SECTION 2. BACKGROUND

.01 On December 22, 2017, section 163(j) of the Code was amended by § 13301 of Pubic Law No. 115-97, 131 Stat. 2054, commonly referred to as the Tax Cuts and Jobs Act (TCJA). Section 163(j), as amended by the TCJA, provides rules limiting the amount of business interest expense that can be deducted for taxable years beginning after December 31, 2017. See TCJA § 13301(a). .02 On March 27, 2020, section 163(j) of the Code was further amended by § 2306 of the Coronavirus Aid, Relief, and Economic Security Act, Public Law No. 116-136, 134 Stat. 281 (CARES Act), to provide special rules for applying section 163(j) to taxable years beginning in 2019 or 2020.

.03 Under section 163(j)(1) of the Code, the amount allowed as a deduction for business interest expense is limited to the sum of: (1) the taxpayer’s business interest income, as defined in section 163(j) (6), for the taxable year; (2) 30 percent of the taxpayer’s adjusted taxable income, as defined in section 163(j)(8), for such taxable year, or 50 percent of the taxpayer’s adjusted taxable income (if applicable, as provided in section 163(j)(10)); and (3) the taxpayer’s floor plan financing interest, as defined in section 163(j)(9), for such taxable year.

.04 The limitation under section 163(j) of the Code on the deductibility of business interest expense applies to all taxpayers with business interest, as defined in section 163(j)(5), except for taxpayers, other than tax shelters under section 448(a)(3), that meet the gross receipts test in section 448(c).

.05 Section 163(j)(5) of the Code generally provides that the term “business interest” means any interest properly allocable to a trade or business. Section 163(j) (7)(A)(ii) provides that, for purposes of the limitation on the deduction for business interest, the term “trade or business” does not include an “electing real property trade or business.” Thus, interest expense that is properly allocable to an electing real property trade or business is not properly allocable to a trade or business for purposes of section 163(j), and is not business interest expense that is subject to section 163(j)(1).

.06 The term “electing real property trade or business” under section 163(j)(7) (B) of the Code means any trade or business that is described in section 469(c)(7) (C) that makes an election to be an electing real property trade or business.

.07 Section 168(g)(1)(F) of the Code provides that an electing real property trade or business within the meaning of section 163(j)(7)(B) must use the alternative depreciation system for property described in section 168(g)(8). See section 163(j)(11)(A). .08 The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) published (1) proposed regulations under section 163(j) of the Code in a notice of proposed rulemaking (REG-106089-18) (proposed regulations) in the Federal Register (83 FR

67490. on December 28, 2018, (2) final regulations on September 14, 2020 (final regulations) in the Federal Register (85 FR 56686), and (3) concurrently with the publication of the final regulations, a notice of proposed rulemaking providing additional proposed regulations under section 163(j) (REG-107911-18) (85 FR 56846).

.09 Section 1.163(j)-9 of the Income Tax Regulations provides the rules and procedures for making an election under section 163(j)(7)(B) of the Code to be an electing real property trade or business. In addition, the Treasury Department and the IRS released Rev. Proc. 2020-22, 2020-18 I.R.B. 745, (April 27, 2020) to provide the time and manner of making a late election, or withdrawing an election under section 163(j)(7)(B) to be an electing real property trade or business for taxable years beginning in 2018, 2019, or 2020. Rev. Proc. 2020-22 also provides the time and manner of making or revoking elections provided by the CARES Act under section 163(j)(10) for taxable years beginning in 2019 or 2020. See Rev. Proc. 2020-22 for more information regarding the time and manner of making, revoking, or withdrawing elections under section 163(j)(7) and section 163(j)(10).

.10 Section 469(c)(7)(C) of the Code defines a real property trade or business as any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

.11 In response to the proposed regulations, commenters expressed concern as to whether a trade or business that manages or operates a residential living facility and also provides supplemental assistive, nursing or routine medical services to its customers or patients is eligible to make the election to be an electing real property trade or business under section 163(j)(7) (B) of the Code.

.12 In light of these comments in the context of section 163(j) of the Code, this revenue procedure provides a safe harbor that allows a taxpayer engaged in a trade or business that manages or operates a qualified residential living facility, as defined in section 3.01 of this revenue procedure, to treat the trade or business as a real property trade or business solely for purposes of qualifying to make an elec

Bulletin No. 2020–40 783 September 28, 2020

tion to be an electing real property trade or business under sections 163(j)(7)(B) and 168(g)(1)(F) (residential living facility safe harbor).