GOODWIN 29 LIMITATIONS ON INTEREST DEDUCTIBILITY AND THE REAL ESTATE BUSINESS EXCEPTION The TCJA imposes a new limitation on the deductibility of business interest, including interest on existing debt. Absent an exception, the deduction for business interest now generally cannot exceed the sum of the taxpayer’s business interest income plus 30% of its “adjusted taxable income.” For taxable years before 2022, “adjusted taxable income” generally means business taxable income before interest income or expense, net operating losses (“NOLs”), the passthrough deduction discussed below, and depreciation and amortization (i.e., comparable to EBITDA). For taxable years thereafter, adjustable taxable income is reduced by depreciation and amortization (i.e., comparable to EBIT). Any business interest that is not deductible due to this limitation may be carried forward indefinitely. The limitation is applied at the partnership level in the case of partnership debt. The partnership’s non-deductible interest expense is allocated out to the partners and may be carried forward by the partners and used in future years, but only to the extent of any excess taxable income allocated to the partner from the applicable partnership in those years. ASSESSING THE IMPACT OF REAL ESTATE TAX REFORM On December 22, 2017, President Trump signed into law H.R. 1, known as the “Tax Cuts and Jobs Act” (the “TCJA”). The TCJA is the most far-reaching tax legislation to be passed in over 30 years. The provisions of the TCJA generally apply to taxable years beginning after December 31, 2017. Although the tax changes specifically directed at real estate are modest as compared to other areas, many of the TCJA provisions will have a material impact on real estate investors, REITs and real estate funds and the optimal tax structures for their investments. Below we consider those provisions that we think are most relevant to owners of and investors in U.S. real estate. JANUARY 2018 1 ADS generally extends the relevant periods from 39 to 40 years for nonresidential real property, from 27.5 years to 30 years for residential rental property and from 15 to 20 years for qualified improvement property. EXCEPTIONS: • Electing real property trade or business. The limitation does not apply to a “real property trade or business” that affirmatively elects out of the limitation. Eligible real property trades or businesses generally include any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. Making the election requires the real property trade or business to depreciate its non-residential real property, residential rental property, and qualified improvement property over a longer period using the alternative depreciation system (“ADS”) rather than the general depreciation system.1 In addition, the new 100% bonus depreciation deduction generally will not be available to taxpayers that elect out of ADS in certain circumstances. The election, once made, is irrevocable. • Small business exception. The business interest limitation does not apply to small-business taxpayers