As part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), Congress provided temporary relief for individuals and businesses by adjusting interest expense limitations under Internal Revenue Code 163(j). Today, we summarize those changes.
Background - The Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (“TCJA”) added several complicated tax provisions in December 2017. Arguably one of the most difficult areas for taxpayers to navigate was IRC §163(j).
Because of its complexity, we urge you to read about the details of 163(j) in our previous blogs, “Business Interest Limitation Under TCJA Part I, Part II, and Part III.
What Has Changed - CARES Act
For taxable years beginning in 2019 and 2020, the interest expense limitation under 163(j) is increased from 30% to 50% of Adjusted Taxable Income (“ATI”) for all taxpayers except partnerships.
Special Rules for Partnerships
The increased 50% limitation only applies to any tax year beginning in 2020 for partnerships.
For any tax year beginning in 2019, the limitation on business interest expense remains 30% of ATI. However, if partners were allocated excess business interest for 2019, the partners can deduct 50% of such excess business interest in 2020 and not subject it to the 163(j) limitation. The remaining 50% of the excess business interest would be subject to the original carryforward rules created by TCJA.
The carryforward rules provide that excess business interest or disallowed interest expense are treated as business interest paid or accrued in the succeeding taxable year and is deductible when there is excess business income from the same partnership.
New Elections Available to Taxpayers
The CARES Act introduced two new elections taxpayers may avail themselves to.
An election to not apply the increased 50% limitation in taxable year beginning 2019 or 2020.
This is an irrevocable election and must be made in accordance with the manner prescribed by the Secretary. The Treasury has not provided guidance regarding this election, however we expect it will be forthcoming.
An election to use 2019 ATI instead of 2020 ATI for the computation of the 2020 interest expense limitation. If the short year is involved, the ATI must be prorated for the computation.
This election will be useful for taxpayers whose ATI is lower in 2020, a scenario likely to apply to most taxpayers given the non-discriminate economic impact of the COVID-19 pandemic. Further, with the availability to use 2019 ATI for 2020, taxpayers should consider 2020 income deferral opportunities to maximize 2021 ATI for interest expense limitation purposes.
Amended Return Opportunities
For non-partnership taxpayers who filed their 2019 tax returns with Section 163(j) limitations prior to the enactment of CARES Act, there is an opportunity to amend your return to take advantage of the 163(j) limitation change. You should consult with your tax advisor to assess any additional interest deduction that is available under the CARES Act.
If you need help determining how the changes to 163(j) under the CARES Act may affect you,call on us. In the meantime, continue to visit our COVID-19 Tax Resource Center for up-to-date information on how the COVID-19 pandemic may affect your tax filings, payments, and planning. We encourage you to share the page with others. Through this unprecedented series of events, you can count on The Tax Warriors® at Drucker & Scaccetti to help.