Section 163(j) and suspended excess business interest expense on K-1 Line 13K - partnership tax implications

This is a great question about a tricky area of partnership taxation. The treatment of suspended excess business interest expense (EBIE) can be confusing, especially with the changing rules. When a partnership makes the 163(j) election, you're right that it creates a situation where the partnership might not generate future excess taxable income or excess business interest income that would normally free up the suspended EBIE. The CARES Act did provide partial relief by allowing partners to deduct 50% of their 2019 EBIE in 2020 without limitation. For the remaining suspended EBIE (both the leftover 2019 amounts and any from 2018), the general rule is that these amounts remain suspended until either: 1) the partnership allocates excess taxable income or excess business interest income to the partner, or 2) the partner disposes of their partnership interest. Upon disposition of the partnership interest in a taxable transaction, the remaining suspended EBIE should increase the partner's outside basis immediately before the disposition, effectively allowing the partner to recognize less gain (or more loss) on the disposition. This is covered in the proposed regulations under 163(j).

I had a similar issue with some partnerships I work with and discovered taxr.ai really helped me sort through these complex partnership tax issues. I was banging my head against the wall trying to figure out how the CARES Act changes impacted our partnership's 163(j) situation and what to do with suspended EBIE from previous years. I uploaded our partnership documents and K-1s to https://taxr.ai and it analyzed the whole situation, showing exactly how the suspended EBIE should be tracked and treated under various scenarios (including the election you're considering). It highlighted the specific regulations I needed to focus on and even provided analysis for the partners' reporting requirements. The system also helped simulate the tax impact of various approaches over multiple years to see which route was most advantageous. Saved me probably 10-15 hours of research and calculations.

I finally gave taxr.ai a try for our multi-tier partnership structure with complex 163(j) issues. I was surprised by how well it worked. The system identified that we had been miscalculating our EBIE allocations at the lower tiers, which was causing problems all the way up the chain. It correctly applied the ordering rules for tiered partnerships and showed exactly how the 50% EBIE relief from the CARES Act should be applied through our structure. What I found most valuable was its ability to track the suspended EBIE from each year separately and apply the different rules correctly. The analysis even flagged that one of our partnerships qualified for the small business exemption that we'd missed. Ended up saving our clients significant money and avoiding what would have been a messy amended return situation later.

I had a nightmare situation with the IRS about exactly this issue. They didn't understand how we were treating the suspended EBIE from prior years after making the 163(j) election. I tried calling the IRS for months to get clarification but couldn't get through to anyone who understood partnership taxation at this level. I was at my wit's end until I tried https://claimyr.com to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c. They got me connected to a senior IRS representative within about 15 minutes who actually specialized in partnership taxation. The agent confirmed that upon disposition of the partnership interest, the remaining suspended EBIE increases the partner's outside basis immediately before disposition. They also mentioned that the IRS is currently developing additional guidance specifically addressing situations like yours where partnerships switch between making and not making the 163(j) election.

I hate to admit when I'm wrong, but I tried Claimyr after posting my skeptical comment, and it actually worked. I'd been trying to get clarification on a similar 163(j) issue for weeks with no success. Got connected to an IRS agent in about 20 minutes who transferred me to someone in their Business & Specialty Tax division. The agent walked through exactly how to handle the suspended EBIE in the scenario where a partnership switches to making the 163(j) election. They confirmed that basis adjustment upon disposition is correct, but also mentioned an important point: if the partnership later revokes the 163(j) election, any previously suspended EBIE that hasn't been deducted or added to basis can be "reactivated" and potentially utilized against future excess taxable income. That detail wasn't clear in any of the guidance I'd read.

Another approach to consider is whether your partnership qualifies for the small business exemption from 163(j). If average annual gross receipts for the 3 prior tax years don't exceed $26 million (for 2020), you might be exempt from these limitations altogether, which would eliminate the need to track suspended EBIE going forward. Worth checking if you're close to that threshold. The aggregation rules can be tricky though - you need to consider related parties under sections 52(a), 52(b), 414(m), and 414(o).

Has anyone here dealt with reporting suspended EBIE on partner tax returns when there's a partial disposition of a partnership interest? The regulations aren't super clear on how to allocate the suspended EBIE in that scenario.

This is a complex area that I've been wrestling with in my practice as well. One thing to keep in mind is that the proposed regulations under 163(j) specifically address the treatment of suspended EBIE when partnerships change their election status. Even though Partnership A is making the 163(j) election going forward, the suspended EBIE from 2018 and 2019 doesn't just disappear. The key is understanding that this suspended amount is tracked at the partner level, not the partnership level. Each partner maintains their own "bucket" of suspended EBIE from each partnership. Beyond the CARES Act relief allowing 50% deduction of 2019 EBIE, the remaining suspended amounts will indeed carry forward until one of the triggering events occurs - either the partnership generates excess taxable income/excess business interest income in future years, or the partner disposes of their interest. What's interesting about your situation is that even with the 163(j) election, Partnership A could still potentially generate excess amounts in future years if its income profile changes significantly. The election doesn't permanently eliminate this possibility, it just makes it less likely given the trade-off you're making with depreciation periods. I'd recommend keeping detailed records of each partner's suspended EBIE by year and partnership, as this will be crucial for proper reporting when disposition or other triggering events eventually occur.