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Business Interest Expense Safe Harbor for Residential Living Facilities

Natalie Tocco

September 23, 2020

On July 28,2020, the IRS issued final regulations to the business interest expense limitation under code section 163(j). Simultaneously, the IRS issued Notice 2020-59, which provides a safe harbor for trades or businesses that manage or operate qualified residential living facilities that elect to be treated as a real property trade or business solely for purposes of the section 163(j) limitation.

Background

A taxpayer’s business interest expense is generally limited to 50% of adjusted taxable income (ATI) for tax years 2019 for C and S corporations, and 2020 for partnerships. Prior to the CARES Act, this limitation was 30% of ATI.  Any disallowed business interest expense is carried forward. The limitation generally applies to all taxpayers, except for qualifying small businesses and those electing real property trades or businesses.

Electing real property trade or business

The section 163(j) limitation does not apply to any electing real property trade or business (RPTB).  Operators and managers of certain residential living facilities can elect to be a RPTB. To be eligible, the trade or business must:

  • Operate or manage multiple rental dwelling units that generally serve as a primary residence on a permanent or semi-permanent basis;
  • Provide supplemental assistive, nursing or other routine medical services; and
  • Have an average customer use of the dwelling units for 90 days or more.

A residential living facility can be a nursing home, continuing care retirement community, independent living facility, assisted living facility, memory care facility, or skilled nursing facility.

A taxpayer making the RPTB election must use the alternative depreciation system and cannot claim bonus depreciation for certain types of property.

The 163(j) residential living facility safe harbor applies to taxable years beginning after December 31, 2017.

For any questions regarding this business interest expense, please contact your Mueller Prost specialist.

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