We’re monitoring the developments of the COVID-19 pandemic and are committed to keep you informed of the implications for you and your business with a dedicated focus on all aspects of the CARES Act. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)1 has recently been signed into law with a number of provisions designed to support small businesses including real estate enterprises and investors.
Here is an overview of some of the related real estate provisions.
DEPRECIATION FOR QUALIFIED IMPROVEMENT PROPERTY
The CARES Act corrects an error contained in the 2017 Tax Cuts & Jobs Act (TCJA). Rather than a 39-year time period for depreciation of qualified improvement property, the CARES act provides for immediate depreciation of these assets. In addition, the CARES Act reduces the depreciable life of qualified improvement property from 39 years to 15 years, making it bonus-eligible property. This correction will benefit retail establishments, restaurants and hotels as a “qualified improvement property” is now eligible for immediate depreciation and is also retroactive applying to 2019 and 2018 tax years. Amending your 2018 and 2019 tax returns is required to take advantage of the adjustment.
PROVISIONS FOR NET OPERATING LOSSES
The CARES Act allows taxpayers to carry back net operating losses resulting from tax years 2018, 2019, or 2020 to the five years preceding the net operating loss. In addition, for the 2020 tax year, the net operating loss deduction limit of 80% of taxable income is suspended, allowing businesses to use net operating losses to offset 100% of their income accruing in 2020. The 80% limit will be reinstated for the 2021 taxable year.
ADJUSTMENTS FOR ALTERNATIVE MINIMUM TAX CREDITS
For tax years 2018, 2019, and 2020, The CARES Act removes the limit for tax deductions arising from business losses non-corporate taxpayers were subjected to under the 2017 Tax Cuts and Jobs Act. Those previously filed tax returns for 2018 and 2019 can be amended to take advantage of this provision. The CARES Act authorizes corporations with unclaimed Alternative Minimum Tax credits to utilize them immediately. Previously, the TCJA ended the corporate Alternative Minimum Tax and authorized corporations with previous Alternative Minimum Tax liability to claim credits, but the credits were spaced over multiple tax years.
CHANGES TO 163(J) BUSINESS INTEREST EXPENSE DEDUCTION
The CARES Act adjusts the maximum business interest expense deduction from 30% to 50% of adjusted taxable income (for tax years 2019 and 2020). Taxpayers may also choose to use their 2019 adjusted taxable income, as opposed to their 2020 adjusted taxable income, in determining their maximum business interest deduction for 2020. This 50% limit on adjusted taxable income excludes partnership entities. Instead, any interest not deductible at the partnership level is passed on to its partners, and is suspended at the partner level under the 2017 Act rules. In 2020, however, 50% of this suspended interest becomes available, and will be fully deductible by the individual taxpayer. The remaining interest expense continues to be suspended until the partner receives additional excess taxable income or interest expense from the partnership.
PAYROLL TAX CREDITS
With the CARES Act, special provisions apply for partnerships and a payroll tax credit for employee retention is available to specific businesses affected by COVID-19. One allows for a refundable payroll tax credit based on 50% of eligible wages paid by employers while another permits the deferral of the employer portion of specific payroll taxes through the end of the 2020 calendar year.
The 50% refundable payroll tax credit2 allows for a credit of up to $10,000 for businesses whose revenues decrease in excess of 50% due to coronavirus related disruptions when compared to the same quarter in the previous year. The credit applies for small business owners who retain their employees on the payroll, but are not currently working due to the pandemic.
The payroll tax deferral allows for employers to defer their portion of the social security tax payment through accrued through January 1, 2021. The first half of the payment would be due December 31, 2021, with the remaining balance owed due December 31, 2022.
The CARES Act has minimal direct relief provisions for multi-family unit landlords and commercial property owners whose mortgages are held by non-federally backed or non-traditional lenders.
Qualified businesses may be eligible to receive forgivable small business loans that can be used to cover payroll, rent, and other operating expenses3 related to their businesses. The current limit for eligible borrowers is the lesser of 2.5 times monthly average payroll or $10 million.
Additional, borrowers holding a government-backed multifamily mortgage loan who are experiencing a financial hardship due either, directly or indirectly, to the impact the COVID-19 emergency, may be able to temporarily defer payments securing an initial forbearance of 30 days, and allowing for requests of two additional 30-day extensions4 (totaling 90 days of forbearance) in exchange for not evicting any tenant for inability to pay rent or assessing penalties and fees for late payment of rent.
As the COVID-19 pandemic continues to develop, additional legislation may be passed which changes current benefits or provides additional relief.
Contact Lipsey & Associates
If you have any questions about the current CARES Act legislation and how it impacts you and your business, please feel free to contact the team here at Lipsey & Associates for more information.
To set up a free 1 hour consultation or if you want to get in touch with us to discuss your tax needs, please enter your information below:
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For more information on the process from there, read our What To Expect page.
1S.3548 – CARES Act (https://www.congress.gov/bill/116th-congress/senate-bill/3548/text, March 25, 2020)
2“Congress Approves Economic Relief Plan for Individuals and Businesses” (https://taxfoundation.org/cares-act-senate-coronavirus-bill-economic-relief-plan/, March 30, 2020)
3″Real Estate Implications of the CARES Act” (www.greenbergglusker.com/publications/real-estate-implications-of-the-cares-act/, April 1, 2020)
4“Key Provisions of the CARES Act and Effects on the Real Estate Industry” (https://aronsonllc.com/key-provisions-of-the-cares-act-and-effects-on-the-real-estate-industry/, March 30, 2020)