Due to the changes in the federal tax law resulting from the passage of the 2017 Tax Cuts and Jobs Act, the deduction for business interest can be severely limited for many taxpayers for tax years beginning after December 31, 2017.
The interest deduction cannot exceed the sum of:
- Business interest income for the tax year
- 30% of the taxpayer’s adjusted taxable income
- Taxpayer’s floor plan financing interest (applicable to auto dealerships)
The interest limitation will be applicable to all taxpayers except for the following:
- Small business, that is not a tax shelter, with average gross receipts of less than $25 million over the prior 3 years (tax shelters include syndicates in which more than 35% of losses are allocated to limited partners)
- Business of furnishing or selling certain types of energy
- An electing farming business
- An electing real property trade or business
Taxpayers impacted will include the typical affordable housing partnership (LIHTC partnership). Even though an LIHTC partnership’s average gross receipts may be less than $25 million, it is most probable the small business exception (listed above) may not be met because the typical LIHTC partnership is generally considered to be a tax shelter.
To avoid the interest limitation, an LIHTC partnership can make an irrevocable election to be treated as a real property trade or business. Making this election would enable the partnership to deduct 100% of the interest. However, there is a trade-off for making this election. When an election is made, the partnership is then required to use a slower depreciation method (e.g., use ADS depreciation on residential property and depreciate it over 30 years instead of 27.5 years).
Each LIHTC partnership will need to evaluate its situation and decide on whether or not it should elect to be treated as a real property trade or business that is exempt from the interest limitation. The new tax laws are quite complex and it is expected that the U.S. Treasury will be issuing regulations and additional guidance in the near future.
If you have any questions, please contact your LvHJ team.