ICSC submits comments on Interest Deduction Limitation

ICSC has provided recommendations to the IRS and the Treasury Department for improving the proposed regulations for the new interest deduction limitation. The tax reform law limits the amount of interest that a business may deduct to 30% of the 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.

Issues covered

• Trade or business clarifications. As with other regulations, including the pass‑through deduction and opportunity zones, the definition of what constitutes an “active trade or business” is ambiguous for triple net leases. Either the regulations should clearly allow these types of developments to use the exemption for real estate or the limitation should not apply at all. 
• Clarify the definition of “tax shelter” with regards to small real estate businesses. The proposed rules say a “tax shelter” cannot use the small business exception. A tax shelter is defined as anything where more than 35% of the losses are allocated to limited partners – a common occurrence for real estate especially at the start of the project. 
• Create a simplified calculation for simple partnerships. The proposed regulations require a highly-complex, 11-step process to calculate the limitation. The process is designed to prevent abuse, but several of the steps are unnecessary for many small partnerships.
• Remove guaranteed payments from the limitation. ICSC believes Treasury did follow the law as written and that these payments should be excluded from the limitation.

The full letter can be found here.