Notice 2020-59

This notice contains a proposed revenue procedure providing a safe harbor for a trade or business that manages or operates a qualified residential living facility, as defined in section 3.01 of the proposed revenue procedure, to be treated as a real property trade or business solely for purposes of qualifying as an electing real property trade or business under section 163(j)(7)(B) of the Internal Revenue Code (Code).

On December 22, 2017, section 163(j) of the Code was revised by § 13301(a) of Public Law No. 115-97, 131 Stat. 2054, commonly referred to as the Tax Cuts and Jobs Act (TCJA), effective for tax years beginning after December 31, 2017. On March 27, 2020, section 163(j) 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.

Section 163(j) generally limits the amount of a taxpayer’s business interest expense that can be deducted in the current taxable year. The deduction limitation is calculated as 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 the 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 the taxable year.

The term “business interest” means any interest that is properly allocable to a trade or business. For purposes of section 163(j), the term “trade or business” does not include certain trades or businesses listed in section 163(j)(7). 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.” Section 163(j)(7)(B) defines an electing real property trade or business as a trade or business defined in section 469(c)(7)(C) that makes a proper election. Taxpayers that make an election under section 163(j)(7)(B) must use the alternative depreciation system under section 168, and cannot claim bonus depreciation. See section 163(j)(11)(A).

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) to be an electing real property trade or business. In addition, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (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).

The Treasury Department and the IRS are aware that taxpayers have uncertainty about whether residential living facilities that include the provision of supplemental assistive, nursing, or routine medical services qualify as electing real property trades or businesses under section 163(j)(7)(B).

To mitigate this uncertainty, the proposed revenue procedure in section 6 of this notice provides a safe harbor under which a qualified residential living facility, as defined in section 3.01 of the proposed revenue procedure, is treated as eligible to be an electing real property trade or business under section 163(j)(7)(B).

The Treasury Department and the IRS request comments on the proposed revenue procedure set forth in section 6 of this notice. Interested parties are invited to submit comments on this notice by September 28, 2020. The Treasury Department and the IRS will publish for public availability any comment received to its public docket, whether submitted electronically or in hard copy.

WHERE TO SEND COMMENTS

Commenters are strongly encouraged to submit public comments electronically. Persons may submit comments electronically via the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and NOT-126369-19). Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.

Send hard copy submissions to: CC:PA:LPD:PR (NOT-126369-19), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

The IRS expects to have limited personnel available to process public comments that are submitted on paper through mail. Until further notice, any comments submitted on paper will be considered to the extent practicable.

The proposed revenue procedure is proposed to apply to taxable years beginning after December 31, 2017.

Until the date on which the proposed revenue procedure is published as a revenue procedure in the Internal Revenue Bulletin, taxpayers may rely on the safe harbor described in the proposed revenue procedure for purposes of determining whether a qualified residential living facility, as defined in section 3.01 of the proposed revenue procedure, is eligible to be an electing real property trade or business solely for purposes of section 163(j).

The principal authors of this notice are Susie Bird, Charles Gorham, and Justin Grill of the Office of Associate Chief Counsel (Income Tax & Accounting) and Adrienne Mikolashek and William Kostak of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Mr. Grill at (202) 317-7003, or Mr. Kostak at (202) 317-5279 (not toll-free calls).

Set forth below is the form of the proposed revenue procedure that is proposed in this notice: