Highlights of interest deduction limitation regulations

On November 26, the Internal Revenue Service issued proposed regulations related to limits on the business interest expense deduction.

The provision was passed as part of the Tax Cuts and Jobs Act (TCJA) and ICSC has been awaiting the Department of Treasury to issue the corresponding regulations. The deduction for business interest expense is generally limited to 30 percent of the taxpayer’s adjusted taxable income. Real estate trades or businesses may elect out of the limit but must use slightly longer depreciation schedules found in the Alternative Depreciation System (ADS). Small businesses whose gross receipts are $25 million or less are exempt.

Overview of the proposed regulations

Positive Developments:

• Clear ability to look through partnerships for purposes of attributing a real estate trade or business for purposes of the upper tier electing out under the real estate exception. Also, REITs can look through lower-tier REITs.
• Broad definition of real estate business, using passive loss regulations § 1.469-9
• Clarification that capitalized interest is not subject to new limitation
• Clear and favorable rules for REITs to look through lower tier entities. 

Continued concerns:

• No explicit tracing for allocating interest expense, as under regulations § 1.163-8T. However, the preamble noted the department is still taking comments.
• No ability for non-REITs to look through lower-tier REITs for purposes of the real estate exception election for the upper tier entity.

ICSC is currently collecting feedback to provide comments on the proposed regulations. If you have any questions or comments, please contact Phillips Hinch, Vice President of Tax Policy, at phinch@ICSC.org or (202) 626-1402.