incurred to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebted- ness. (II) Limitation on period of refinancing Subclause (I) shall not apply to any in- debtedness after the expiration of the term of the original indebtedness or, if the principal of such original indebted- ness is not amortized over its term, the expiration of the term of the 1st refi- nancing of such indebtedness (or if ear- lier, the date which is 30 years after the date of such 1st refinancing). (iv) Coordination with exclusion of income from discharge of indebtedness Section 108(h)(2) shall be applied without regard to this subparagraph. (4) Other definitions and special rules For purposes of this subsection— (A) Qualified residence (i) In general The term ‘‘qualified residence’’ means— (I) the principal residence (within the meaning of section 121) of the taxpayer, and (II) 1 other residence of the taxpayer which is selected by the taxpayer for purposes of this subsection for the tax- able year and which is used by the tax- payer as a residence (within the meaning of section 280A(d)(1)). (ii) Married individuals filing separate re- turns If a married couple does not file a joint return for the taxable year— (I) such couple shall be treated as 1 taxpayer for purposes of clause (i), and Page 747 TITLE 26—INTERNAL REVENUE CODE § 163 (II) each individual shall be entitled to take into account 1 residence unless both individuals consent in writing to 1 indi- vidual taking into account the principal residence and 1 other residence. (iii) Residence not rented For purposes of clause (i)(II), notwith- standing section 280A(d)(1), if the taxpayer does not rent a dwelling unit at any time during a taxable year, such unit may be treated as a residence for such taxable year. (B) Special rule for cooperative housing cor- porations Any indebtedness secured by stock held by the taxpayer as a tenant-stockholder (as de- fined in section 216) in a cooperative housing corporation (as so defined) shall be treated as secured by the house or apartment which the taxpayer is entitled to occupy as such a tenant-stockholder. If stock described in the preceding sentence may not be used to se- cure indebtedness, indebtedness shall be treated as so secured if the taxpayer estab- lishes to the satisfaction of the Secretary that such indebtedness was incurred to ac- quire such stock. (C) Unenforceable security interests Indebtedness shall not fail to be treated as secured by any property solely because, under any applicable State or local home- stead or other debtor protection law in ef- fect on August 16, 1986, the security interest is ineffective or the enforceability of the se- curity interest is restricted. (D) Special rules for estates and trusts For purposes of determining whether any interest paid or accrued by an estate or trust is qualified residence interest, any residence held by such estate or trust shall be treated as a qualified residence of such estate or trust if such estate or trust establishes that such residence is a qualified residence of a beneficiary who has a present interest in such estate or trust or an interest in the re- siduary of such estate or trust. (E) Qualified mortgage insurance The term ‘‘qualified mortgage insurance’’ means— (i) mortgage insurance provided by the Department of Veterans Affairs, the Fed- eral Housing Administration, or the Rural Housing Service, and (ii) private mortgage insurance (as de- fined by section 2 of the Homeowners Pro- tection Act of 1998 (12 U.S.C. 4901), as in ef- fect on the date of the enactment of this subparagraph). (F) Special rules for prepaid qualified mort- gage insurance Any amount paid by the taxpayer for qualified mortgage insurance that is prop- erly allocable to any mortgage the payment of which extends to periods that are after the close of the taxable year in which such amount is paid shall be chargeable to capital account and shall be treated as paid in such periods to which so allocated. No deduction shall be allowed for the unamortized balance of such account if such mortgage is satisfied before the end of its term. The preceding sentences shall not apply to amounts paid for qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. (i) Applicable high yield discount obligation (1) In general For purposes of this section, the term ‘‘ap- plicable high yield discount obligation’’ means any debt instrument if— (A) the maturity date of such instrument is more than 5 years from the date of issue, (B) the yield to maturity on such instru- ment equals or exceeds the sum of— (i) the applicable Federal rate in effect under section 1274(d) for the calendar month in which the obligation is issued, plus (ii) 5 percentage points, and (C) such instrument has significant origi- nal issue discount. For purposes of subparagraph (B)(i), the Sec- retary may by regulation (i) permit a rate to be used with respect to any debt instrument which is higher than the applicable Federal rate if the taxpayer establishes to the satisfac- tion of the Secretary that such higher rate is based on the same principles as the applicable Federal rate and is appropriate for the term of the instrument, or (ii) permit, on a temporary basis, a rate to be used with respect to any debt instrument which is higher than the ap- plicable Federal rate if the Secretary deter- mines that such rate is appropriate in light of distressed conditions in the debt capital mar- kets. (2) Significant original issue discount For purposes of paragraph (1)(C), a debt in- strument shall be treated as having signifi- cant original issue discount if— (A) the aggregate amount which would be includible in gross income with respect to such instrument for periods before the close of any accrual period (as defined in section 1272(a)(5)) ending after the date 5 years after the date of issue, exceeds— (B) the sum of— (i) the aggregate amount of interest to be paid under the instrument before the close of such accrual period, and (ii) the product of the issue price of such instrument (as defined in sections 1273(b) and 1274(a)) and its yield to maturity. (3) Special rules For purposes of determining whether a debt instrument is an applicable high yield dis- count obligation— (A) any payment under the instrument shall be assumed to be made on the last day permitted under the instrument, and (B) any payment to be made in the form of another obligation of the issuer (or a related person within the meaning of section 453(f)(1)) shall be assumed to be made when such obligation is required to be paid in cash or in property other than such obligation. Page 748 TITLE 26—INTERNAL REVENUE CODE § 163 Except for purposes of paragraph (1)(B), any reference to an obligation in subparagraph (B) of this paragraph shall be treated as including a reference to stock. (4) Debt instrument For purposes of this subsection, the term ‘‘debt instrument’’ means any instrument which is a debt instrument as defined in sec- tion 1275(a). (5) Regulations The Secretary shall prescribe such regula- tions as may be appropriate to carry out the purposes of this subsection and subsection (e)(5), including— (A) regulations providing for modifications to the provisions of this subsection and sub- section (e)(5) in the case of varying rates of interest, put or call options, indefinite ma- turities, contingent payments, assumptions of debt instruments, conversion rights, or other circumstances where such modifica- tions are appropriate to carry out the pur- poses of this subsection and subsection (e)(5), and (B) regulations to prevent avoidance of the purposes of this subsection and subsection (e)(5) through the use of issuers other than C corporations, agreements to borrow amounts due under the debt instrument, or other ar- rangements. (j) Limitation on business interest (1) In general The amount allowed as a deduction under this chapter for any taxable year for business interest shall not exceed the sum of— (A) the business interest income of such taxpayer for such taxable year, (B) 30 percent of the adjusted taxable in- come of such taxpayer for such taxable year, plus (C) the floor plan financing interest of such taxpayer for such taxable year. The amount determined under subparagraph (B) shall not be less than zero. (2) Carryforward of disallowed business inter- est The amount of any business interest not al- lowed as a deduction for any taxable year by reason of paragraph (1) shall be treated as business interest paid or accrued in the suc- ceeding taxable year. (3) Exemption for certain small businesses In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year, paragraph (1) shall not apply to such tax- payer for such taxable year. In the case of any taxpayer which is not a corporation or a part- nership, the gross receipts test of section 448(c) shall be applied in the same manner as if such taxpayer were a corporation or part- nership. (4) Application to partnerships, etc. (A) In general In the case of any partnership— (i) this subsection shall be applied at the partnership level and any deduction for business interest shall be taken into ac- count in determining the non-separately stated taxable income or loss of the part- nership, and (ii) the adjusted taxable income of each partner of such partnership— (I) shall be determined without regard to such partner’s distributive share of any items of income, gain, deduction, or loss of such partnership, and (II) shall be increased by such partner’s distributive share of such partnership’s excess taxable income. For purposes of clause (ii)(II), a partner’s distributive share of partnership excess taxable income shall be determined in the same manner as the partner’s distributive share of nonseparately stated taxable in- come or loss of the partnership. (B) Special rules for carryforwards (i) In general The amount of any business interest not allowed as a deduction to a partnership for any taxable year by reason of paragraph (1) for any taxable year— (I) shall not be treated under para- graph (2) as business interest paid or ac- crued by the partnership in the suc- ceeding taxable year, and (II) shall, subject to clause (ii), be treated as excess business interest which is allocated to each partner in the same manner as the non-separately stated tax- able income or loss of the partnership. (ii) Treatment of excess business interest allocated to partners If a partner is allocated any excess busi- ness interest from a partnership under clause (i) for any taxable year— (I) such excess business interest shall be treated as business interest paid or accrued by the partner in the next suc- ceeding taxable year in which the part- ner is allocated excess taxable income from such partnership, but only to the extent of such excess taxable income, and (II) any portion of such excess business interest remaining after the application of subclause (I) shall, subject to the limi- tations of subclause (I), be treated as business interest paid or accrued in suc- ceeding taxable years. For purposes of applying this paragraph, excess taxable income allocated to a part- ner from a partnership for any taxable year shall not be taken into account under paragraph (1)(A) with respect to any busi- ness interest other than excess business in- terest from the partnership until all such excess business interest for such taxable year and all preceding taxable years has been treated as paid or accrued under clause (ii). (iii) Basis adjustments (I) In general The adjusted basis of a partner in a partnership interest shall be reduced Page 749 TITLE 26—INTERNAL REVENUE CODE § 163 1 See References in Text note below. (but not below zero) by the amount of ex- cess business interest allocated to the partner under clause (i)(II). (II) Special rule for dispositions If a partner disposes of a partnership interest, the adjusted basis of the part- ner in the partnership interest shall be increased immediately before the dis- position by the amount of the excess (if any) of the amount of the basis reduc- tion under subclause (I) over the portion of any excess business interest allocated to the partner under clause (i)(II) which has previously been treated under clause (ii) as business interest paid or accrued by the partner. The preceding sentence shall also apply to transfers of the part- nership interest (including by reason of death) in a transaction in which gain is not recognized in whole or in part. No deduction shall be allowed to the trans- feror or transferee under this chapter for any excess business interest resulting in a basis increase under this subclause. (C) Excess taxable income The term ‘‘excess taxable income’’ means, with respect to any partnership, the amount which bears the same ratio to the partner- ship’s adjusted taxable income as— (i) the excess (if any) of— (I) the amount determined for the partnership under paragraph (1)(B), over (II) the amount (if any) by which the business interest of the partnership, re- duced by the floor plan financing inter- est, exceeds the business interest income of the partnership, bears to (ii) the amount determined for the part- nership under paragraph (1)(B). (D) Application to S corporations Rules similar to the rules of subparagraphs (A) and (C) shall apply with respect to any S corporation and its shareholders. (5) Business interest For purposes of this subsection, the term ‘‘business interest’’ means any interest paid or accrued on indebtedness properly allocable to a trade or business. Such term shall not in- clude investment interest (within the meaning of subsection (d)). (6) Business interest income For purposes of this subsection, the term ‘‘business interest income’’ means the amount of interest includible in the gross income of the taxpayer for the taxable year which is properly allocable to a trade or business. Such term shall not include investment income (within the meaning of subsection (d)). (7) Trade or business For purposes of this subsection— (A) In general The term ‘‘trade or business’’ shall not in- clude— (i) the trade or business of performing services as an employee, (ii) any electing real property trade or business, (iii) any electing farming business, or (iv) the trade or business of the fur- nishing or sale of— (I) electrical energy, water, or sewage disposal services, (II) gas or steam through a local dis- tribution system, or (III) transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivi- sion thereof, by any agency or instrumen- tality of the United States, by a public service or public utility commission or other similar body of any State or polit- ical subdivision thereof, or by the gov- erning or ratemaking body of an electric cooperative. (B) Electing real property trade or business For purposes of this paragraph, the term ‘‘electing real property trade or business’’ means any trade or business which is de- scribed in section 469(c)(7)(C) and which makes an election under this subparagraph. Any such election shall be made at such time and in such manner as the Secretary shall prescribe, and, once made, shall be ir- revocable. (C) Electing farming business For purposes of this paragraph, the term ‘‘electing farming business’’ means— (i) a farming business (as defined in sec- tion 263A(e)(4)) which makes an election under this subparagraph, or (ii) any trade or business of a specified agricultural or horticultural cooperative (as defined in section 199A(g)(2)) 1 with re- spect to which the cooperative makes an election under this subparagraph. Any such election shall be made at such time and in such manner as the Secretary shall prescribe, and, once made, shall be ir- revocable. (8) Adjusted taxable income For purposes of this subsection, the term ‘‘adjusted taxable income’’ means the taxable income of the taxpayer— (A) computed without regard to— (i) any item of income, gain, deduction, or loss which is not properly allocable to a trade or business, (ii) any business interest or business in- terest income, (iii) the amount of any net operating loss deduction under section 172, (iv) the amount of any deduction allowed under section 199A, and (v) in the case of taxable years beginning before January 1, 2022, any deduction al- lowable for depreciation, amortization, or depletion, and (B) computed with such other adjustments as provided by the Secretary. (9) Floor plan financing interest defined For purposes of this subsection— Page 750 TITLE 26—INTERNAL REVENUE CODE § 163 2 So in original. Probably should be followed by a period. (A) In general The term ‘‘floor plan financing interest’’ means interest paid or accrued on floor plan financing indebtedness. (B) Floor plan financing indebtedness The term ‘‘floor plan financing indebted- ness’’ means indebtedness— (i) used to finance the acquisition of motor vehicles held for sale or lease, and (ii) secured by the inventory so acquired. (C) Motor vehicle The term ‘‘motor vehicle’’ means a motor vehicle that is any of the following: (i) Any self-propelled vehicle designed for transporting persons or property on a public street, highway, or road. (ii) A boat. (iii) Farm machinery or equipment. (10) Special rule for taxable years beginning in 2019 and 2020 (A) In general (i) In general Except as provided in clause (ii) or (iii), in the case of any taxable year beginning in 2019 or 2020, paragraph (1)(B) shall be ap- plied by substituting ‘‘50 percent’’ for ‘‘30 percent’’. (ii) Special rule for partnerships In the case of a partnership— (I) clause (i) shall not apply to any tax- able year beginning in 2019, but (II) unless a partner elects not to have this subclause apply, in the case of any excess business interest of the partner- ship for any taxable year beginning in 2019 which is allocated to the partner under paragraph (4)(B)(i)(II)— (aa) 50 percent of such excess busi- ness interest shall be treated as busi- ness interest which, notwithstanding paragraph (4)(B)(ii), is paid or accrued by the partner in the partner’s first taxable year beginning in 2020 and which is not subject to the limits of paragraph (1), and (bb) 50 percent of such excess busi- ness interest shall be subject to the limitations of paragraph (4)(B)(ii) in the same manner as any other excess business interest so allocated. (iii) Election out A taxpayer may elect, at such time and in such manner as the Secretary may pre- scribe, not to have clause (i) apply to any taxable year. Such an election, once made, may be revoked only with the consent of the Secretary. In the case of a partnership, any such election shall be made by the partnership and may be made only for tax- able years beginning in 2020. (B) Election to use 2019 adjusted taxable in- come for taxable years beginning in 2020 (i) In general Subject to clause (ii), in the case of any taxable year beginning in 2020, the tax- payer may elect to apply this subsection by substituting the adjusted taxable in- come of the taxpayer for the last taxable year beginning in 2019 for the adjusted tax- able income for such taxable year. In the case of a partnership, any such election shall be made by the partnership. (ii) Special rule for short taxable years If an election is made under clause (i) for a taxable year which is a short taxable year, the adjusted taxable income for the taxpayer’s last taxable year beginning in 2019 which is substituted under clause (i) shall be equal to the amount which bears the same ratio to such adjusted taxable in- come determined without regard to this clause as the number of months in the short taxable year bears to 12 2 (11) Cross references (A) For requirement that an electing real property trade or business use the alternative depreciation system, see section 168(g)(1)(F). (B) For requirement that an electing farm- ing business use the alternative depreciation system, see section 168(g)(1)(G). (k) Section 6166 interest No deduction shall be allowed under this sec- tion for any interest payable under section 6601 on any unpaid portion of the tax imposed by sec- tion 2001 for the period during which an exten- sion of time for payment of such tax is in effect under section 6166. (l) Disallowance of deduction on certain debt in- struments of corporations (1) In general No deduction shall be allowed under this chapter for any interest paid or accrued on a disqualified debt instrument. (2) Disqualified debt instrument For purposes of this subsection, the term ‘‘disqualified debt instrument’’ means any in- debtedness of a corporation which is payable in equity of the issuer or a related party or eq- uity held by the issuer (or any related party) in any other person. (3) Special rules for amounts payable in equity For purposes of paragraph (2), indebtedness shall be treated as payable in equity of the issuer or any other person only if— (A) a substantial amount of the principal or interest is required to be paid or con- verted, or at the option of the issuer or a re- lated party is payable in, or convertible into, such equity, (B) a substantial amount of the principal or interest is required to be determined, or at the option of the issuer or a related party is determined, by reference to the value of such equity, or (C) the indebtedness is part of an arrange- ment which is reasonably expected to result in a transaction described in subparagraph (A) or (B). For purposes of this paragraph, principal or interest shall be treated as required to be so Page 751 TITLE 26—INTERNAL REVENUE CODE § 163 paid, converted, or determined if it may be re- quired at the option of the holder or a related party and there is a substantial certainty the option will be exercised. (4) Capitalization allowed with respect to eq- uity of persons other than issuer and re- lated parties If the disqualified debt instrument of a cor- poration is payable in equity held by the issuer (or any related party) in any other per- son (other than a related party), the basis of such equity shall be increased by the amount not allowed as a deduction by reason of para- graph (1) with respect to the instrument. (5) Exception for certain instruments issued by dealers in securities For purposes of this subsection, the term ‘‘disqualified debt instrument’’ does not in- clude indebtedness issued by a dealer in secu- rities (or a related party) which is payable in, or by reference to, equity (other than equity of the issuer or a related party) held by such dealer in its capacity as a dealer in securities. For purposes of this paragraph, the term ‘‘dealer in securities’’ has the meaning given such term by section 475. (6) Related party For purposes of this subsection, a person is a related party with respect to another person if such person bears a relationship to such other person described in section 267(b) or 707(b). (7) Regulations The Secretary shall prescribe such regula- tions as may be necessary or appropriate to carry out the purposes of this subsection, in- cluding regulations preventing avoidance of this subsection through the use of an issuer other than a corporation. (m) Interest on unpaid taxes attributable to non- disclosed reportable transactions No deduction shall be allowed under this chap- ter for any interest paid or accrued under sec- tion 6601 on any underpayment of tax which is attributable to the portion of any reportable transaction understatement (as defined in sec- tion 6662A(b)) with respect to which the require- ment of section 6664(d)(2)(A) 1 is not met. (n) Cross references (1) For disallowance of certain amounts paid in connection with insurance, endowment, or annuity contracts, see section 264. (2) For disallowance of deduction for interest re- lating to tax-exempt income, see section 265(a)(2). (3) For disallowance of deduction for carrying charges chargeable to capital account, see section 266. (4) For disallowance of interest with respect to transactions between related taxpayers, see section 267. (5) For treatment of redeemable ground rents and real property held subject to liabilities under re- deemable ground rents, see section 1055. (Aug. 16, 1954, ch. 736, 68A Stat. 46; Pub. L. 88–9, § 1(a), (c), Apr. 10, 1963, 77 Stat. 6, 7; Pub. L. 88–272, title II, § 224(c), Feb. 26, 1964, 78 Stat. 79; Pub. L. 91–172, title II, § 221(a), Dec. 30, 1969, 83 Stat. 574; Pub. L. 92–178, title III, § 304(a)(2), (b)(2), (d), Dec. 10, 1971, 85 Stat. 523, 524; Pub. L. 94–455, title II, §§ 205(c)(3), 209(a), title XIX, §§ 1901(b)(3)(K), (8)(C), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1535, 1542, 1793, 1794, 1834; Pub. L. 97–248, title II, § 231(b), title III, § 310(b)(2), Sept. 3, 1982, 96 Stat. 498, 596; Pub. L. 97–354, § 5(a)(18), Oct. 19, 1982, 96 Stat. 1693; Pub. L. 98–369, div. A, title I, §§ 42(a)(3), 56(b), 127(f), 128(c), title VI, § 612(c), July 18, 1984, 98 Stat. 556, 574, 652, 654, 911; Pub. L. 99–514, title V, § 511(a), (b), title IX, § 902(e)(1), title XIII, § 1301(j)(3), title XVIII, §§ 1803(a)(4), 1810(e)(1), Oct. 22, 1986, 100 Stat. 2244, 2246, 2382, 2657, 2793, 2825; Pub. L. 100–203, title X, §§ 10102(a), (b), 10212(b), Dec. 22, 1987, 101 Stat. 1330–384, 1330–386, 1330–406; Pub. L. 100–647, title I, §§ 1005(c)(1)–(9), (12), 1006(u)(1), 1009(b)(6), title II, § 2004(b)(1), Nov. 10, 1988, 102 Stat. 3390–3392, 3427, 3449, 3598; Pub. L. 101–239, title VII, §§ 7202(a), (b), 7210(a), Dec. 19, 1989, 103 Stat. 2330, 2331, 2339; Pub. L. 101–508, title XI, § 11701(b), (c), Nov. 5, 1990, 104 Stat. 1388–507; Pub. L. 103–66, title XIII, §§ 13206(d)(1), 13228(a)–(c), Aug. 10, 1993, 107 Stat. 467, 494, 495; Pub. L. 104–188, title I, §§ 1703(n)(4), 1704(f)(2)(A), (B), Aug. 20, 1996, 110 Stat. 1877, 1879; Pub. L. 105–34, title III, § 312(d)(1), title V, § 503(b)(2), title X, § 1005(a), title XVI, § 1604(g)(1), Aug. 5, 1997, 111 Stat. 839, 853, 911, 1099; Pub. L. 105–277, div. J, title IV, § 4003(a)(1), Oct. 21, 1998, 112 Stat. 2681–908; Pub. L. 106–170, title V, § 544, Dec. 17, 1999, 113 Stat. 1944; Pub. L. 108–27, title III, § 302(b), May 28, 2003, 117 Stat. 762; Pub. L. 108–357, title VIII, §§ 838(a), 841(a), 845(a)–(d), Oct. 22, 2004, 118 Stat. 1596, 1597, 1600, 1601; Pub. L. 109–135, title IV, § 403(a)(15), Dec. 21, 2005, 119 Stat. 2619; Pub. L. 109–222, title V, § 501(a), (b), May 17, 2006, 120 Stat. 354; Pub. L. 109–432, div. A, title IV, § 419(a), (b), Dec. 20, 2006, 120 Stat. 2967; Pub. L. 110–142, § 3(a), Dec. 20, 2007, 121 Stat. 1804; Pub. L. 111–5, div. B, title I, § 1232(a), (b), Feb. 17, 2009, 123 Stat. 341; Pub. L. 111–147, title V, § 502(a)(1), (2)(B), (C), (c), Mar. 18, 2010, 124 Stat. 107, 108; Pub. L. 111–312, title VII, § 759(a), Dec. 17, 2010, 124 Stat. 3323; Pub. L. 112–240, title II, § 204(a), (b), Jan. 2, 2013, 126 Stat. 2323; Pub. L. 113–295, div. A, title I, § 104(a), title II, §§ 220(h), 221(a)(25)(A), Dec. 19, 2014, 128 Stat. 4013, 4036, 4040; Pub. L. 114–113, div. Q, title I, § 152(a), Dec. 18, 2015, 129 Stat. 3066; Pub. L. 115–97, title I, §§ 11043(a), 13301(a), Dec. 22, 2017, 131 Stat. 2086, 2117; Pub. L. 115–123, div. D, title I, § 40202(a), Feb. 9, 2018, 132 Stat. 145; Pub. L. 115–141, div. U, title IV, § 401(a)(48), (b)(12), (c)(1)(C), (3)(B), Mar. 23, 2018, 132 Stat. 1186, 1202, 1205, 1206; Pub. L. 116–94, div. Q, title I, § 102(a), Dec. 20, 2019, 133 Stat. 3228; Pub. L. 116–136, div. A, title II, § 2306(a), Mar. 27, 2020, 134 Stat. 358; Pub. L. 116–260, div. EE, title I, § 133(a), Dec. 27, 2020, 134 Stat. 3053.) Editorial Notes REFERENCES IN TEXT The date of the enactment of this subparagraph, re- ferred to in subsec. (h)(4)(E)(ii), is the date of enact- ment of Pub. L. 109–432, which was approved Dec. 20, 2006. Section 199A(g)(2), referred to in subsec. (j)(7)(C)(ii), probably should be a reference to section 199A(g)(4), which defines ‘‘specified agricultural or horticultural cooperative’’ after the general amendment of section 199A(g) by Pub. L. 115–141, div. T, § 101(a)(1), Mar. 23, 2018, 132 Stat. 1151. Page 752 TITLE 26—INTERNAL REVENUE CODE § 163 Section 6664(d)(2)(A), referred to in subsec. (m), was redesignated as section 6664(d)(3)(A) by Pub. L. 111–152, title I, § 1409(c)(2)(A), Mar. 30, 2010, 124 Stat. 1069. AMENDMENTS 2020—Subsec. (h)(3)(E)(iv)(I). Pub. L. 116–260 sub- stituted ‘‘December 31, 2021’’ for ‘‘December 31, 2020’’. Subsec. (j)(10), (11). Pub. L. 116–136 added par. (10) and redesignated former par. (10) as (11). 2019—Subsec. (h)(3)(E)(iv)(I). Pub. L. 116–94 sub- stituted ‘‘December 31, 2020’’ for ‘‘December 31, 2017’’. 2018—Subsec. (d)(4)(E). Pub. L. 115–141, § 401(b)(12), struck out subpar. (E). Text read as follows: ‘‘Invest- ment income of the taxpayer for any taxable year shall be reduced by the amount of the passive activity loss to which section 469(a) does not apply for such taxable year by reason of section 469(m). The preceding sen- tence shall not apply to any portion of such passive ac- tivity loss which is attributable to a rental real estate activity with respect to which the taxpayer actively participates (within the meaning of section 469(i)(6)) during such taxable year.’’ Subsec. (e)(1). Pub. L. 115–141, § 401(c)(1)(C), sub- stituted ‘‘The portion of the original issue discount with respect to any debt instrument which is’’ for ‘‘In the case of any debt instrument issued after July 1, 1982, the portion of the original issue discount with re- spect to such debt instrument which is’’. Subsec. (e)(4). Pub. L. 115–141, § 401(c)(3)(B), amended par. (4) generally. Prior to amendment, text read as fol- lows: ‘‘This subsection shall not apply to any debt in- strument described in— ‘‘(A) subparagraph (D) of section 1272(a)(2) (relating to obligations issued by natural persons before March 2, 1984), and ‘‘(B) subparagraph (E) of section 1272(a)(2) (relating to loans between natural persons).’’ Subsec. (e)(5)(C)(ii). Pub. L. 115–141, § 401(a)(48), in- serted ‘‘in’’ before ‘‘subsection (i)(1)(B)’’. Subsec. (h)(3)(E)(iv)(I). Pub. L. 115–123 substituted ‘‘December 31, 2017’’ for ‘‘December 31, 2016’’. 2017—Subsec. (h)(3)(F). Pub. L. 115–97, § 11043(a), added subpar. (F). Subsec. (j). Pub. L. 115–97, § 13301(a), amended subsec. (j) generally. Prior to amendment, subsec. (j) related to a limitation on deduction for interest on certain in- debtedness of a corporation. 2015—Subsec. (h)(3)(E)(iv)(I). Pub. L. 114–113 sub- stituted ‘‘December 31, 2016’’ for ‘‘December 31, 2014’’. 2014—Subsec. (d)(6). Pub. L. 113–295, § 221(a)(25)(A)(i), struck out par. (6) which related to phase-in of dis- allowance. Subsec. (h)(3)(E)(iv)(I). Pub. L. 113–295, § 104(a), sub- stituted ‘‘December 31, 2014’’ for ‘‘December 31, 2013’’. Subsec. (h)(4)(F). Pub. L. 113–295, § 220(h), substituted ‘‘Department of Veterans Affairs or the Rural Housing Service’’ for ‘‘Veterans Administration or the Rural Housing Administration’’. Subsec. (h)(5). Pub. L. 113–295, § 221(a)(25)(A)(ii), struck out par. (5). Text read as follows: ‘‘In the case of any taxable year beginning in calendar years 1987 through 1990, the amount of interest with respect to which a deduction is disallowed under this subsection shall be equal to the applicable percentage (within the meaning of subsection (d)(6)(B)) of the amount which (but for this paragraph) would have been so dis- allowed.’’ 2013—Subsec. (h)(3)(E)(iv)(I). Pub. L. 112–240, § 204(a), substituted ‘‘December 31, 2013’’ for ‘‘December 31, 2011’’. Subsec. (h)(4)(E)(i). Pub. L. 112–240, § 204(b), sub- stituted ‘‘Department of Veterans Affairs’’ for ‘‘Vet- erans Administration’’ and ‘‘Rural Housing Service’’ for ‘‘Rural Housing Administration’’. 2010—Subsec. (f)(2)(A)(ii) to (iv). Pub. L. 111–147, § 502(a)(2)(B), inserted ‘‘or’’ at end of cl. (ii), substituted period for ‘‘, or’’ in cl. (iii), and struck out cl. (iv), which read as follows: ‘‘is described in subparagraph (B).’’ Subsec. (f)(2)(B). Pub. L. 111–147, § 502(a)(1), (2)(C)(i), redesignated subpar. (C) as (B), struck out ‘‘, and sub- paragraph (B),’’ after ‘‘subparagraph (A)’’ in introduc- tory provisions, and struck out former subpar. (B) which related to certain obligations not included as registration-required obligations. Subsec. (f)(2)(B)(i). Pub. L. 111–147, § 502(a)(2)(C)(ii), amended cl. (i) generally. Prior to amendment, cl. (i) read as follows: ‘‘in the case of— ‘‘(I) subparagraph (A), such obligation is of a type which the Secretary has determined by regulations to be used frequently in avoiding Federal taxes, or ‘‘(II) subparagraph (B), such obligation is of a type specified by the Secretary in regulations, and’’. Subsec. (f)(2)(C). Pub. L. 111–147, § 502(a)(1), redesig- nated subpar. (C) as (B). Subsec. (f)(3). Pub. L. 111–147, § 502(c), inserted before period at end ‘‘, except that a dematerialized book entry system or other book entry system specified by the Secretary shall be treated as a book entry system described in such section’’. Subsec. (h)(3)(E)(iv)(I). Pub. L. 111–312 substituted ‘‘December 31, 2011’’ for ‘‘December 31, 2010’’. 2009—Subsec. (e)(5)(F), (G). Pub. L. 111–5, § 1232(a), added subpar. (F) and redesignated former subpar. (F) as (G). Subsec. (i)(1). Pub. L. 111–5, § 1232(b), in concluding provisions, inserted ‘‘(i)’’ before ‘‘permit a rate’’ and ‘‘, or (ii) permit, on a temporary basis, a rate to be used with respect to any debt instrument which is higher than the applicable Federal rate if the Secretary determines that such rate is appropriate in light of dis- tressed conditions in the debt capital markets’’ before period at end. 2007—Subsec. (h)(3)(E)(iv)(I). Pub. L. 110–142 sub- stituted ‘‘December 31, 2010’’ for ‘‘December 31, 2007’’. 2006—Subsec. (h)(3)(E). Pub. L. 109–432, § 419(a), added subpar. (E). Subsec. (h)(4)(E), (F). Pub. L. 109–432, § 419(b), added subpars. (E) and (F). Subsec. (j)(8). Pub. L. 109–222, § 501(a), added par. (8). Former par. (8) redesignated (9). Subsec. (j)(9). Pub. L. 109–222 redesignated par. (8) as (9) and added subpar. (D). 2005—Subsec. (j)(6)(A)(i)(III), (IV). Pub. L. 109–135 added subcl. (III) and redesignated former subcl. (III) as (IV). 2004—Subsec. (e)(3)(B), (C). Pub. L. 108–357, § 841(a), added subpar. (B) and redesignated former subpar. (B) as (C). Subsec. (l)(2). Pub. L. 108–357, § 845(a), inserted ‘‘or eq- uity held by the issuer (or any related party) in any other person’’ after ‘‘or a related party’’. Subsec. (l)(3). Pub. L. 108–357, § 845(d), substituted ‘‘or any other person’’ for ‘‘or a related party’’ in introduc- tory provisions. Subsec. (l)(4) to (7). Pub. L. 108–357, § 845(b), (c), added pars. (4) and (5) and redesignated former pars. (4) and (5) as (6) and (7), respectively. Subsecs. (m), (n). Pub. L. 108–357, § 838(a), added sub- sec. (m) and redesignated former subsec. (m) as (n). 2003—Subsec. (d)(4)(B). Pub. L. 108–27 inserted at end ‘‘Such term shall include qualified dividend income (as defined in section 1(h)(11)(B)) only to the extent the taxpayer elects to treat such income as investment in- come for purposes of this subsection.’’ 1999—Subsec. (j)(3)(C). Pub. L. 106–170 added subpar. (C). 1998—Subsec. (h)(2)(F). Pub. L. 105–277 added subpar. (F). 1997—Subsec. (h)(2)(E). Pub. L. 105–34, § 503(b)(2)(B), struck out ‘‘or 6166 or under section 6166A (as in effect before its repeal by the Economic Recovery Tax Act of 1981)’’ after ‘‘section 6163’’. Subsec. (h)(4)(A)(i)(I). Pub. L. 105–34, § 312(d)(1), sub- stituted ‘‘section 121’’ for ‘‘section 1034’’. Subsec. (j)(2)(B)(iii). Pub. L. 105–34, § 1604(g)(1), sub- stituted ‘‘clause (ii)’’ for ‘‘clause (i)’’ in introductory provisions. Subsec. (k). Pub. L. 105–34, § 503(b)(2)(A), added subsec. (k). Former subsec. (k) redesignated (l). Subsec. (l). Pub. L. 105–34, § 1005(a), added subsec. (l). Former subsec. (l) redesignated (m). Page 753 TITLE 26—INTERNAL REVENUE CODE § 163 Pub. L. 105–34, § 503(b)(2)(A), redesignated subsec. (k) as (l). Subsec. (m). Pub. L. 105–34, § 1005(a), redesignated sub- sec. (l) as (m). 1996—Subsec. (j)(1)(B). Pub. L. 104–188, § 1704(f)(2)(A), inserted before period at end ‘‘(and clause (ii) of para- graph (2)(A) shall not apply for purposes of applying this subsection to the amount so treated)’’. Subsec. (j)(6)(E)(ii). Pub. L. 104–188, § 1703(n)(4), which directed that cl. (ii) be amended by substituting ‘‘which is’’ for ‘‘which is a’’, could not be executed, because ‘‘which is a’’ does not appear. Subsec. (j)(7), (8). Pub. L. 104–188, § 1704(f)(2)(B), added par. (7) and redesignated former par. (7) as (8). 1993—Subsec. (d)(4)(B). Pub. L. 103–66, § 13206(d)(1), amended heading and text of subpar. (B) generally. Prior to amendment, text read as follows: ‘‘The term ‘investment income’ means the sum of— ‘‘(i) gross income (other than gain taken into ac- count under clause (ii)) from property held for invest- ment, and ‘‘(ii) any net gain attributable to the disposition of property held for investment.’’ Subsec. (j). Pub. L. 103–66, § 13228(c)(2), substituted ‘‘for interest on certain indebtedness’’ for ‘‘for certain interest paid by corporation to related person’’ in head- ing. Subsec. (j)(3). Pub. L. 103–66, § 13228(a), amended head- ing and text of par. (3) generally. Prior to amendment, text read as follows: ‘‘For purposes of this subsection— ‘‘(A) IN GENERAL.—Except as provided in subpara- graph (B), the term ‘disqualified interest’ means any interest paid or accrued by the taxpayer (directly or indirectly) to a related person if no tax is imposed by this subtitle with respect to such interest. ‘‘(B) EXCEPTION FOR CERTAIN EXISTING INDEBTED- NESS.—The term ‘disqualified interest’ does not in- clude any interest paid or accrued under indebtedness with a fixed term— ‘‘(i) which was issued on or before July 10, 1989, or ‘‘(ii) which was issued after such date pursuant to a written binding contract in effect on such date and all times thereafter before such indebtedness was issued.’’ Subsec. (j)(5)(B). Pub. L. 103–66, § 13228(c)(1), struck out ‘‘to a related person’’ after ‘‘by the taxpayer’’ in in- troductory provisions. Subsec. (j)(6)(D), (E). Pub. L. 103–66, § 13228(b), added subpars. (D) and (E). 1990—Subsec. (e)(5)(A). Pub. L. 101–508, § 11701(b)(1), amended last sentence generally. Prior to amendment, last sentence read as follows: ‘‘For purposes of clause (ii), rules similar to the rules of subsection (i)(3)(B) shall apply in determining the time when the original issue discount is paid.’’ Subsec. (i)(3). Pub. L. 101–508, § 11701(b)(2)(B), inserted sentence at end. Subsec. (i)(3)(B). Pub. L. 101–508, § 11701(b)(2)(A), struck out ‘‘(or stock)’’ after ‘‘obligation’’ wherever ap- pearing. Subsec. (j)(2)(A)(ii). Pub. L. 101–508, § 11701(c)(2), sub- stituted ‘‘or on any other day’’ for ‘‘and on such other days’’. Subsec. (j)(2)(C). Pub. L. 101–508, § 11701(c)(1), sub- stituted ‘‘reduced (but not below zero) by such’’ for ‘‘less such’’ in introductory provisions. 1989—Subsec. (e)(5), (6). Pub. L. 101–239, § 7202(a), added par. (5) and redesignated former par. (5) as (6). Subsec. (i). Pub. L. 101–239, § 7202(b), added subsec. (i). Former subsec. (i) redesignated (j). Subsec. (j). Pub. L. 101–239, § 7210(a), added subsec. (j). Former subsec. (j) redesignated (k). Pub. L. 101–239, § 7202(b), redesignated subsec. (i) as (j). Subsec. (k). Pub. L. 101–239, § 7210(a), redesignated subsec. (j) as (k). 1988—Subsec. (d)(3)(A). Pub. L. 100–647, § 1005(c)(1), substituted ‘‘properly allocable to’’ for ‘‘incurred or continued to purchase or carry’’. Subsec. (d)(4)(B). Pub. L. 100–647, § 1005(c)(2), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: ‘‘The term ‘investment income’ means the sum of— ‘‘(i) gross income (other than gain described in clause (ii)) from property held for investment, and ‘‘(ii) any net gain attributable to the disposition of property held for investment, but only to the extent such amounts are not derived from the conduct of a trade or business.’’ Subsec. (d)(6)(A). Pub. L. 100–647, § 1005(c)(3), amended subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: ‘‘The amount of interest disallowed under this subsection for any such taxable year shall be equal to the sum of— ‘‘(i) the applicable percentage of the amount which (without regard to this paragraph) is not allowed as a deduction under this subsection for the taxable year to the extent such amount does not exceed the ceiling amount, ‘‘(ii) the amount which (without regard to this paragraph) is not allowed as a deduction under this subsection in excess of the ceiling amount, plus ‘‘(iii) the amount of any carryforward to such tax- able year under paragraph (2) with respect to which a deduction was disallowed under this subsection for a preceding taxable year. For purposes of this subparagraph, the amount under clause (i) or (ii) shall be computed without regard to the amount described in clause (iii).’’ Subsec. (e)(2)(B). Pub. L. 100–647, § 1006(u)(1), sub- stituted ‘‘paragraph (7)’’ for ‘‘paragraph (6)’’. Subsec. (h)(2)(A). Pub. L. 100–647, § 1005(c)(4), sub- stituted ‘‘properly allocable to’’ for ‘‘incurred or con- tinued in connection with the conduct of’’. Subsec. (h)(2)(E). Pub. L. 100–647, § 1005(c)(12), inserted ‘‘or under section 6166A (as in effect before its repeal by the Economic Recovery Tax Act of 1981)’’ before period at end. Subsec. (h)(3)(C). Pub. L. 100–647, § 1005(c)(5), effective as if enacted immediately before enactment of Pub. L. 100–203 (see 1987 Amendment note below), amended sub- par. (C) generally. Prior to amendment, subpar. (C) read as follows: ‘‘The amount under subparagraph (B)(ii)(I) at any time after August 16, 1986, shall not be less than the outstanding aggregate principal amount (as of such time) of indebtedness which was incurred on or before August 16, 1986, and which was secured by the qualified residence on August 16, 1986.’’ Subsec. (h)(4). Pub. L. 100–647, § 1005(c)(6)(A), effective as if enacted immediately before enactment of Pub. L. 100–203 (redesignating par. (5) as (4), see 1987 Amend- ment note below), amended heading by substituting ‘‘Other definitions and special rules—For purposes of this subsection—’’ for ‘‘Other definitions and special rules’’. Subsec. (h)(4)(A). Pub. L. 100–647, § 1005(c)(6)(B)(i), (7), effective as if enacted immediately before enactment of Pub. L. 100–203 (redesignating par. (5) as (4), see 1987 Amendment note below), amended subpar. (A) by strik- ing out ‘‘For purposes of this subsection—’’ after ‘‘Qualified residence’’ in introductory provisions, ‘‘used or’’ after ‘‘Residence not’’ in cl. (iii) heading, and ‘‘or use’’ after ‘‘does not rent’’ in cl. (iii) text. Subsec. (h)(4)(B). Pub. L. 100–647, § 1005(c)(6)(B)(ii), ef- fective as if enacted immediately before enactment of Pub. L. 100–203 (redesignating par. (5) as (4), see 1987 Amendment note below), amended subpar. (B) by sub- stituting ‘‘Any’’ for ‘‘For purposes of this paragraph, any’’. Subsec. (h)(4)(C), (D). Pub. L. 100–647, § 1005(c)(8), ef- fective as if enacted immediately before enactment of Pub. L. 100–203 (redesignating par. (5) as (4), see 1987 Amendment note below), par. (4) added subpars. (C) and (D). Subsec. (h)(5). Pub. L. 100–647, § 2004(b)(1), redesig- nated par. (6) as (5). Subsec. (h)(6). Pub. L. 100–647, § 2004(b)(1), redesig- nated par. (6) as (5). Pub. L. 100–647, § 1005(c)(9), substituted ‘‘but for this paragraph’’ for ‘‘but for this subsection’’. Subsec. (i)(2). Pub. L. 100–647, § 1009(b)(6), made tech- nical correction to directory language of Pub. L. 99–514, § 902(e)(1), see 1986 Amendment note below. Page 754 TITLE 26—INTERNAL REVENUE CODE § 163 1987—Subsec. (d)(4)(E). Pub. L. 100–203, § 10212(b), sub- stituted ‘‘section 469(m)’’ for ‘‘section 469(l)’’. Subsec. (h)(3). Pub. L. 100–203, § 10102(a), amended par. (3) generally. Prior to amendment (see 1988 Amendment note above), par. (3) read as follows: ‘‘For purposes of this subsection— ‘‘(A) IN GENERAL.—The term ‘qualified residence in- terest’ means interest which is paid or accrued during the taxable year on indebtedness which is secured by any property which (at the time such interest is paid or accrued) is a qualified residence of the taxpayer. ‘‘(B) LIMITATION ON AMOUNT OF INTEREST.—The term ‘qualified residence interest’ shall not include any in- terest paid or accrued on indebtedness secured by any qualified residence which is allocable to that portion of the principal amount of such indebtedness which, when added to the outstanding aggregate principal amount of all other indebtedness previously incurred and secured by such qualified residence, exceeds the lesser of— ‘‘(i) the fair market value of such qualified resi- dence, or ‘‘(ii) the sum of— ‘‘(I) the taxpayer’s basis in such qualified resi- dence (adjusted only by the cost of any improve- ments to such residence), plus ‘‘(II) the aggregate amount of qualified indebt- edness of the taxpayer with respect to such quali- fied residence. ‘‘(C) COST NOT LESS THAN BALANCE OF INDEBTEDNESS INCURRED ON OR BEFORE AUGUST 16, 1986.— ‘‘(i) IN GENERAL.—The amount under subpara- graph (B)(ii)(I) at any time after August 16, 1986, shall not be less than the outstanding principal amount (as of such time) of indebtedness— ‘‘(I) which was incurred on or before August 16, 1986, and which was secured by the qualified resi- dence on August 16, 1986, or ‘‘(II) which is secured by the qualified residence and was incurred after August 16, 1986, to refi- nance indebtedness described in subclause (I) (or refinanced indebtedness meeting the require- ments of this subclause) to the extent (imme- diately after the refinancing) the principal amount of the indebtedness resulting from the re- financing does not exceed the principal amount of the refinanced indebtedness (immediately before the refinancing). ‘‘(ii) LIMITATION ON PERIOD OF REFINANCING.—Sub- clause (II) of clause (i) shall not apply to any in- debtedness after— ‘‘(I) the expiration of the term of the indebted- ness described in clause (i)(I), or ‘‘(II) if the principal of the indebtedness de- scribed in clause (i)(I) is not amortized over its term, the expiration of the term of the 1st refi- nancing of such indebtedness (or if earlier, the date which is 30 years after the date of such refi- nancing). ‘‘(D) TIME FOR DETERMINATION.—Except as provided in regulations, any determination under subpara- graph (B) shall be made as of the time the indebted- ness is incurred.’’ Subsec. (h)(4), (5). Pub. L. 100–203, § 10102(b), redesig- nated par. (5) as (4) and struck out former par. (4) which defined ‘‘qualified indebtedness’’ for purposes of this subsection. 1986—Subsec. (d). Pub. L. 99–514, § 511(a), substituted ‘‘Limitation on investment interest’’ for ‘‘Limitation on interest on investment indebtedness’’ in heading, and amended text generally, revising and restating as pars. (1) to (6) provisions of former pars. (1) to (7). Subsec. (e)(2)(C). Pub. L. 99–514, § 1803(a)(4), added sub- par. (C). Subsec. (e)(3)(A). Pub. L. 99–514, § 1810(e)(1)(A), in- serted ‘‘The preceding sentence shall not apply to the extent that the original issue discount is effectively connected with the conduct by such foreign related per- son of a trade or business within the United States un- less such original issue discount is exempt from tax- ation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States.’’ Subsec. (e)(5). Pub. L. 99–514, § 1810(e)(1)(B), redesig- nated par. (4), relating to cross references, as (5). Subsec. (f)(3). Pub. L. 99–514, § 1301(j)(3), substituted ‘‘section 149(a)(3)’’ for ‘‘section 103(j)(3)’’. Subsec. (h). Pub. L. 99–514, § 511(b), added subsec. (h). Former subsec. (h) redesignated (i). Subsec. (i)(2). Pub. L. 99–514, § 902(e)(1), as amended by Pub. L. 100–647, § 1009(b)(6), substituted ‘‘section 265(a)(2)’’ for ‘‘section 265(2)’’. Pub. L. 99–514, § 511(b), redesignated former subsec. (h) as (i). 1984—Subsec. (d)(3)(D). Pub. L. 98–369, § 56(b), des- ignated existing provisions as cl. (i) and added cl. (ii). Subsec. (e)(1). Pub. L. 98–369, § 42(a)(3), substituted ‘‘debt instrument’’ for ‘‘bond’’ in two places and struck out ‘‘by an issuer (other than a natural person)’’ before ‘‘, the portion of the original issue’’. Subsec. (e)(2). Pub. L. 98–369, § 42(a)(3), substituted provisions relating to debt instruments for provisions relating to bonds. Subsec. (e)(3). Pub. L. 98–369, § 128(c), added par. (3) re- lating to special rule for original issue discount on ob- ligation held by related foreign person. Former par. (3), relating to exceptions, redesignated (4). Pub. L. 98–369, § 42(a)(3), added par. (3) relating to ex- ceptions. Subsec. (e)(4). Pub. L. 98–369, § 128(c), redesignated par. (3), relating to exceptions, as (4). Pub. L. 98–369, § 42(a)(3), added par. (4) relating to cross references. Subsec. (f)(2)(C)(i). Pub. L. 98–369, § 127(f), redesig- nated existing provision as subcl. (I), and in subcl. (I) as so redesignated, inserted reference to subpar. (A) and substituted ‘‘or’’ for ‘‘and’’, and added subcl. (II). Subsecs. (g), (h). Pub. L. 98–369, § 612(c), added subsec. (g) and redesignated former subsec. (g) as (h). 1982—Subsec. (d)(4). Pub. L. 97–354 redesignated sub- par. (D) as (B). Former subpars. (B) and (C), relating to partnerships and shareholders of electing small busi- ness corporations, respectively, were struck out. Subsec. (e). Pub. L. 97–248, § 231(b), added subsec. (e) relating to original issue discount. Former subsec. (e), setting forth cross references, redesignated (f). Pub. L. 97–248, § 231(b), redesignated former subsec. (e), setting forth cross references, as (f). Subsec. (f). Pub. L. 97–248, § 310(b)(2), added subsec. (f) relating to the requirement that obligations be in reg- istered form to be tax-exempt. Former subsec. (f), set- ting forth cross references, redesignated (g). Subsec. (g). Pub. L. 97–248, § 310(b)(2), redesignated former subsec. (f), setting forth cross references, as (g). 1976—Subsec. (b)(1). Pub. L. 94–455, § 1901(b)(8)(C), sub- stituted ‘‘organization described in section 170(b)(1)(A)(ii) and which is provided for a student of such organization’’ for ‘‘institution (as defined in sec- tion 151(e)(4)) and which is provided for a student of such institution’’. Subsec. (d)(1). Pub. L. 94–455, § 209(a)(1), among other changes, substituted in subpar. (A) ‘‘$10,000’’ for ‘‘$25,000’’ and ‘‘$5,000’’ for ‘‘$12,500’’, struck out subpar. (C) relating to the excess of net long-term capital gain over short-term capital loss and subpar. (D) relating to the excess of investment interest over amounts in sub- par. (A), and in provisions following lettered para- graphs substituted ‘‘$10,000’’ for ‘‘$25,000’’ and struck out provisions relating to the determination of the amount referred to in subpar. (C). Subsec. (d)(2). Pub. L. 94–455, § 209(a)(1), among other changes, struck out provisions relating to the limita- tion on the amount of interest allowable by this par. and to reduction of disallowed investment interest for capital gain deduction purposes. Subsec. (d)(3)(A). Pub. L. 94–455, § 209(a)(2), inserted provision relating to determination of the amount of net investment income where taxpayer has investment interest for taxable year to which this subsection ap- plies. Subsec. (d)(3)(B)(iii). Pub. L. 94–455, §§ 205(c)(3), 1901(b)(3)(K), substituted ‘‘1250, and 1254’’ for ‘‘and Page 755 TITLE 26—INTERNAL REVENUE CODE § 163 1250’’, and ‘‘ordinary income’’ for ‘‘gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231’’. Section 205(c)(3) of Pub. L. 94–455, which directed the amend- ment of subsec. (d)(3)(A)(iii), was executed by amending subsec. (d)(3)(B)(iii) to reflect the probable intent of Congress. Subsec. (d)(3)(E). Pub. L. 94–455, § 209(a)(3), substituted ‘‘limitation in paragraph (1)’’ for ‘‘limitations in para- graphs (1) and (2)(A)’’. Subsec. (d)(4)(B), (C). Pub. L. 94–455, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Secretary’’. Subsec. (d)(5). Pub. L. 94–455, § 209(a)(4), (5), redesig- nated par. (6) as (5) and inserted provision relating to the application of this paragraph after Dec. 31, 1975, on an allocation basis rather than a specific item basis. Former par. (5), relating to capital gains treatment of investment interest, was struck out. Pub. L. 94–455, § 1901(b)(3)(K), directed the amendment of par. (5) by substituting ‘‘ordinary income’’ for ‘‘gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231’’, such par. (5) having been struck out by Pub. L. 94–455, § 209(a)(4). Subsec. (d)(6). Pub. L. 94–455, §§ 209(a)(4), 1906(b)(13)(A), redesignated par. (7) as (6) and struck out in provision following subpar. (B) ‘‘or his delegate’’ after ‘‘Sec- retary’’. Former par. (6) redesignated (5). Subsec. (d)(7). Pub. L. 94–455, § 209(a)(6), added par. (7). Former par. (7) redesignated (6). 1971—Subsec. (d)(1)(B). Pub. L. 92–178, § 304(b)(2), in- serted ‘‘the amount (if any) by which the deductions al- lowable under this section (determined without regard to this subsection) and sections 162, 164(a)(1) or (2), or 212 attributable to property of the taxpayer subject to a net lease exceeds the rental income produced by such property for the property year, plus’’ after ‘‘plus’’. Subsec. (d)(3)(C). Pub. L. 92–178, § 304(d), inserted ref- erence to section 162. Subsec. (d)(4)(A)(i). Pub. L. 92–178, § 304(a)(2)(A), in- serted ‘‘of the lessor’’ after ‘‘deductions’’ and ‘‘(other than rents and reimbursed amounts with respect to such property)’’ after ‘‘section 162’’. Subsec. (d)(7). Pub. L. 92–178, § 304(a)(2)(B), added par. (7). 1969—Subsecs. (d), (e). Pub. L. 91–172 added subsec. (d). Former subsec. (d) redesignated (e). 1964—Subsec. (b)(1). Pub. L. 88–272 included the pur- chase of educational services, and defined ‘‘educational services’’. 1963—Subsecs. (c), (d). Pub. L. 88–9, § 1(a), (c), added subsec. (c), redesignated former subsec. (c) as (d) and added par. (5). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2020 AMENDMENT Pub. L. 116–260, div. EE, title I, § 133(b), Dec. 27, 2020, 134 Stat. 3053, provided that: ‘‘The amendment made by this section [amending this section] shall apply to amounts paid or accrued after December 31, 2020.’’ Pub. L. 116–136, div. A, title II, § 2306(b), Mar. 27, 2020, 134 Stat. 359, provided that: ‘‘The amendments made by this section [amending this section] shall apply to tax- able years beginning after December 31, 2018.’’ EFFECTIVE DATE OF 2019 AMENDMENT Pub. L. 116–94, div. Q, title I, § 102(b), Dec. 20, 2019, 133 Stat. 3228, provided that: ‘‘The amendment made by this section [amending this section] shall apply to amounts paid or accrued after December 31, 2017.’’ EFFECTIVE DATE OF 2018 AMENDMENT Pub. L. 115–141, div. U, title IV, § 401(c)(1)(H), Mar. 23, 2018, 132 Stat. 1205, provided that: ‘‘The amendments made by this paragraph [amending this section and sec- tions 1271, 1272, and 1278 of this title] shall apply to debt instruments issued on or after July 2, 1982.’’ Pub. L. 115–141, div. U, title IV, § 401(c)(3)(C), Mar. 23, 2018, 132 Stat. 1206, provided that: ‘‘The amendments made by this paragraph [amending this section and sec- tion 1272 of this title] shall apply to obligations issued on or after March 2, 1984.’’ Pub. L. 115–123, div. D, title I, § 40202(b), Feb. 9, 2018, 132 Stat. 145, provided that: ‘‘The amendment made by this section [amending this section] shall apply to amounts paid or accrued after December 31, 2016.’’ EFFECTIVE DATE OF 2017 AMENDMENT Pub. L. 115–97, title I, § 11043(b), Dec. 22, 2017, 131 Stat. 2087, provided that: ‘‘The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 2017.’’ Pub. L. 115–97, title I, § 13301(c), Dec. 22, 2017, 131 Stat. 2121, provided that: ‘‘The amendments made by this section [amending this section and sections 381 and 382 of this title] shall apply to taxable years beginning after December 31, 2017.’’ EFFECTIVE DATE OF 2015 AMENDMENT Pub. L. 114–113, div. Q, title I, § 152(b), Dec. 18, 2015, 129 Stat. 3066, provided that: ‘‘The amendment made by this section [amending this section] shall apply to amounts paid or accrued after December 31, 2014.’’ EFFECTIVE DATE OF 2014 AMENDMENT Pub. L. 113–295, div. A, title I, § 104(b), Dec. 19, 2014, 128 Stat. 4013, provided that: ‘‘The amendment made by this section [amending this section] shall apply to amounts paid or accrued after December 31, 2013.’’ Amendment by section 221(a)(25)(A) of Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title. EFFECTIVE DATE OF 2013 AMENDMENT Pub. L. 112–240, title II, § 204(c), Jan. 2, 2013, 126 Stat. 2323, provided that: ‘‘The amendments made by this section [amending this section] shall apply to amounts paid or accrued after December 31, 2011.’’ EFFECTIVE DATE OF 2010 AMENDMENT Pub. L. 111–312, title VII, § 759(b), Dec. 17, 2010, 124 Stat. 3323, provided that: ‘‘The amendment made by this section [amending this section] shall apply to amounts paid or accrued after December 31, 2010.’’ Amendment by Pub. L. 111–147 applicable to obliga- tions issued after the date which is 2 years after Mar. 18, 2010, see section 502(f) of Pub. L. 111–147, set out as a note under section 149 of this title. EFFECTIVE DATE OF 2009 AMENDMENT Pub. L. 111–5, div. B, title I, § 1232(c), Feb. 17, 2009, 123 Stat. 341, provided that: ‘‘(1) SUSPENSION.—The amendments made by sub- section (a) [amending this section] shall apply to obli- gations issued after August 31, 2008, in taxable years ending after such date. ‘‘(2) INTEREST RATE AUTHORITY.—The amendments made by subsection (b) [amending this section] shall apply to obligations issued after December 31, 2009, in taxable years ending after such date.’’ EFFECTIVE DATE OF 2007 AMENDMENT Pub. L. 110–142, § 3(b), Dec. 20, 2007, 121 Stat. 1804, pro- vided that: ‘‘The amendment made by this section [amending this section] shall apply to amounts paid or accrued after December 31, 2007.’’ EFFECTIVE DATE OF 2006 AMENDMENT Pub. L. 109–432, div. A, title IV, § 419(d), Dec. 20, 2006, 120 Stat. 2968, provided that: ‘‘The amendments made by this section [amending this section and section 6050H of this title] shall apply to amounts paid or ac- crued after December 31, 2006.’’ Pub. L. 109–222, title V, § 501(c), May 17, 2006, 120 Stat. 354, provided that: ‘‘The amendments made by this sec- tion [amending this section] shall apply to taxable Page 756 TITLE 26—INTERNAL REVENUE CODE § 163 years beginning on or after the date of the enactment of this Act [May 17, 2006].’’ EFFECTIVE DATE OF 2005 AMENDMENT Amendment by Pub. L. 109–135 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 403(nn) of Pub. L. 109–135, set out as a note under section 26 of this title. EFFECTIVE DATE OF 2004 AMENDMENT Pub. L. 108–357, title VIII, § 838(b), Oct. 22, 2004, 118 Stat. 1597, provided that: ‘‘The amendments made by this section [amending this section] shall apply to transactions in taxable years beginning after the date of the enactment of this Act [Oct. 22, 2004].’’ Pub. L. 108–357, title VIII, § 841(c), Oct. 22, 2004, 118 Stat. 1598, provided that: ‘‘The amendments made by this section [amending this section and section 267 of this title] shall apply to payments accrued on or after the date of the enactment of this Act [Oct. 22, 2004].’’ Pub. L. 108–357, title VIII, § 845(e), Oct. 22, 2004, 118 Stat. 1601, provided that: ‘‘The amendments made by this section [amending this section] shall apply to debt instruments issued after October 3, 2004.’’ EFFECTIVE DATE OF 2003 AMENDMENT Amendment by Pub. L. 108–27 applicable, except as otherwise provided, to taxable years beginning after Dec. 31, 2002, see section 302(f) of Pub. L. 108–27, set out as an Effective and Termination Dates of 2003 Amend- ment note under section 1 of this title. EFFECTIVE DATE OF 1999 AMENDMENT Amendment by Pub. L. 106–170 applicable to taxable years beginning after Dec. 31, 2000, see section 546(a) of Pub. L. 106–170, set out as a note under section 856 of this title. EFFECTIVE DATE OF 1998 AMENDMENT Amendment by Pub. L. 105–277 effective as if included in the provision of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 4003(l) of Pub. L. 105–277, set out as a note under section 86 of this title. EFFECTIVE DATE OF 1997 AMENDMENT Amendment by section 312(d)(1) of Pub. L. 105–34 ap- plicable to sales and exchanges after May 6, 1997, with certain exceptions, see section 312(d) of Pub. L. 105–34, set out as a note under section 121 of this title. Pub. L. 105–34, title V, § 503(d), Aug. 5, 1997, 111 Stat. 853, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [amending this section and sections 2053, 6166, and 6601 of this title] shall apply to estates of decedents dying after December 31, 1997. ‘‘(2) ELECTION.—In the case of the estate of any dece- dent dying before January 1, 1998, with respect to which there is an election under section 6166 of the Internal Revenue Code of 1986, the executor of the estate may elect to have the amendments made by this section apply with respect to installments due after the effec- tive date of the election; except that the 2-percent por- tion of such installments shall be equal to the amount which would be the 4-percent portion of such install- ments without regard to such election. Such an elec- tion shall be made before January 1, 1999 in the manner prescribed by the Secretary of the Treasury and, once made, is irrevocable.’’ Pub. L. 105–34, title X, § 1005(b), Aug. 5, 1997, 111 Stat. 912, provided that: ‘‘(1) IN GENERAL.—The amendment made by this sec- tion [amending this section] shall apply to disqualified debt instruments issued after June 8, 1997. ‘‘(2) TRANSITION RULE.—The amendment made by this section shall not apply to any instrument issued after June 8, 1997, if such instrument is— ‘‘(A) issued pursuant to a written agreement which was binding on such date and at all times thereafter, ‘‘(B) described in a ruling request submitted to the Internal Revenue Service on or before such date, or ‘‘(C) described on or before such date in a public an- nouncement or in a filing with the Securities and Ex- change Commission required solely by reason of the issuance.’’ EFFECTIVE DATE OF 1996 AMENDMENT Amendment by section 1703(n)(4) of Pub. L. 104–188 ef- fective as if included in the provision of the Revenue Reconciliation Act of 1993, Pub. L. 103–66, §§ 13001–13444, to which such amendment relates, see section 1703(o) of Pub. L. 104–188, set out as a note under section 39 of this title. Pub. L. 104–188, title I, § 1704(f)(2)(C), Aug. 20, 1996, 110 Stat. 1879, provided that: ‘‘The amendments made by this paragraph [amending this section] shall apply as if included in the amendments made by section 7210(a) of the Revenue Reconciliation Act of 1989 [Pub. L. 101–239].’’ EFFECTIVE DATE OF 1993 AMENDMENT Amendment by section 13206(d)(1) of Pub. L. 103–66 ap- plicable to taxable years beginning after Dec. 31, 1992, see section 13206(d)(3) of Pub. L. 103–66 set out as a note under section 1 of this title. Pub. L. 103–66, title XIII, § 13228(d), Aug. 10, 1993, 107 Stat. 495, provided that: ‘‘The amendments made by this section [amending this section] shall apply to in- terest paid or accrued in taxable years beginning after December 31, 1993.’’ EFFECTIVE DATE OF 1990 AMENDMENT Amendment by Pub. L. 101–508 effective, except as otherwise provided, as if included in the provision of the Revenue Reconciliation Act of 1989, Pub. L. 101–239, title VII, to which such amendment relates, see section 11701(n) of Pub. L. 101–508, set out as a note under sec- tion 42 of this title. EFFECTIVE DATE OF 1989 AMENDMENT Pub. L. 101–239, title VII, § 7202(c), Dec. 19, 1989, 103 Stat. 2332, provided that: ‘‘(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section [amending this section] shall apply to instruments issued after July 10, 1989. ‘‘(2) EXCEPTIONS.— ‘‘(A) The amendments made by this section shall not apply to any instrument if— ‘‘(i) such instrument is issued in connection with an acquisition— ‘‘(I) which is made on or before July 10, 1989, ‘‘(II) for which there was a written binding con- tract in effect on July 10, 1989, and at all times thereafter before such acquisition, or ‘‘(III) for which a tender offer was filed with the Securities and Exchange Commission on or before July 10, 1989, ‘‘(ii) the term of such instrument is not greater than— ‘‘(I) the term specified in the written documents described in clause (iii), or ‘‘(II) if no term is determined under subclause (I), 10 years, and ‘‘(iii) the use of such instrument in connection with such acquisition (and the maximum amount of proceeds from such instrument) was determined on or before July 10, 1989, and such determination is evidenced by written documents— ‘‘(I) which were transmitted on or before July 10, 1989, between the issuer and any governmental regulatory bodies or prospective parties to the issuance or acquisition, and ‘‘(II) which are customarily used for the type of acquisition or financing involved. ‘‘(B) The amendments made by this section shall not apply to any instrument issued pursuant to the Page 757 TITLE 26—INTERNAL REVENUE CODE § 163 terms of a debt instrument issued on or before July 10, 1989, or described in subparagraph (A) or (D). ‘‘(C) The amendments made by this section shall not apply to any instrument issued to refinance an original issue discount debt instrument to which the amendments made by this section do not apply if— ‘‘(i) the maturity date of the refinancing instru- ment is not later than the maturity date of the re- financed instrument, ‘‘(ii) the issue price of the refinancing instrument does not exceed the adjusted issue price of the refi- nanced instrument, ‘‘(iii) the stated redemption price at maturity of the refinancing instrument is not greater than the stated redemption price at maturity of the refi- nanced instrument, and ‘‘(iv) the interest payments required under the re- financing instrument before maturity are not less than (and are paid not later than) the interest pay- ments required under the refinanced instrument. ‘‘(D) The amendments made by this section shall not apply to instruments issued after July 10, 1989, pursuant to a reorganization plan in a title 11 or similar case (as defined in section 368(a)(3) of the In- ternal Revenue Code of 1986) if the amount of pro- ceeds of such instruments, and the maturities of such instruments, do not exceed the amount or maturities specified in the last reorganization plan filed in such case on or before July 10, 1989.’’ Pub. L. 101–239, title VII, § 7210(b), Dec. 19, 1989, 103 Stat. 2342, provided that: ‘‘(1) IN GENERAL.—The amendment made by this sec- tion [amending this section] shall apply to interest paid or accrued in taxable years beginning after July 10, 1989. ‘‘(2) SPECIAL RULE FOR DEMAND LOANS, ETC.—In the case of any demand loan (or other loan without a fixed term) which was outstanding on July 10, 1989, interest on such loan to the extent attributable to periods be- fore September 1, 1989, shall not be treated as disquali- fied interest for purposes of section 163(j) of the Inter- nal Revenue Code of 1986 (as added by subsection (a)).’’ EFFECTIVE DATE OF 1988 AMENDMENT Pub. L. 100–647, title I, § 1005(c)(13), Nov. 10, 1988, 102 Stat. 3392, provided that: ‘‘For purposes of applying the amendments made by this subsection [amending this section and sections 467, 1255, and 7872 of this title] and the amendments made by section 10102 of the Revenue Act of 1987 [section 10102 of Pub. L. 100–203, amending this section], the provisions of this subsection shall be treated as having been enacted immediately before the enactment of the Revenue Act of 1987.’’ Amendment by sections 1006(u)(1) and 1009(b)(6) of Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment re- lates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. Amendment by section 2004(b)(1) of Pub. L. 100–647 ef- fective, except as otherwise provided, as if included in the provisions of the Revenue Act of 1987, Pub. L. 100–203, title X, to which such amendment relates, see section 2004(u) of Pub. L. 100–647, set out as a note under section 56 of this title. EFFECTIVE DATE OF 1987 AMENDMENT Pub. L. 100–203, title X, § 10102(c), Dec. 22, 1987, 101 Stat. 1330–386, provided that: ‘‘The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 1987.’’ Amendment by section 10212(b) of Pub. L. 100–203 ef- fective as if included in the amendments made by sec- tion 501 of the Tax Reform Act of 1986, Pub. L. 99–514, see section 10212(c) of Pub. L. 100–203, set out as a note under section 58 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Pub. L. 99–514, title V, § 511(e), Oct. 22, 1986, 100 Stat. 2249, provided that: ‘‘The amendments made by this section [amending this section and sections 467, 703, 1255, 1363, and 7872 of this title] shall apply to taxable years beginning after December 31, 1986.’’ Amendment by section 902(e)(1) of Pub. L. 99–514 ap- plicable to taxable years ending after Dec. 31, 1986, with certain exceptions and qualifications, see section 902(f) of Pub. L. 99–514, set out as a note under section 265 of this title. Amendment by section 1301(j)(3) of Pub. L. 99–514 ap- plicable to bonds issued after Aug. 15, 1986, except as otherwise provided, see sections 1311 to 1318 of Pub. L. 99–514, set out as an Effective Date; Transitional Rules note under section 141 of this title. Amendment by sections 1803(a)(4) and 1810(e)(1) of Pub. L. 99–514 effective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by section 42(a)(3) of Pub. L. 98–369 appli- cable to taxable years ending after July 18, 1984, see section 44 of Pub. L. 98–369, set out as an Effective Date note under section 1271 of this title. Pub. L. 98–369, div. A, title I, § 56(d), July 18, 1984, 98 Stat. 574, provided that: ‘‘The amendments made by this section [amending this section and sections 263 and 265 of this title] shall apply to short sales after the date of enactment of this Act [July 18, 1984] in taxable years ending after such date.’’ Amendment by section 127(f) of Pub. L. 98–369 applica- ble to interest received after July 18, 1984, with respect to obligations issued after such date, in taxable years ending after such date, see section 127(g)(1) of Pub. L. 98–369, set out as a note under section 871 of this title. Amendment by section 128(c) of Pub. L. 98–369 appli- cable to obligations issued after June 9, 1984, see sec- tion 128(d)(2) of Pub. L. 98–369, set out as a note under section 871 of this title. Amendment by section 612(c) of Pub. L. 98–369 appli- cable to interest paid or accrued after Dec. 31, 1984, on indebtedness incurred after Dec. 31, 1984, see section 612(g) of Pub. L. 98–369, set out as an Effective Date note under section 25 of this title. EFFECTIVE DATE OF 1982 AMENDMENT Amendment by Pub. L. 97–354 applicable to taxable years beginning after Dec. 31, 1982, see section 6(a) of Pub. L. 97–354, set out as an Effective Date note under section 1361 of this title. Amendment by Pub. L. 97–248 applicable to obliga- tions issued after Dec. 31, 1982, with exceptions for cer- tain warrants, see section 310(d) of Pub. L. 97–248, set out as a note under section 103 of this title. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 205(c)(3) of Pub. L. 94–455 ap- plicable with respect to taxable years ending after Dec. 31, 1975, see section 205(e) of Pub. L. 94–455, set out as an Effective Date note under section 1254 of this title. Pub. L. 94–455, title II, § 209(b), Oct. 4, 1976, 90 Stat. 1543, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by subsection (a) [amending this section] shall apply to taxable years beginning after December 31, 1975. ‘‘(2) INDEBTEDNESS INCURRED BEFORE SEPTEMBER 11, 1975.—In the case of indebtedness attributable to a spe- cific item of property which— ‘‘(A) is for a specified term, and ‘‘(B) was incurred before September 11, 1975, or is incurred after September 10, 1975, pursuant to a writ- ten contract or commitment which on September 11, 1975, and at all times thereafter before the incurring of such indebtedness, is binding on the taxpayer, the amendments made by this section shall not apply, but section 163(d) of the Internal Revenue Code of 1986 Page 758 TITLE 26—INTERNAL REVENUE CODE § 164 [formerly I.R.C. 1954] (as in effect before the enactment of this Act [Oct. 4, 1976]) shall apply. For purposes of the preceding sentence, so much of the net investment income (as defined in section 163(d)(3)(A) of such Code) for any taxable year as is not taken into account under section 163(d) of such Code, as amended by this Act, by reason of the last sentence of section 163(d)(3)(A) of such Code, shall be taken into account for purposes of applying such section as in effect before the date of en- actment of this Act [Oct. 4, 1976] with respect to inter- est on indebtedness referred to in the preceding sen- tence.’’ Amendment by section 1901(b)(8)(C), (3)(K) of Pub. L. 94–455 applicable with respect to taxable years begin- ning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Pub. L. 92–178, title III, § 304(e), Dec. 10, 1971, 85 Stat. 524, provided that: ‘‘The amendments made by this sec- tion to section 57 of the Internal Revenue Code of 1954 shall apply to taxable years beginning after December 31, 1969. The amendments made by this section to sec- tion 163 of such Code shall apply to taxable years begin- ning after December 31, 1971.’’ EFFECTIVE DATE OF 1969 AMENDMENT Pub. L. 91–172, title II, § 221(b), Dec. 30, 1969, 83 Stat. 576, provided that: ‘‘The amendments made by this sec- tion [amending this section] shall apply to taxable years beginning after December 31, 1971.’’ EFFECTIVE DATE OF 1964 AMENDMENT Pub. L. 88–272, title II, § 224(d), Feb. 26, 1964, 78 Stat. 79, provided that: ‘‘The amendments made by sub- sections (a) [enacting section 483 of this title] and (b) [amending the analysis preceding section 481 of this title] shall apply to payments made after December 31, 1963, on account of sales or exchanges of property oc- curring after June 30, 1963, other than any sale or ex- change made pursuant to a binding written contract (including an irrevocable written option) entered into before July 1, 1963. The amendments made by sub- section (c) [amending this section] shall apply to pay- ments made during taxable years beginning after De- cember 31, 1963.’’ EFFECTIVE DATE OF 1963 AMENDMENT Subsec. (c) effective as of Jan. 1, 1962, and applicable with respect to taxable years ending on or after such date, see section 2 of Pub. L. 88–9, set out as an Effec- tive Date note under section 1055 of this title. SAVINGS PROVISION For provisions that nothing in amendment by section 401(b)(12) of Pub. L. 115–141 be construed to affect treat- ment of certain transactions occurring, property ac- quired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining liability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 of this title. APPLICATION OF SUBSECTION (h) TO TAXABLE YEARS BEGINNING IN 1987 Pub. L. 100–647, title I, § 1005(c)(14), Nov. 10, 1988, 102 Stat. 3392, provided that: ‘‘(A) For purposes of applying section 163(h) of the 1986 Code to any taxable year beginning during 1987, if, incident to a divorce or legal separation— ‘‘(i) an individual acquires the interest of a spouse or former spouse in a qualified residence in a transfer to which section 1041 of the 1986 Code applies, and ‘‘(ii) such individual incurs indebtedness which is secured by such qualified residence, the amount determined under paragraph (3)(B)(ii)(I) of section 163(h) of the 1986 Code (as in effect before the amendments made by the Revenue Act of 1987 [Pub. L. 100–203, title X]) with respect to such qualified resi- dence shall be increased by the amount determined under subparagraph (B). ‘‘(B) The amount determined under this subparagraph shall be equal to the excess (if any) of— ‘‘(i) the lesser of the amount of the indebtedness de- scribed in subparagraph (A)(ii), or the fair market value of the spouse’s or former spouse’s interest in the qualified residence as of the time of the transfer, over ‘‘(ii) the basis of the spouse or former spouse in such interest in such residence (adjusted only by the cost of any improvements to such residence).’’ PLAN AMENDMENTS NOT REQUIRED UNTIL JANUARY 1, 1989 For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§ 1101–1147 and 1171–1177] or title XVIII [§§ 1800–1899A] of Pub. L. 99–514 require an amendment to any plan, such plan amendment shall not be required to be made before the first plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. L. 99–514, as amended, set out as a note under section 401 of this title. TRANSITIONAL RULE FOR TREATMENT OF CERTAIN INCOME FROM S CORPORATIONS Pub. L. 98–369, div. A, title X, § 1066, July 18, 1984, 98 Stat. 1048, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘(a) IN GENERAL.—If— ‘‘(1) a corporation had an election in effect under subchapter S of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] for the taxable years of such corporation beginning in 1982, 1983, and 1984, and ‘‘(2) a shareholder of such corporation makes an election to have this section apply, then any qualified income which such shareholder takes into account by reason of holding stock in such corporation for any taxable year of such corporation beginning in 1983 or 1984 shall be treated for purposes of section 163(d) of the Internal Revenue Code of 1986 as such income would have been treated but for the enact- ment of the Subchapter S Revision Act of 1982 [Pub. L. 97–354, see Tables for classification]. ‘‘(b) QUALIFIED INCOME.—For purposes of subsection (a), the term ‘qualified income’ means any income other than income which is attributable to personal services performed by the shareholder for the corpora- tion. ‘‘(c) ELECTION.—The election under subsection (a)(2) shall be made at such time and in such manner as the Secretary of the Treasury or his delegate may by regu- lations prescribe.’’ TRANSITIONAL RULE For provision that, for purposes of amendments by section 231(b) of Pub. L. 97–248, any evidence of indebt- edness issued pursuant to a written commitment which was binding on July 1, 1982, and at all times thereafter be treated as issued on July 1, 1982, see section 231(e) of Pub. L. 97–248, set out as a note under section 1232A of this title. § 164. Taxes (a) General rule Except as otherwise provided in this section, the following taxes shall be allowed as a deduc- tion for the taxable year within which paid or accrued: (1) State and local, and foreign, real prop- erty taxes. (2) State and local personal property taxes. (3) State and local, and foreign, income, war profits, and excess profits taxes. (4) The GST tax imposed on income distribu- tions.