In Revenue Procedure 2020-22, the IRS allows taxpayers to withdraw or make late IRC Section 163(j) elections in order to take advantage of changes made by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The revenue procedure also provides guidance for making an election related to the adjusted taxable income (ATI) limitations under the CARES Act by timely filing a federal income tax return or Form 1065, including extensions, an amended federal income tax return, amended Form 1065, or administrative adjustment request (AAR), as applicable.

The CARES Act made changes to IRC Section 163(j), including allowing taxpayers to: (1) increase the 30%-of-ATI limitation on business interest expense to 50% of ATI for any tax year beginning in 2019 or 2020; (2) use their 2019 ATI in calculating their 2020 IRC Section 163(j) limitation; and (3) treat 50% of any excess business interest expense (EBIE) allocated to partners from a partnership in tax year 2019 as automatically paid or accrued to them in the partner's 2020 tax year, without further IRC Section 163(j) limitations at the partner level. For more information, see Tax Alert 2020-0872. The CARES Act also amended IRC Section 168(e)(3)(E) to retroactively include qualified improvement property (QIP) as property to which a 15-year recovery period applies and for which bonus depreciation may be claimed.

Before Revenue Procedure 2020-22, real property trade or business elections had to be made on a timely filed original return, and such elections were irrevocable. The revenue procedure allows taxpayers to make a real property trade or business election for the 2018, 2019, or 2020 tax year by filing an amended federal income tax return, amended Form 1065, or AAR, as applicable.

In addition, the revenue procedure allows an electing real property trade or businesses to withdraw an election under IRC Section 163(j)(7) for tax years 2018 and 2019. Taxpayer that previously made the IRC Section 163(j) election had to use the alternative depreciation system (ADS) for their QIP. The new guidance permits taxpayers to determine whether to withdraw the IRC Section 163(j) election in light of the CARES Act changes, particularly when they have significant QIP in 2018 or 2019 that is now retroactively eligible for bonus depreciation following the CARES Act.

A Tax Alert on the revenue procedure is forthcoming.