While the CARES Act reflects unprecedented broad support to all sectors of the economy, it includes business tax provisions that provide significant benefits to the real estate industry.
The CARES Act allows taxpayers to reduce their income taxes by claiming 100% bonus depreciation for “qualified improvement property” (QIP), which includes improvements made by the taxpayer to an interior portion of a nonresidential building after the date the building was placed in service. Excluded from this, however, is anything related to the internal structural framework of the building, elevators or escalators, or the enlargement of the building.
Section 2307 of the CARES Act resolves a technical drafting error in the TCJA by classifying QIP as 15-year property, therefore making it eligible for bonus depreciation. Under TCJA, QIP was required to be depreciated over 39 years and was not bonus-eligible.
Similarly, the depreciable life of QIP has changed for businesses using the Alternative Depreciation System (ADS) from 40 years under TCJA to 20 years under the CARES Act. Unfortunately, though, QIP remains ineligible for bonus depreciation under ADS. Businesses that previously elected out of the business interest expense limitation in IRC Section 163(j), because QIP was ineligible for bonus depreciation, now find themselves locked out of the new QIP bonus depreciation rules unless retroactive relief is offered by Congress. For the moment, these businesses may be able to amend their 2018 tax returns or file a Form 3115 with their 2019 tax returns to accelerate the ADS depreciation by changing from a 40-year life to a 20-year life.
Additionally, if a company experiences net operating losses as a result of the accelerated depreciation in 2018 and 2019, then these losses are also subject to new and more beneficial rules.
Under the TCJA, NOLs were not permitted to be carried back and were limited to only 80% of adjusted taxable income. The new tax provision in the CARES Act allows for better utilization of the losses by providing an option of a 5-year carryback period, and eliminating the 80% carryforward limitation for the years 2018, 2019 and 2020. In accordance with the new rules, businesses with NOLs in those years may offset their taxable income in prior years and qualify for immediate recovery of taxes previously paid.
For years 2019 and 2020, the CARES Act increases the business interest expense limitation from 30% to 50% of “adjusted taxable income” (ATI), except for partnerships which are still subject to the 30% ATI limitation for 2019. However, partners will have the ability to treat 50% of any 2019 excess business interest expense as “paid or accrued” in 2020, effectively releasing in 2020 50% of the interest suspended in 2019, while the other 50% will remain suspended under the general rules. When computing 2020 limitations, taxpayers can elect to choose between 2019 or 2020 adjusted taxable income. This offers tax planning opportunities, since many businesses may experience reduced taxable income in 2020.
As always, if you have any questions regarding the new law, please contact your Withum representative.