The “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act”, for short, passed the House on March 27, 2020 and was signed into law shortly thereafter by President Donald Trump. Within this landmark relief bill intended to provide emergency aid to individuals and businesses, are some very important provisions that must be fully understood and properly utilized to maximize the benefit for business owners.
For business owners, the three important, and immediately applicable provisions that we believe are most relevant to you are: 1. Net Operating Losses; 2. Depreciation of Qualified Improvement Property; and 3. The Business Interest Limitation.
The CARES Act temporarily repeals a limitation on Net Operating Losses (NOLs) previously enacted under the Tax Cuts and Jobs Act (TCJA). The CARES Act now allows a taxpayer to carryback losses arising in 2018, 2019, or 2020 up to five years. This means we can use losses generated this year and next (2019 and 2020) and carry them back to offset prior year income. If you have losses in prior years, we should be filing returns now to carryback those losses to generate immediate refunds. Likewise, if it is likely you will have a current year loss, it would be worth expediting your 2019 filing to generate your NOL. Then we can carry back the 2019 loss and generate refunds from prior years.
The CARES Act amended this. Now, for tax years beginning in 2019 and 2020, the business interest limitation has been increased to 50% of Adjusted Taxable Income (ATI). This means we should be amending any 2019 returns (already filed with a business interest limitation) and updating your extension calculations and 2020 forecasts to reduce taxable income by the increased interest deduction. For taxpayers impacted by this limitation, this is a significant change in your income tax planning.
The CARES Act contains the technical correction reducing the life of Qualified Improvement Property to 15 years. As part of TCJA, Sec. 179 expensing limitations were increased and bonus depreciation under 168(k) was increased to 100% of cost. Bonus depreciation was also expanded to include both new and used property. However, one significant oversight in the TCJA was Congress accidentally allowed the life of the new asset class “Qualified Improvement Property” (which replaced qualified leasehold improvements, restaurant property, and retail improvement property) to be the life of the building. This meant these improvements became property subject to a 39- year depreciation period vs. a 15- year period. This is a significant oversight because the new increased bonus depreciation only applies to assets with a class life of less than 20 years – meaning our QIP was NOT bonus eligible. The CARES Act makes this technical correction. Now QIP will be 15- year property for tax years effective for years beginning with 2018. This will require us to recalculate our current year depreciation and amend any 2019 returns that have been filed depreciating QIP as 39 years. We will also need to amend 2018 tax returns for the same reason. Consequently, if you generate a taxable loss from this change to the depreciation rules for QIP, you can carry that NOL back for up to five years. Finally, you may want to reconsider any plans to make a 2019 election to become an “electing real property trade or business” to exempt your entity from the 163(j) limitation – as ADS depreciation may have just become significantly more detrimental.
There are many other important provisions in the CARES Act and other COVID-19 legislation. Our goal is to digest the information and translate it for you as soon as possible. If you have questions or need guidance, contact us at Wall, Einhorn and Chernitzer, P.C. Please observe all safeguards and we will get through this together.