Coronavirus Food Assistance Program

Electing Out of the Business Interest Expense Limitation

CPAs & Advisors

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Eligible real property and farming businesses can elect out of the business interest expense limitation. However, electing to be exempt has a tax cost.

Real Property Businesses

Real property businesses can elect out of the business interest expense limitation rules if they use the slower Alternative Depreciation System (ADS) method to depreciate their nonresidential real property, residential rental property and qualified improvement property. Using the ADS method results in lower annual depreciation deductions because its depreciation periods are longer than the depreciation periods under the regular MACRS (Modified Accelerated Cost Recovery System) method. Real property businesses include developing, redeveloping, constructing, reconstructing, acquiring, converting, renting, operating, managing, leasing and brokering real property.

Affected real estate businesses should evaluate the tax benefit of gaining bigger interest expense deductions by electing out of the interest expense limitation rules vs. the tax detriment of lower depreciation deductions under the ADS method. If the election out is made, first-year bonus depreciation that would otherwise be allowed for eligible real property is not allowed under the ADS method.

Farming Businesses

Eligible farming businesses can also elect out of the business interest expense limitation rules. Farming businesses include nurseries; sod farms; raising or harvesting of tree crops, other crops, or ornamental trees; and certain agricultural and horticultural cooperatives. These businesses can elect out of the rules if they use the ADS method to depreciate assets used in the farming business that have MACRS depreciation periods of 10 years or more.

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