IRS Provides Procedural Relief on Elections Related to Interest Expenses Under Section 163(j)

April 15, 2020

On April 10, the IRS released Revenue Procedure 2020-22 in response to changes made to Internal Revenue Code Section 163(j) under the CARES Act. The CARES Act retroactively increased the amount of business interest expense that may be deductible for taxable years beginning in 2019 and 2020 by increasing a taxpayer’s adjusted taxable income threshold from 30 percent to 50 percent. Revenue Procedure 2020-22 provides guidance to businesses operating in the real estate and farming industries with options to make a late real property trade or business election under Section 163(j)(7) or to withdraw an election previously made. Section 163(j)(7) allows certain real property or farming businesses to elect out of the limitations on the deductibility of interest under Section 163(j). The election is irrevocable and, once made, requires the electing business to reduce depreciation deductions.

Revenue Procedure 2020-22 allows businesses to file an amended tax return or an Administrative Adjustment Request (AAR) to either withdraw or make a late election, subject to the exceptions provided in Rev. Proc. 2020-23, which offered partnerships broad filing relief because of the CARES Act changes including an opportunity to take advantage of the Qualified Improvement Property (QIP) bonus depreciation “glitch-fix.” It is important to note that some partnerships are no longer permitted to file an amended tax return and must now file an AAR to report any changes in partnership income. 

The Revenue Procedure also provides an automatic extension for taxpayers to file an election to be a real property trade or business for tax years 2018 to 2020 and allows some taxpayers to withdraw elections made on prior returns. The late election or the withdrawal of the election must be made on an amended tax return or an AAR filed on or before October 15, 2021. Partnerships subject to the Centralized Partnership Auditing Regime (CPAR) that have already filed their 2018 or 2019 tax returns have until September 30, 2020 to file an amended IRS Form 1065 to make a late election or withdraw one previously made, pursuant to the procedure set forth in Rev. Proc. 2020-23. Partnerships subject to the CPAR that choose not to file an amended Form 1065 may withdraw or make a late election by filing an AAR on or before October 15, 2021.

The amended federal income tax return or AAR must include the adjustment to taxable income for the withdrawn Section 163(j)(7) election and any collateral adjustments to taxable income or to tax liability, including any adjustments under Section 481 for all affected tax years.  An example of a collateral adjustment is the amount of depreciation allowed or allowable in the applicable taxable year for the property to which the withdrawn election applies. An election withdrawal statement or a late election statement must accompany the amended tax return or AAR and must be titled, "Revenue Procedure 2020-22 Late Section 163(j)(7) Election” for late elections or “Revenue Procedure 2020-22 Section 163(j)(7) Election Withdrawal” for election withdrawals.  These statements are also required to contain additional basic taxpayer information such as name, address, EIN, etc.

For further information concerning this new development, please contact your Marks Paneth tax advisor. You may also reach out to our Response Team or visit our Pandemic Resource Center for additional updates and guidance on the coronavirus (COVID-19).

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