Tax planning may not be a priority as real estate groups respond and recover to COVID-19 pandemic disruption, but recent legislation provides some significant opportunities that are worth a closer look. Determining an appropriate strategy under these provisions to optimize income tax obligations will require careful consideration and planning. Recent legislation, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act, addresses previous tax reform provisions and also creates new income tax minimization potential.
When taken together with other federal financial relief, such as the expansion of loan availability under the Small Business Administration’s Paycheck Protection Program, these incentives might create a stronger position for the future of your company. The following are some of the top provisions your organization might consider.
Payroll Tax Holiday and Retention Credits
The CARES Act provides a payroll tax holiday that allows employers to defer the employer portion of their Social Security payroll tax liability (i.e. , 6.2% of wages), including an identical amount of self-employment tax, for the period beginning March 27, 2020 and extending to the end of the year. Businesses taking advantage of this holiday must repay 50% of the amount deferred by the end of 2021, and the remaining 50% by the end of 2022.
Employers that had a Paycheck Protection Program loan from the SBA forgiven will not be eligible for holiday, and must stop the deferral when the loan is forgiven.
There is also an employee retention tax credit that covers employees’ wages paid after March 12, 2020, through the end of the year. Eligible companies for the tax credit are employers whose operations were fully or partially suspended due to a related shutdown order, or whose gross receipts declined by more than 50% when compared to the same quarter in the prior year. Qualified wages depend on whether your company has more than 100 employees.
Employers that received a Paycheck Protection Program loan from the SBA will not be eligible for this employee retention tax credit.
Net Operating Losses
The CARES Act temporarily restores the ability for organizations and individuals to carry back net operating losses (NOLs) incurred between 2018 through 2020. The carryback feature had been eliminated by the tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA), which also capped the deduction for NOLs at 80% of taxable income. Under the CARES Act, NOLs may now be carried back five taxable years and can offset 100% of regular taxable income in both carryback years and carryforward years, because the former NOL deduction cap has also been removed.
Certain NOL calculation questions will require additional guidance concerning the alternative minimum tax (AMT), such as a 2019 NOL carried back to a year with a corporate AMT. There was some initial concerns about taxpayers’ ability to quickly claim NOLs in previous tax years because the IRS announced that it would not be able to process paper returns during its COVID-19 pandemic response and the safety precautions it is taking. The IRS later clarified that businesses and individuals can temporarily submit eligible refund claims on Forms 1139 or 1045 via fax.
Excess Business Loss Limitation
The CARES Act suspends the excess business loss (EBL) limitation retroactively for tax years beginning after Dec. 31, 2017, and through tax years ending Dec. 31, 2020. Amended returns will need to be evaluated to claim associated refunds, and losses that become deductible may be eligible for NOL carryback.
The CARES Act makes a technical correction to the TCJA to re-establish the 15-year depreciation recovery period for certain improvements to nonresidential real property (qualified improvement property), effective for property placed in service after Dec. 31, 2017. This correction also permits taxpayers to use the bonus depreciation deduction benefits on the qualified improvement property, often with a 100% rate. Taxpayers may consider filing an amended return in appropriate circumstances to claim additional depreciation, or request an automatic accounting method change to claim additional depreciation in the immediately succeeding tax year.
Business Interest Deductions
The CARES Act increases the amount of business interest that may be deducted by generally increasing the interest limitation from interest income plus 30% of adjusted taxable income to 50% of adjusted taxable income, for tax years that begin in 2019 or in 2020. “Small taxpayers” are not subject to the rule, and real estate trades or businesses had the option to elect out of the provision using Section 163(j)(7). Real estate operators will need to decide if it would make more financial sense to revoke previous Section 163(j)(7) elections to capitalize on potential bonus deprecation on qualified investment property.
Taxpayers can use the 2019 calculation for adjusted taxable income to determine the business interest limitation for tax years beginning in 2020, but can opt out of this provision. The 50% limitation applies to all taxpayers, except partnerships that have a tax year that begins in 2019.
Qualified Disaster Loss
Section 165(i) rules allow a loss “attributable to a federally declared disaster” to be claimed in the immediately preceding tax year. Businesses should determine if they have losses attributable to the pandemic that have been fixed by identifiable events that may be eligible to be deducted on their 2019 returns.
Property Tax Adjustments
COVID-19 pandemic responses may have created occupancy issues for real estate operators. Now is a good time to evaluate whether you need to make rent concessions, adjustments to help tenants, or if operating costs have increased due to economic uncertainty.
Occupancy issues may also affect your property tax obligations. Assessment notices during this time will need to be carefully monitored to fully understand when claims can be made or special rules can be observed.
For More Insight
Provisions under the CARES Act as well as existing tax provisions can help your business overcome challenges you currently face. We are here to help make sense of complicated calculations and optimize savings for your operations with regard to tax liability.
For more information on how the COVID-19 pandemic affects your operations, visit our COVID-19 Resource Center or contact a member of our team.
Published on May 11, 2020