Philadelphia has provided guidance that business income and receipts tax (BIRT) taxpayers are obligated to use the federal interest expense deduction calculated on a separate entity basis.
BIRT taxpayers filing a consolidated federal return, where the consolidated group reports an interest limitation under IRC Sec. 163(j), must calculate the federal interest expense limitation on a separate entity basis. If BIRT Method II taxpayers have an IRC Sec. 163(j) limitation and also reports nonbusiness (allocable) income, the taxpayer should determine the amount of overall interest expense associated with nonbusiness income, if any, and allocate an interest limitation to that amount on a pro-rata basis.
For BIRT purposes, the interest expense limitation is calculated for partnerships at the partnership level. Advisory Notice – Net Interest Expense Limitation [IRC Sec. 163(j)] Tax Policy Update, City of Philadelphia Department of Revenue, May 29, 2019