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Infrastructure safe harbor and section 163(j) business interest limitation

Infrastructure safe harbor and section 163(j)

The IRS today released an advance version of Rev. Proc. 2018-59 that provides a “safe harbor” to allow taxpayers to treat certain infrastructure trades or businesses as “real property trades or businesses” solely for purposes of qualifying as an electing real property trade or business for purposes of the business interest limitation under section 163(j). This is being referred to as the “infrastructure safe harbor.”

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Read text of Rev. Proc. 2018-59 [PDF 44 KB]

Infrastructure safe harbor

Section 163(j), added to the Code by the new U.S. tax law (Pub. L. No. 115-97), limits the amount of the business interest deduction claimed by certain taxpayers.

  • The term “business interest” means any interest properly allocable to a trade or business. 
  • 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.” 
  • Thus, for purposes of section 163(j), an interest expense that is properly allocable to an electing real property trade or business is not properly allocable to a trade or business, and is not business interest expense that is subject to the limitation under section 163(j).

Rev. Proc. 2018-59 explains that the IRS and Treasury Department are aware that there may be uncertainty as to whether certain infrastructure arrangements between private persons and governmental entities under which private persons maintain or provide other services with respect to certain types of infrastructure projects can qualify as a real property trade or business. In light of these taxpayer concerns, today’s revenue procedure provides a safe harbor that, if certain requirements are met, allows taxpayers to treat certain trades or businesses that are conducted in connection with the designing, building, managing, operating or maintaining of certain infrastructure projects as real property trades or businesses for purposes of qualifying as an electing real property trade or business under section 163(j)(7)(B). This is being referred to as the “infrastructure safe harbor.” 

The infrastructure safe harbor in Rev. Proc. 2018-59 is based on the proposed eligibility parameters for public infrastructure projects for purposes of the private activity bond financing proposals described in the “Legislative Outline for Rebuilding Infrastructure in America,” which the White House released publicly and transmitted to Congress on February 12, 2018. Taxpayers can apply the infrastructure safe harbor to tax years beginning after December 31, 2017.

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