Earnings Stripping

About Earnings Stripping:

Earnings Stripping Rules are rules stipulating that thinly capitalized corporations may not claim a current deduction for excessive interest paid to a related party if the interest income is exempted from U.S. taxation. These rules apply to a corporation only if it has a debt-to-equity ratio in excess of 1.5 to 1. In this situation, a corporation's interest deduction is disallowed to the extent that the corporation's net interest expense exceeds 50% of its adjusted taxable income for the year. Disallowed interest expense may be carried forward indefinitely and deducted in a tax year in which the corporation has excess limitation (i.e., net interest expense in an amount less than 50% of its adjusted taxable income).

See also other Tax Terms and Definitions in U.S.A.

thin corporation; thin capitalization.

U.S. and other Developed Countries International Tax Meaning

Practice of reducing the taxable income of a corporation by paying excessive amounts of interest to related third parties.