excess business interest expense limitation under section 163(j) question

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Message Board excess business interest expense limitation under section 163(j) question

This topic contains 14 replies, has 3 voices, and was last updated by Sandy Weiner 1 month ago.

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  • #149769
    Mary Colby
    Participant

    An urgent request: I have a client who owns an S corp–100% ownership between the client and his wife–, it operates a non-real estate related business. The S corp business rents a building from the client’s 100% owned LLC at fair market rent, a triple net lease. Under TCJA a significant portion of the mortgage interest paid by the LLC on the property is being treated as “excess business interest expense” on the K-1 passing through to the 1040 client if the LLC is not treated as an excepted trade or business. I am considering electing out of the section 163(j) limitation, an irrevocable election according to Form 8990. From another source I saw something that made me wonder if the S corp and LLC could be considered related parties because of ownership for purposes of this election and thus the LLC would not be able to make the election? Form 8990 does not address this. Any thoughts?

  • #149776
    William Dewberry
    Participant

    Are you applying the interest limitation rules because you think the LLC is a tax shelter ? Who are the members ?

  • #149777
    Mary Colby
    Participant

    The LLC members are the sole shareholders/owners of the S Corp that the LLC rents the property to. It is not a tax shelter nor designed to be a tax shelter. Both entities have had this arrangement for the past 10 years or so.

  • #149778
    Sandy Weiner
    Participant

    Mary, I believe you are correct that they cannot elect out of the limitation. See Treas. Reg. Sec. 1.163(j)-9(h)

  • #149786
    William Dewberry
    Participant

    I don’t think they are subject to 163j unless gross receipts are greater than 25,000,000 between the two entities;
    it is not a syndicate under that definition.

  • #149787
    Mary Colby
    Participant

    Thank you both for your responses; a possible unintended consequence of the new tax law. Gross receipts for each entity are well under $25MM threshold. Just concerned if the related party rules could be an issue regardless of the gross receipt amounts.

  • #149795
    Sandy Weiner
    Participant

    Mary you are correct the related party aggregation rules are a big trap for smaller businesses. We’ll be discussing this at the May seminars.

  • #149862
    Mary Colby
    Participant

    Sandy one final question. If for some reason there is a change in law and we have already filed the LLC return and the owner’s return could we amend to make the election to “opt out” or will that opportunity have been missed because it has to be filed on an original return. I just want to provide the owner with correct information on the options.

  • #149864
    Sandy Weiner
    Participant

    Mary there is no way to predict if there is a change in the law. You may want to file an extended return to wait to see what the final regulations say (hopefully they will be released before then).

  • #149874
    Mary Colby
    Participant

    The question is can the election only be made on the originally filed return or could it be made on an amended return? The information on Form 8990 seems to say on original return only.

  • #150570
    Sandy Weiner
    Participant

    Yes, on an original filed return. Sorry I misunderstood the question.

  • #152168
    Mary Colby
    Participant

    Sandy Weiner: Could you let me know who spoke at the LB, CA Spidell Tax Update Seminar on Jan 15, 2019 on Chapter 4 in the book as it relates to Businesses. This concept was discussed in the material on pages 4-42 through 4-44 but there is no mention made of the related party rental rules and how that might impact small businesses being able to elect out of the business interest expense limitation. I’d like to have that presenter’s view on my particular scenario and the subsequent discussion on this question; I’d also like to get in touch with him or her as I was at that seminar but don’t remember who presented in the morning session(s) where it might have been presented. Thank you.

  • #152358
    Sandy Weiner
    Participant

    Mary, we are going to be discussing the 163(j) limitation in much more detail at the May seminars. https://www.caltax.com/product-category/seminars/2019-post-tax-season-update-and-review/

  • #152360
    Mary Colby
    Participant

    Great thank you. I’ll plan to attend and to talk to the presenter(s) about this as the opportunity presents itself. I do hope there will be specific discussion/presentation around the related party issue at that seminar as the 2018 Fed/CA update seminar material appears not to discuss this at all.

  • #152501
    Sandy Weiner
    Participant

    It will definitely be covered!