Lawmaker Seeks Change to Business Interest Regs

August 9, 2019

The Honorable Steven Mnuchin
Secretary
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW 
Washington, D.C. 20220 

The Honorable Charles Rettig
Commissioner of Internal Revenue
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224

Dear Secretary Mnuchin and Commissioner Rettig:

I write today to express my concerns with the November 26, 2018, published proposed rule (REG-106089-18) by the Department of Treasury (Treasury) and the Internal Revenue Service (IRS) limiting the deduction for business interest expense after the enactment of the Tax Cuts and Jobs Act (TCJA).

Traditionally, interest paid or accrued by a business has been deductible in the calculation of taxable income. However, after the passage of the TCJA, section 163 of the Internal Revenue Code (IRC) introduced new limitations on the amount of business interest a taxpayer can deduct, except for two entities — certain small businesses and for electing real property trades or businesses, which are described in IRC § 469(c)(7)(C).

This Proposed Rule provides the required guidance to the implement the various complexities of IRC § 163(j). Nonetheless, the proposed rule sought comment on an anti-abuse rule that would ultimately prohibit real property or trade businesses that lease a minimum of 80 percent of their real property to a trade or business under common control, including skilled nursing facilities (SNFs) and assisted living communities. The Proposed Rule expressed concerns that without an anti-abuse regulation, individuals would use non-economic business structures to evade the new limitations on the deduction of business interest expense. However, in chorus, the Proposed Rule would allow an exception for real estate investment trusts (REITs) that lease to SNFs and assisted living communities to related parties to avoid these limitations.

For many economic reasons, including lending requirements issued by the Department of Housing and Urban Development, numerous non-REIT owners of SNFs and assisted living communities have historically used business structures whereby ownership of the real estate associated with such facilities is leased to related trades or businesses that operate the facilities. Given these business structures precede the amendments made to IRC § 163(j), limiting the deductibility of business interest incurred by such real property trades or businesses solely because they are not structured as REITs would subjectively impose significant harm on an essential industry sector.

Therefore, I respectfully request that the Treasury and the IRS provide identical treatment under IRC § 163(j) for owners of real estate associated with SNFs and assisted living communities, regardless of whether they are structured as REITs.

As always, if I can be of further assistance to you in anyway, please do not hesitate to contact my office.

Sincerely,

Glenn “GT” Thompson
Member of Congress