Safe Harbor Provides Exclusion From Interest Expense Deduction Limits

Safe Harbor Provides Exclusion From Interest Expense Deduction Limits

Internal Revenue Service

The IRS has provided (Rev. Proc. 2018-59) a safe harbor allowing taxpayers to treat some infrastructure trades and businesses as real property trades and businesses solely for purposes of the exemption from the limitation on the business interest expense deduction described in companion proposed regulations (<a href="/lr/resolve//28mmy">REG-106089-18</a>). <a href="/research/federal/usc26/163#cqcf-0000169" resolve="/lr/resolve/section-163j/cqcf#cqcf-0000169" title="Section 163(j)">Section 163(j)</a>, as amended by the Tax Cuts and Jobs Act (<a href="/lr/resolve//1xftl">P.L. 115-97</a>), limits the business interest expense deduction to the sum of business interest income, 30 percent of adjusted taxable income, and floor plan financing interest. The limitation applies to all taxpayers, with exceptions for small businesses, some regulated utilities, and any real estate and farming trades or businesses that make an irrevocable election not to be subject to the limitation. These electing real property trades or businesses must use the alternative depreciation system to depreciate property described in <a href="/research/federal/usc26/168#cp0w-0000866" resolve="/lr/resolve/section-168g8/cp0w#cp0w-0000866" title="section 168(g)(8)">section 168(g)(8)</a>.  Treasury and the IRS seek, through Rev. Proc. 2018-59, to provide clarity on the types of infrastructure arrangements that are included in the definition of a real property trade or business under <a href="/research/federal/usc26/469#cq8z-0000031" resolve="/lr/resolve//cq8z#cq8z-0000031">section 469(c)(7)(C)</a>, generally noting that they are arrangements between the private and public sectors in which private persons maintain or provide other services related to core infrastructure property such as roads, bridges, and similar property. The infrastructure safe harbor is available to taxpayers with a trade or business that (1) is contractually obligated to fulfill the terms of a specified infrastructure arrangement; (2) is conducted in connection with fulfilling the terms of an arrangement; and (3) would not otherwise be treated as a real property trade or business under <a href="/research/federal/usc26/163#cqcf-0000421" resolve="/lr/resolve//cqcf#cqcf-0000421">section 163(j)(7)(B)</a> or <a href="/research/federal/usc26/469#cq8z-0000031" resolve="/lr/resolve/469c7c/cq8z#cq8z-0000031" title="469(c)(7)(C)">469(c)(7)(C)</a>. A specified infrastructure arrangement is defined as a contract lasting more than five years between a government and a private trade or business under which the private trade or business is under contract to provide at least one of the functions of designing, building, constructing, reconstructing, developing, redeveloping, managing, operating, or maintaining qualified public infrastructure property. Rev. Proc. 2018-59 provides definitions for such terms as Brownfield site, environmental remediation costs, flood control and storm water facilities, government and foreign governments, and infrastructure property, which includes airports, hazardous waste facilities, and public educational facilities. Rev. Proc. 2018-59 is effective December 10, 2018, and taxpayers may apply the safe harbor to tax years beginning after December 31, 2017.

Related <a href="/lr/resolve//28mmx">IRS news release</a>, <a href="/lr/resolve//28mn2">FAQ</a>.

The IRS has provided (Rev. Proc. 2018-59) a safe harbor allowing taxpayers to treat some infrastructure trades and businesses as real property trades and businesses solely for purposes of the exemption from the limitation on the business interest expense deduction described in companion proposed regulations (REG-106089-18).

The IRS has provided (Rev. Proc. 2018-59) a safe harbor allowing taxpayers to treat some infrastructure trades and businesses as real property trades and businesses solely for purposes of the exemption from the limitation on the business interest expense deduction described in companion proposed regulations (REG-106089-18). Section 163(j), as amended by the Tax Cuts and Jobs Act (P.L. 115-97), limits the business interest expense deduction to the sum of business interest income, 30 percent of adjusted taxable income, and floor plan financing interest. The limitation applies to all taxpayers, with exceptions for small businesses, some regulated utilities, and any real estate and farming trades or businesses that make an irrevocable election not to be subject to the limitation. These electing real property trades or businesses must use the alternative depreciation system to depreciate property described in section 168(g)(8).  Treasury and the IRS seek, through Rev. Proc. 2018-59, to provide clarity on the types of infrastructure arrangements that are included in the definition of a real property trade or business under section 469(c)(7)(C), generally noting that they are arrangements between the private and public sectors in which private persons maintain or provide other services related to core infrastructure property such as roads, bridges, and similar property. The infrastructure safe harbor is available to taxpayers with a trade or business that (1) is contractually obligated to fulfill the terms of a specified infrastructure arrangement; (2) is conducted in connection with fulfilling the terms of an arrangement; and (3) would not otherwise be treated as a real property trade or business under section 163(j)(7)(B) or 469(c)(7)(C). A specified infrastructure arrangement is defined as a contract lasting more than five years between a government and a private trade or business under which the private trade or business is under contract to provide at least one of the functions of designing, building, constructing, reconstructing, developing, redeveloping, managing, operating, or maintaining qualified public infrastructure property. Rev. Proc. 2018-59 provides definitions for such terms as Brownfield site, environmental remediation costs, flood control and storm water facilities, government and foreign governments, and infrastructure property, which includes airports, hazardous waste facilities, and public educational facilities. Rev. Proc. 2018-59 is effective December 10, 2018, and taxpayers may apply the safe harbor to tax years beginning after December 31, 2017.

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Safe Harbor Provides Exclusion From Interest Expense Deduction Limits