2019 Year-End Tax Guide

THE MARCUM 2019 YEAR-END TAX GUIDE | www.marcumllp.com

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There were two major exemptions to the disallowed BIE; one was for small businesses under $25 million and the other was for Electing Real Property Trade or Business companies. At first glance, it would seem that most real estate entities would be covered by the $25 million exemption, and they could deduct all of their interest expense. However, the $25 million exemption has two catches. First are the complex series of aggregation rules that require entities with common ownership to aggregate their receipts. This has created a significant practical issue, i.e., what happens if multiple accounting firms prepare tax returns for partnerships that are related; how does each firm determine if the $25 million threshold is crossed? The second hurdle in the $25 million gross receipts exemption is that it does not apply to tax shelters. In general, the term “tax shelter” includes: 1. Any enterprise, other than a C corporation, if at any time interest in such enterprise has been offered for sale in any offering required to be registered with any federal or state agency having the authority to regulate the offering of securities for sale. 2. Any syndicate (within the meaning of certain Internal Revenue Code sections); a partnership or S corporation in which more than 35% of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs. Any tax shelter is defined as any partnership or other entity, or any plan or arrangement, if a “significant purpose” of such partnership, entity, plan or arrangement is the avoidance or evasion of federal income tax. This is also potentially problematic, but we would hope it does not apply merely because the taxpayers chose to organize an entity as a flow- through entity rather than a C corporation, assuming the business was formed to make an economic profit and not to create inflated tax losses.

Thus, if a real estate entity had losses allocated to its limited partners and was deemed to be a tax shelter, the entity had one final solution to having its BIE not limited. The entity can be an Electing Real Property Trade or Business. This is applicable to any taxpayer who is engaged in a “real property trade or business” (RPTB), who may file an irrevocable election to not be subject to the section 163(j) limitation. The definition of a RPTB is as follows: 1. “The term ‘real property trade or business’ means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing or brokerage trade or business.” 2. Proposed regulations define “real property operation” and “real property management” but do not provide a detailed definition for other “flavors” of RPTB. These proposed definitions are limited to rental real estate operations – real estate that is used by “customers.” The proposed regulations allow for “incidental personal services” to be provided to customers so long as they are insubstantial in relation to the customer’s use of the real property and are not a significant factor in the customer’s decision to use the property.

Under TCJA, qualified property is defined as tangible personal property with a recovery period of 20 years or less.

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