Newly Announced Exception for the Nursing Home Industry
On July 27 and 28th, the Treasury and IRS issued final regulations on the interest deduction limitation contained in Section 163 (j) which would have severely impacted Nursing homes and other residential care facilities. After considerable analysis and industry lobbying, Nursing homes and residential care facilities were granted an exception—which as many experts noted, would have otherwise been catastrophic forcing many owner/operators out of business and plunging an already devastated industry due to COVID-19, into further financial chaos.
Section 163(j) and Its Implications
Section 163(j) of the Internal Revenue Code, enacted as part of the Tax Cut and Jobs Act of 2017, limited the amount of interest a company could deduct to an amount equal to 30% of its EBITDA. The CARES ACT subsequently increased the amount to 50% for non-LLC/partnerships for 2019 and to 50% for all taxpayers in 2020.
Companies conducting a rental real estate activity could elect out of the 30% deduction limitation in exchange for slowing down some depreciation deductions (the Election). In late 2018, the Proposed Regulations issued by the IRS contained a rule that a real estate company (Propco) leasing to a related party operator (Opco) was prohibited from making the election, which resulted in increasing the organization’s tax burden.
A Special Carve-out For Long Term Care Facilities
Last month, when the Treasury released final regulations concurrently with Notice 2020-59, the final regulations did not change the related party prohibition. However, Notice 2020-59 does contain a special carve-out for long term care facilities. According to that notice, if the average period of resident stay at the Opco is 90 days or more, then the Propco is allowed to file the Election.
This is a significant win for the industry and reflects of the efforts of the community to reach out to Washington and explain the hardship which the proposed rule would have created. In the explanation to the final regulations, Treasury goes so far as to use the terms Opco and Propco.
For Those Who did NOT File the Election
For those who were advised against making the election and therefore reported higher income, the final regulations give permission to make a late election and amend 2018, 2019, and 2020 tax returns. However, amending tax returns must take place by the newly announced deadline of September 30, 2020.
One Last Complete Out
The final regulations acknowledge that a triple net lease might not rise to the level of a trade or business. Therefore, the interest limitation and the election would not apply at all. The final regulations do not provide guidance or list any criteria by which this should be assessed. However, the final regulations do state that a company engaged in triple net leasing activities can opt to file the Election.
Executives should consider taking the position that a property acquired before September 27, 2017 subject to a triple net lease is not a trade or business and therefore, is not subject to the interest election (The MF exception). And, filing the election for the companies where the real estate was acquired after September 27, 2017. Since filing the election is done on a company by company basis, doing it one way or the other on different returns is not inconsistent.
If your organization has questions regarding these final regulations and the deduction limitation election, contact me for further clarification at firstname.lastname@example.org.