Recent developments related to the COVID-19 crisis have had a sweeping impact across the nation, including economically. At this time, about 95% of the country is under stay-at-home orders. The massive reductions in travel and discretionary spending by consumers have created an abundance of cash flow issues for businesses across the spectrum. Government authorities are starting to roll out measures effectively aimed at assisting cash flow challenges for individuals and businesses.
For example, on April 1, Ohio Governor Mike DeWine signed an executive order requesting that landlords suspend rent payments and evictions for 90 days for small business commercial tenants facing hardship due to the pandemic. Governor DeWine is also requesting that lenders provide a 90-day forbearance on real estate loans (2020-08D).
Almost every state has followed the federal government’s lead in extending their April 15 tax filing and payment deadlines to July 15. Ohio and Pennsylvania are two of the states conforming to the federal due date change. The District of Columbia is also offering taxpayers an additional 90 days after April 15, 2020 to file and pay. Along with these due date changes for tax filings, first and second quarter estimated tax payments for independent contractors and businesses are delayed until July 15, 2020 in those states and in the District of Columbia .
President Trump signed into law on March 27, 2020 the Coronavirus Aid, Relief and Economic Security (CARES) Act, a $2.2 trillion stimulus package containing many taxpayer-friendly provisions. The Internal Revenue Service (IRS) has also issued separate guidance for the benefit of the real estate industry. Several of these provisions are summarized below:
Small Business Loans:
Small Business Administration (SBA) loans of $350 billion have been made available through the Paycheck Protection Program and there are ongoing discussions at the government level about supplemental funding. Schneider Downs recommends reaching out to your banker as soon as possible to apply for these SBA loans . To apply you will likely need to gather a variety of financial and investor information. The maximum loan amount is $10m. The principal and one percent interest of these loans can ultimately become forgivable if used toward “forgivable purposes.” Such forgivable purposes would include payroll, interest payments on mortgages, rent/lease and utility payments.
The infamous qualified improvement property “restaurant/retail glitch” was a drafting error in the Tax Cuts and Jobs Act (“TCJA”) causing landlords and owners of non-residential real estate to generally depreciate their interior renovations over 39 years. The lawmakers behind TCJA did not have intentions of changing the 15-year life on these types of improvements, causing them to be ineligible for full expensing in the year of completion. However, this was not properly reflected in the final statute, and congressional gridlock prevented a technical correction of the law. The CARES Act amends the statute to allow taxpayers to claim the full amount of the deductions, as originally intended. If you or your businesses had significant non-residential interior renovations, please reach out to your tax advisor to see if you might be eligible for additional depreciation deductions.
The CARES Act increases the limit on business interest expense under Section 163(j) to 50% of the taxpayer’s tax basis earnings before depreciation, amortization and interest deductions (ATI). Previously, under TCJA, this limitation was 30%. Additionally, the CARES Act allows taxpayers to use 2019 ATI in calculating the 2020 limitation anticipating operational losses and what would be lower deductions in 2020.
Some taxpayers elected out of these limitations in 2018 by making an election to be a real property trade or business. Taxpayers were required to defer certain depreciation deductions as a trade off, but often the benefit of deducting the entire interest expense outweighed that. See this previous Schneider Downs Our Thoughts On article for more information on business interest deductions: (https://www.schneiderdowns.com/our-thoughts-on/limitation-on-business-interest-deductions).
The IRS has since issued guidance that permits taxpayers to retroactively revoke their previously irrevocable Section 163(j)(7) election. This allows taxpayers to revisit their election in order to be able to claim additional depreciation deductions as a result of the previously discussed correction to the definition of qualified improvement property. This is a significant opportunity for landlords to amend their 2018 or 2019 tax filings and receive cash refunds from the government.
Qualified Opportunity Fund Investment Extension
In Notice 2020-23, the IRS has provided taxpayers additional time to fund their investment into qualified opportunity funds (QOFs). Generally, the investor would need to fund their investment in the QOF within 180 days of realizing the capital gain that they wish to defer. If this 180-day deadline fell between April 1 and July 15 of 2020, the IRS is now allowing these investors until July 15 to fund the investment.
Similar to the timing extension that the IRS provided to QOF investors, taxpayers currently engaged in a like kind exchange now have until July 15 if the taxpayer’s window to either identify or acquire the property falls between April 1 and July 15 of 2020.
Section 461(l) Loss Limitations
Business loss limitations were enacted under TCJA that would impact an individual taxpayer who incurred business losses greater than $250k if filing single, or $500k if married filing jointly. Under the CARES Act, these limitations are retroactively waived to 1/1/2018. If your business losses were limited in 2018 due to Section 461, this would be an opportunity to amend prior-year returns to claim the excess business losses.
Payroll Tax Credits:
Section 2301 provides for a tax credit for employee retention for those employers continuing to pay qualifying wages during a Suspension or Gross Receipts Decline. The credit amount depends on a business’s size, but it can be up to $5k per employee.
Net Operating Loss Changes:
Under the TCJA, net operating loss rules generally disallowed NOL carrybacks. Losses under TCJA could be carried forward indefinitely, but could only offset 80% of taxable income. Under the CARES Act, losses incurred in 2018, 2019, 2020 can be carried back five years or carried forward, if electing to waive the carryback period. CARES allows losses carried to years 2019 or 2020 to offset 100% of taxable income. If you or your company has experienced losses that could offset taxable income in other years, reach out to your tax advisor to see how these rules may apply.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.