Changes to the business interest expense deduction limitation

For most large taxpayers, those with average annual gross receipts over $25 million, adjusted for inflation annually, the Tax Cuts and Jobs Act (TCJA, 12/22/2017) limited their ability to deduct business interest expenses to 30% of Adjusted Taxable Income (ATI) for tax years beginning 2018. (Code Sec. 163(j))

Disallowed business interest expense can then be carried over indefinitely to the following years. However, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, 3/17/2020) retroactively increased the ATI limitation from 30% to 50% for tax years beginning in 2019 and 2020 (not including 2018). (Code Sec. 163(j)(10)(A)(i), as amended by the CARES Act) A special rule applies to partners in partnerships: the 50% ATI limitation cannot be applied to the 2019 tax year; it can only be applied to the 2020 tax year. (Code Sec. 163(j)(10)(A)(ii)(I), as amended by the CARES Act)

This rule was intended to avoid the need to amend a 2019 partnership return because any 2019 disallowed business interest expense can be carried forward to 2020. (Rev Proc 2020-22, 2020-18 IRB 745)

Taxpayers amending a 2019 return, to reflect the increased ATI limitation to 50%, that results in an NOL, can carryback the NOL to a prior year to recover a tax refund. See IRS provides guidance for electing to be an electing real property or farming business (04/13/2020). 

Partnerships are also relieved of filing Administrative Adjustment Requests (AARs) to amend returns to take advantage of CARES Act tax relief. The Bipartisan Budget Act of 2015 generally prohibits partnerships from amending the information furnished to their partners after the due date of the return unless they file an AAR.

Fortunately, Rev Proc 2020-23 allows partnerships to amend their 1065 and provide partners with an amended K-1 for tax years 2018-2019, without having to file an AAR. Amended returns and corresponding schedule K-1s should be filed before September 30, 2020 and the partnership is advised to write "Filed Pursuant to Rev Proc 2020-23" at the top of the amended return and attach a statement to each partner's K-1 with similar language.

For additional tax tips and guidance, explore Thomson Reuters resources such as Federal Tax Handbook 2021, Federal Tax Regulations, Winter 2021, and the Complete Internal Revenue Code, Winter 2021.