The Internal Revenue Service (IRS) recently released new guidance for real estate and farming businesses related to interest limit relief outlined by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Interest Limit Changes

Businesses, other than certain small businesses, are subject to an annual limitation on the amount of business interest expense they can deduct. In general, the limitation denied businesses a current deduction for any business interest expense that exceeded 30% of the taxpayer’s adjusted taxable income. Any excess business interest expense must be carried forward to the next taxable year. Certain real estate and farming businesses are able to elect out of this limitation, but the election is not necessarily advantageous because it requires the electing real estate business to use longer depreciation periods for its real estate and improvements. It also does not allow to immediately expense qualifying property.

For those real estate and certain farming businesses subject to the limitation, the CARES Act increases the 30% of adjusted taxable income cap to 50% for taxable years beginning in 2019 or 2020. Congress expected businesses will have a lower adjusted taxable income in 2020 than they did in 2019 due to the COVID-19 pandemic. For this reason, the CARES Act also allows businesses to elect to use their 2019 adjusted taxable income rather than their 2020 adjustable taxable income when determining the business interest expense limitation for any taxable year beginning in 2020.

Furthermore, partnerships are subject to a different rule in the case of business interest expense for any taxable year beginning in 2019, not 2020. Thus, 50% of a 2019 excess business interest a partnership allocated to a partner and that is carried forward to 2020, is treated as business interest expense paid or accrued by the partner in the first taxable year beginning in 2020 not subject to the business interest expense limitation. The remaining 50% of excess business interest is subject to the regular rules as modified by the CARES Act.

Options Available

Due to these changes, real estate and farming businesses have some decisions to make. Under the CARES Act, they can elect out interest limits in some cases, but the election is irrevocable. Many real estate and farming businesses were concerned they wouldn’t be able to take advantage of the interest limit changes under the CARES Act due to elections made on earlier returns. There was also some concern related to partnerships subject to the centralized audit regime not being allowed to file amended returns.

However, the IRS has indicated eligible partnerships will have the ability to file amended returns in lieu of filing an administrative adjustment request to take advantage of the CARES Act legislation. It has also indicated it will allow certain taxpayers, such as real estate and farming businesses 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 CARES Act.

Doeren Mayhew’s tax advisors are here to help you determine the best tax strategy for your business as it relates to interest limits and other provisions of the CARES Act. Contact us today.