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Real Estate Businesses Can Revoke 163(j) Election and Cash in on Bonus Depreciation Fix

April 13, 2020

By: Amanda Wilson 

The 2017 Tax Cuts and Jobs Act introduced a new Section 163(j) limitation on deducting business interest expense (our prior discussion of this tax law change can be found here). Specifically, businesses could only deduct net business interest in any given year equal to 30% of adjusted taxable income.

Real estate businesses could make a Section 163(j) election to elect out of this limitation, although doing so meant that they had to use the less favorable alternate depreciation system. Many real estate businesses made the Section 163(j) election as the benefit of avoiding the 30% limitation was more advantageous than the impact of using the alternate depreciation system.   

Fast forward to 2020, and the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act. One of the key tax changes in the CARES Act was fixing a technical glitch in the 2017 Tax Cuts and Jobs Act so that qualified improvement property was eligible retroactively for 100% bonus depreciation (this fix discussed previously here).

Many real estate businesses suddenly realized that they had the opportunity to take a full write off of past improvements to non-residential real property, provided they had not made the Section 163(j) election.

If a taxpayer had made the Section 163(j) election, the qualified improvement property would not qualify for the 100% bonus depreciation. This is because qualified improvement property is treated as 20-year property under the alternate depreciation system, (compared to 15-year property under the standard depreciation system after the CARES Act fix), and only property with a less than 20-year recovery period could qualify for 100% bonus depreciation. As a result, many real estate businesses are left in the position of regretting their Section 163(j) election.

Happily, the IRS is giving these real estate businesses the opportunity to revisit their election. The IRS has now issued Revenue Procedure 2020-22, which allows real estate businesses the opportunity to revoke their prior Section 163(j) election. Taxpayers who revoke their election will be treated as though the election had never been made, and will now be able to benefit from the 100% bonus depreciation available for qualified improvement property.

A taxpayer revokes its prior Section 163(j) election by timely filing an amended Federal income tax return, amended Form 1065, or administrative adjustment request, as applicable, for the taxable year in which the election was made, with an election withdrawal statement. The election withdrawal statement should be titled, “Revenue Procedure 2020-22 Section 163(j)(7) Election Withdrawal.”

The statement must contain the taxpayer’s name, address, and social security number or employer identification number, and must state that, pursuant to Revenue Procedure 2020-22, the taxpayer is withdrawing its election under section 163(j)(7)(B) or 163(j)(7)(C), as applicable

It should be noted that the CARES Act also made changes to the Section 163(j) business interest limitation for 2019 and 2020 tax years, which will be the subject of a separate article. Stay tuned!

Be sure to visit our Coronavirus (COVID-19) Resource Center page to keep up to date on the latest news.

This article is informational only. You should consult an attorney before acting or failing to act. The law may change rapidly and no warranty is given. LOWNDES DISCLAIMS ALL IMPLIED WARRANTIES AND WITHOUT LIMITATION, ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE. ALL ARTICLES ARE PROVIDED AS IS AND WITH ALL FAULTS. Consult a Lowndes attorney if you wish to establish an attorney/client relationship.

A member of the firm’s tax practice, Amanda Wilson concentrates on federal tax planning and structuring. She represents clients in a wide variety of complex federal tax matters with a particular emphasis on pass-through entities such as partnerships, S corporations and real estate investment trusts.

Specifically, Amanda focuses on advising clients on the formation, operation, acquisition and restructuring of such pass-through entities. In addition, she regularly advises clients on the structuring and operation of private equity funds, real estate funds and timber funds. Amanda is the author of the Bloomberg Tax Management Portfolio 718-3rd Edition, Partnerships- Disposition of Partnership Interests or Partnership Business; Partnership Termination.

Amanda regularly works in structuring deals to benefit from tax advantaged structures, including like-kind exchanges, new market tax credits, low income housing tax credits, qualified opportunity zones, and investment tax credits available for solar and other renewable energy. Amanda also has extensive experience in corporate planning and international tax matters, as well as federal tax controversy. Her practice before the Internal Revenue Service (IRS) includes providing advice on audits and appeals, drafting protests and ruling requests, and negotiating settlements.

Prior to joining the firm, Amanda worked for Sutherland Asbill & Brennan LLP (now Eversheds Sutherland), an Am Law 100 firm in the Atlanta office, where she was part of Sutherland’s Tax Practice Group. Amanda has also served as an adjunct professor at Emory University School of Law where she taught Partnership Taxation.

Amanda regularly contributes to the firm’s Taxing Times blog and is a regular panelist on tax webinars hosted by Strafford Publications.

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