IRS Allows Changes to Prior Code Section 163(j) Elections
Last week, the IRS released Rev. Proc. 2020-23 providing procedures for partnerships to file amended returns or administrative adjustment requests (AAR) to claim the benefits of tax changes made in the CARES Act. Our e-alert describing Rev. Proc. 2020-23 is available here. As we noted in that alert, Rev. Proc. 2020-23 left unanswered whether, and how, partnerships claiming such benefits could revoke Section 163(j) elections. On April 10, 2020 the IRS answered that question in Rev. Proc. 2020-22 (available here), allowing retroactive changes to elections made under Code Section 163(j) on amended returns as well as AARs and procedures for claiming other benefits under Section 163(j) provided by the CARES Act under Section 163(j).
Section 163(j) as amended by the Tax Cuts and Jobs Act (TCJA) limited the deduction for business interest for any tax year to 30 percent of the taxpayer’s adjusted taxable income for the tax year. Interest disallowed under this provision can be carried over indefinitely. The CARES Act amended Section 163(j) by: (1) increasing the net interest deduction limitation for 2019 and 2020 from 30 percent to 50 percent, (2) allowing a taxpayer to elect for its tax year beginning in 2020 to substitute its adjusted taxable income for its tax year beginning in 2019, (3) allowing a taxpayer to elect out of the increase of the limitation to 50 percent, and (4) leaving the 30 percent limitation in place for partnerships and instead allowing a partner to deduct 50 percent of the excess business interest deduction allocated to it in 2019 (without limitation) as a deduction in 2020.
The CARES Act also fixed the retail glitch that mistakenly omitted qualified improvement property (QIP) from eligibility for 100 percent bonus depreciation for tax years before 2023 for property placed in service after December 17, 2017 by assigning to QIP a 15-year MACRS life and 20-year ADS life retroactive to enactment of the TCJA. Real property trades or businesses (as defined in Section 163(j)) now have a choice to expense QIP and be subject to the Section 163(j) interest deduction limitations or to elect out of the Section 163(j) interest deduction limits and use the 20-year ADS life for QIP. Before the CARES Act, changes to bonus depreciation for QIP and interest deduction limitations under Section 163(j), taxpayers, including partnerships, made irrevocable elections under Section 163(j).
Rev. Proc. 2020-22 provides procedures for revoking those elections and making new elections under Section 163(j). Rev. Proc. 2020-22 provides that new elections may be made by taxpayers that did not file elections to be a real property trade or business that elects out of the Section 163(j) interest deduction limitations with a timely filed (including extensions) IRS Form 1065 for tax years beginning in 2018, 2019, or 2020, taxpayers who made elections to be a real property trade or business that elects out of the Section 163(j) interest deduction limitations, and taxpayers who change either election pursuant to Rev. Proc. 2020-22. Such taxpayers may amend prior returns or file an AAR and change their elections and must report all collateral changes, such as changes to depreciation deductions.For questions about this relief or other tax issues, contact a member of the Ballard Spahr Tax Group.
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