Businesses dealing with the present economic downturn may find relief from taxation and potential tax refund options under existing tax law as recently amended by the CARES Act.
Unlocking the Benefits of Net Operating Loss (“NOLs”) Carrybacks: The 2017 Tax Act eliminated the ability to carryback NOLs generated in 2018 and later years. The CARES Act now allows for carrybacks of NOLs generated in 2018, 2019 and 2020 for up to five years to get a tax refund. The IRS recently extended the filing deadline for expedited refund of 2018 NOLs to June 30, 2020, which also makes it easier to get a refund.
Qualified Improvement Property (“QIP”) Tax Benefits Resurrected: Prior to the 2017 Tax Act, improvements made to property leased by retail businesses and certain other taxpayers could be depreciated over 15 years. The 2017 Tax Act renamed these categories of eligible assets as QIP, but inadvertently eliminated the ability to treat it as 15-year recovery property eligible for the new 100% bonus depreciation rules. The CARES Act fixed this issue (known as the “Retail Glitch”) by treating QIP as 15-year property eligible for bonus depreciation, effective retroactively as of Sept. 27, 2017.
The IRS recently announced that qualifying taxpayers can elect to take bonus depreciation on QIP by filing amended returns (or administrative adjustment requests or Form 3115 change of accounting method) for their 2018, 2019 or 2020 returns. Taking this step could produce refunds and much needed cash for these types of businesses.
Partnership Relief in Getting CARES Act Benefits: The IRS recently issued Rev. Proc. 2020-23, which temporarily allows eligible partnerships to file amended partnership returns rather than file an administrative adjustment request, which was much more cumbersome. This change will allow partnerships to take advantage of the QIP, NOL and other tax benefits afforded by the CARES Act.
Limits on Business Interest Deductions Relaxed: The 2017 Tax Act added a limit on deductibility of business interest. Starting in 2018, business interest deductions can generally only offset 30% of the taxpayer’s adjusted taxable income (“ATI”). The CARES Act increases the 30% limitation to 50% for 2019 and 2020 and made other changes to lessen the adverse impact of this rule.
The Takeaway: Affected taxpayers should consider the CARES Act tax law changes to reduce their current tax exposure and obtain potential tax refunds. Let us know how we can help you to take advantage of these opportunities.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.