Earnings Stripping Regulations Finalized; S Corporations Are Exempt from Loan Provisions

On October 13, the Treasury Department issued its final regulations on "earnings stripping," including a provision that exempts S corporations from the new regulations on related-party loans. The new regulations are designed to reduce the incentives for corporate tax inversions, but the fear in the S corporation ESOP world was that application of the rules as originally proposed six months ago could cause loans from related parties to be reclassified as equity. The exemption in the final rule exempts S corporations from reporting and other requirements.