The Tax Cuts and Jobs Act created a limitation on the amount of interest expense that can be deducted from a business’s taxes. There are multiple exemptions to this limitation to allow a business to deduct their full interest expense. For FLA members the first exemption that they can qualify for is based on average gross receipts. Any business with an average of less than $25 million over a three-year period is automatically exempted from the limitation.
The IRS has released final rules for Section 163J which outlines additional exemptions for the interest deduction limitation. In addition to releasing the final regulations, IRS concurrently released a Notice of Proposed Rule Making. The final regulations outlined an exemption for real property trades or businesses. The final rule did determine that unharvested timber does qualify as real property, but the management of timber property is not considered a real property trade or business based on the definition provided by the Tax Cuts and Jobs Act (Section 468(c)7(C)). The concurrent proposed rule did however put forward two expanded definitions of development and redevelopment as they relate to real property trades or businesses:
Real property development: “to establish, cultivate, maintain or improve timberlands (generally defined as parcels of land covered by forest).”
Real property redevelopment: “the establishment and cultivation of new timberlands.”
Once these definitions are finalized either later this year or in early 2021, commercial management of timberland will be an exemption from the limitation on business interest deductions for those businesses that are above the gross revenue exemption.
In addition to this proposed rule, as part of legislation to address the economic impact of the COVD-19 pandemic, the limitation on business interest was suspended for tax years 2019 and 2020. With this suspension the gap between the final rule released in June and the proposed rule that will be finalized later will not impact any business interest paid in 2020. FLA is submitting comments to ensure if the proposed rule is not finalized until 2021 that it will be retroactive to the beginning of the 2021 tax year.