To Our Valued Clients:
The CARES Act was signed into law by President Trump on March 27, 2020. The Act contains many types of aid and other benefits to help businesses of all sizes get through the ongoing pandemic.
With an estimated cost of $2.2 trillion, the CARES Act is the largest stimulus package in our nation’s history. While it contains a wide array of provisions, we wanted to highlight four that will have great impact on our real estate clients and advisors.
Let’s take them one at a time:
1. Net Operating Loss (NOL) Carry-Back
The CARES Act will allow a five-year carry-back of NOLs created in the 2020, 2019, and 2018 tax years. For example, if you perform a Cost Segregation study in the current year and create an NOL, the CARES Act will allow you to carry back the loss for as long as five years to claim potential tax refunds.
Previously, the Tax Cuts and Jobs Act (TCJA) eliminated the ability to carryback NOLS for tax years ending after 2017. The CARES Act will now enable taxpayers that had an NOL in 2018 to carry back losses as far back 2013 to claim tax refunds. Think of the new NOL rules as a way to increase your cashflow during this pandemic.
2. NOL Carry Forward
Previously, the TCJA limited carry-forward losses to offset only 80 percent of income. However, the CARES Act will now allow carry-forward losses generated in tax years 2018 through 2020 to offset 100 percent of income.
3. Business Interest Limitation – §163(J):
The TCJA also limited the net business interest deduction to 30 percent of adjustable taxable income (ATI). The CARES Act has now increased that threshold to 50 percent of ATI for 2019 and 2020. This means taxpayers will be able to expense a larger amount of business interest.
4. Qualified Improvement Property (QIP) Fix:
The CARES Act contained a much awaited correction to a drafting error in the TCJA that was related to Qualified Improvement Property (QIP). Previously, QIP was considered 39-year property. Under the CARES Act, QIP is now considered 15-year property and is eligible for bonus depreciation retroactively effective for properties that were placed into service after December 31, 2017. QIP is now defined as any improvements made to the interior of a building following the date that the building was placed in service.
It should be noted that not all capital improvements qualify as QIP since certain exceptions still apply.
At Bedford, we have anticipated this correction ever since TCJA was signed into law in 2017. That’s why all reports issued to Bedford clients from 2018 through March 2020 have separately delineated QIP as a separate group of assets. You will now have the ability to reclassify your QIP as 15-year property with bonus!
Special note for taxpayers that are taking the Real Estate Trades or Business election under §163(j), QIP will receive an ADS life of 20 years and will NOT be bonus eligible. In these cases, it will be highly beneficial to carve out as much 5- and 7-year property utilizing a cost segregation study.
How to Implement the Changes
If you wish to take advantage of some of the changes introduced in the CARES Act, the correction of prior year returns can be done either by completing IRS Form 3115 or by correcting the original tax filing with an amended/superseded tax return.
The COVID-19 pandemic is challenging all of us to seek innovative ways to continue serving our clients nationwide. Just know that Bedford is fully operational. Each one of our staff members is working from home with full connectivity. We are limited only by the “stay at home” orders for certain states, as well by commonsense social distancing practices. We want to ensure that all Bedford staff members and client contacts are safe. However, conducting on-site inspections for the foreseeable future will be a challenge.
That being said, Bedford has many innovative ways to complete our studies without conducting site visits. We can utilize client-supplied information, best available technology and good old American ingenuity! Contact us any time and we’ll be happy to tell you about other proven techniques we can deploy to complete most studies virtually.
We have also updated our Depreciation Decoder to reflect the most recent changes brought about by the CARES Act.
We know that many of you will be deciding to proceed with new studies thanks to important new provisions contained in the CARES Act. As always, we are ideally positioned and ready to assist you with Cost Segregation, 179D Energy and R&D Tax Credit Studies.
On behalf of the entire Bedford Team, I would like to thank you for your continued support and loyalty to our company and hope that you stay safe and healthy during these trying times. If you or a professional colleague has questions or concerns about qualifying for important tax savings under the CARES Act, please don’t hesitate to contact your local Bedford representative or use the link and we will make sure we connect you with the right person.
Greg Bryant | Managing Partner