The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) amended Section 163(j) to allow many taxpayers to deduct more business interest expense for taxable years beginning in 2019 and 2020 by increasing the limitation from 30% of Adjusted Taxable Income (ATI) to 50% of ATI.
For partnerships, the increase to 50% of ATI applies to years beginning in 2020 only, and not to years beginning in 2019. The LIHTC partnership may elect to not have the 50% of ATI rule apply.
Furthermore, in computing the 2020 Sec. 163(j) limitation, a LIHTC partnership can elect to apply its 2019 ATI instead of computing the 2020 ATI. This could be beneficial for a partnership that has net income in 2019 that is higher than the net income in 2020.
The CARES Act also amended Section 163(j) to allow more interest deductions to partners of a partnership. For LIHTC partnerships that (1) have not yet made the Real Property Trade or Business (RPTOB) election under Sec. 163(j)(7) in 2019 and (2) there is excess business interest expense in 2019, under the new law, the partner will be able to treat 50% of the 2019 excess business interest expense allocated to them by the partnership as business interest expense that is not subject to the Sec. 163(j) limitation on the partner’s first taxable year beginning in 2020. The remaining 50% of the partner’s share of the 2019 excess business interest will continue to be treated as before, i.e., it will be carried forward by the partner until the partner is allocated excess taxable income or excess business interest income from the same partnership.
RPTOB Late Election or Withdrawal under Revenue Procedure 2020-22
In light of the rule changes to the business interest deduction limitation brought upon by the CARES Act, the IRS is providing taxpayers the opportunity to make either a late RPTOB election or to withdraw an RPTOB election as if the election was never made by filing an amended return or an AAR.
We will continue to monitor updates for your tax, audit and advisory needs and provide updates on our blog. We welcome any questions or concerns you have at this time.
Lindquist von Husen & Joyce provides individual and business tax services. If you need assistance navigating the extensions and deadlines, contact Stan Woo, Principal, at 415-905-5416 or swoo@lvhj.com.