Regulations and Guidance on Business Interest Expense Deduction Limitations
By Timothy Bessette
During the spring of 2020, Congress passed the CARES Act to help combat the impact the coronavirus had on the country’s economy. One notable change was to IRC Section 163(j), which modified the business interest limitation allowed for each taxpayer for the 2020 tax year. This change had a particular effect on partnerships that had not historically elected out of this interest limitation.
Some updates related to the changes made to IRC Section 163(j) that affect these partnerships are as follows:
- The adjusted taxable income (ATI) used to calculate the limitation can be from either the 2019 or 2020 tax year; and
- Partnerships are now allowed to base the limitation on 50% of ATI rather than on 30% of ATI, as normally permitted.
In addition, partnerships have the option to make a late Excepted Business Election that allows them to elect out of 163(j) retroactively, extending as far back as January 1, 2018. This allows these partnerships to depreciate their residential real estate placed in service prior to January 1, 2018, using a shorter depreciable life. The CARES Act affords taxpayers who elect out of the 163(j) limitation the opportunity to use a 30-year depreciable life rather than the 40-year life originally required.
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