The Tax Cuts and Jobs Act (TCJA) contains many provisions that could influence Low Income Housing Tax Credit (LIHTC) developments. Arguably one of the biggest is the new limitation on the deductibility of business interest expense.
Under previous law, all business interest expense was deductible each year by most taxpayers (unless organized as a C-Corporation with extraordinarily high debt levels). Under the new law, the interest expense of many, if not most, businesses will be limited.
In general, the TCJA limits the business interest expense deduction to 30% of the entity’s adjusted taxable income, starting with 2018 tax years. There is an exception to the limitation for most businesses with average gross receipts under $25 million. This exception, however, does not apply to entities defined as syndicates under IRC Section 1256(e)(3)(B). In other words, the limitation does apply to all LIHTC partnerships in which a limited partner is allocated more than 35% of losses.
Adjusted taxable income in 2018-2021 is calculated as net taxable income before interest expense, and after adding back depreciation expense. Beginning in 2022 businesses are no longer able to add back depreciation expense to escape the limitation. So even if your entity is not limited in the early years of the new law, chances are it will be when the TCJA is fully implemented. (Disallowed interest can be carried forward and deducted in a future year.)
LIHTC businesses that do not want to apply the limitation have the option of electing to be treated as an “electing real property trade or business”, but this is not without consequence. The election is irrevocable, and comes with a cost — if the election is made, most property must be depreciated under the alternative depreciation system, resulting in significantly longer lives and reduced annual depreciation deductions.
As with most aspects of the TCJA, application of the provision will require the help of an experienced tax professional. Contact your CSH advisor for assistance in planning for the consequences of this new law.