Similarly, in the case of any S corporation, the deduction limitation would be applied at the S corporation level, and any deduction for business interest expense would be taken into account in determining the nonseparately stated taxable income or loss of the S corporation. The IRS said that, "due to the fact that S corporations generally are required to make pro rata distributions of income, allocations of excess taxable income and excess business interest income would be made in accordance with the shareholders’ respective interests in the S corporation." 

Further, the proposed definition of interest would also include things that may not technically be interest but are closely related and affect matters such as economic yield or cost of funds. The IRS said this can encompass things like income, deduction, gain or loss from a transaction used to hedge an interest bearing asset or liability; a substitute interest payment made on a debt instrument under the terms of a securities lending or a sale repurchase transaction; certain commitment fees; and certain debt issuance costs. The proposal also contains anti-avoidance rules that treat as interest expense for purposes of section 163(j) an expense or loss predominantly incurred in consideration of the time value of money in a transaction or series of integrated or related transactions in which a taxpayer secures the use of funds for a period of time.