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IRS Provides Procedural Relief for Real Estate Businesses

Posted on Apr. 13, 2020

The IRS released guidance providing real estate and farming businesses with options to make or withdraw late elections because of changes made under coronavirus legislation.

The IRS released Rev. Proc. 2020-22, 2020-18 IRB 1, on April 10 that allows some taxpayers subject to the business interest deduction limitations to file amended returns or administrative adjustment requests to make changes to prior positions based on the changes in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136).

The CARES Act made changes to the business interest deduction limitation under section 163(j) that could affect decisions taxpayers made in prior years. Real estate and farming businesses can elect out of the section 163(j) limits in some cases, but the election is irrevocable.

Under the Tax Cuts and Jobs Act, business interest deductions were generally limited to interest income and 30 percent of adjusted taxable income, and the limit applied at the partnership level.

However, the CARES Act modified the limit from 30 percent of ATI to 50 percent for tax years beginning in 2019 or 2020. For tax years beginning in 2020, businesses may elect to compute the interest expense limitation based on their 2019 ATI, which will likely be higher because of the current economic downturn.

The section 163(j) changes for partnerships are even more complex.

This relief comes just days after the IRS provided broad partnership filing relief because of the CARES Act changes.

The CARES Act also made another important change — it fixed the so-called retail glitch and now makes qualified improvement property eligible for 100 percent bonus depreciation, which is important for real estate businesses deciding whether to elect out of the interest deduction limits, practitioners pointed out.

But under proposed rules (REG-106089-18) released in late 2018, an election out of section 163(j) by a real estate or farming business is irrevocable, so immediate transition guidance was necessary.

The revenue procedure provides an automatic extension of time for taxpayers to file an election to be a real property trade or business or farming business for tax years 2018 to 2020. The guidance also allows some taxpayers to withdraw elections made on prior returns.

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