April 9, 2020
There are many pages in the CARES Act written about business tax provisions. The Coronavirus Aid, Relief and Economic Security Act (CARES Act or the Act) was signed into law by President Trump on March 27, 2020. This Act provides relief to individuals, businesses, nonprofits and others affected by COVID-19. JPS has summarized some of the top provisions for businesses to consider.
Technical Correction to Qualified Improvement Property Depreciation
The CARES Act contains a technical correction to a drafting error in the Tax Cuts and Jobs Act (TCJA) that required qualified improvement property (QIP) to be depreciated over 39 years, rendering such property ineligible for bonus depreciation. With the technical correction applying retroactively to 2018, QIP is now 15-year property and thus eligible for 100% bonus depreciation. This can provide immediate cash flow benefits and relief to taxpayers, especially those in the retail, restaurant, and hospitality industries.
QIP is defined as any improvement to the interior portion of a nonresidential building, so long as that was done after the building was first placed in service. Also, QIP specifically excludes an enlargement of a building, elevators, escalators, and the internal structural framework of the building.
Taxpayers that placed QIP into service in 2019 can claim 100% bonus depreciation on their 2019 return, and C corporations should consider whether they can file Form 4466 to quickly recover overpayments of 2019 estimated taxes.
Taxpayers that placed QIP in service in 2018 or 2019 and that filed their federal income tax returns for those years treating the assets as bonus-ineligible 39-year property should consider amending that return to treat such assets as bonus-eligible.
Claiming the bonus depreciation on an amended return can potentially generate net operating losses (NOLs) that can be carried back five years to taxable years before 2018 when the tax rates were higher than they were in 2018. Changes the CARES Act made to NOLs are discussed in more detail below.
Alternatively, in lieu of amending the 2018 return, taxpayers may file an automatic Form 3115, Application for Change in Accounting Method, with the 2019 return to take advantage of the new favorable treatment and claim the missed depreciation.
Net Operating Losses
Previously, NOLs generated beginning in 2018 could only be used to reduce 80% of taxable income (computed without regard to any NOL deduction). Any unused NOL was not able to be carried back but could be carried forward indefinitely.
The CARES Act permits individuals with NOLs generated in taxable years beginning after December 31, 2017, and before January 1, 2021, to carry back such NOLs five taxable years. Such NOLs not carried back may continue to be carried forward indefinitely. The CARES Act also eliminates the 80% taxable income limitation imposed by the TCJA for taxable years beginning before January 1, 2021.
Due to these changes, taxpayers with NOLs generated in 2018 and 2019 may find it advantageous to carry back NOLs to prior years by amending those prior year returns. These amendments can provide refunds from taxes previously paid when higher tax rates were in effect.
Excess Business Loss Limitations
Beginning in 2018, net business losses in excess of $500,000 for joint filers ($250,000 for all other taxpayers) were not allowed as a current deduction against other income. These threshold amounts were indexed for inflation and, in 2020, were scheduled to be $518,000 for joint filers ($259,000 for all other taxpayers). The disallowed business losses became a net operating loss applied to subsequent taxable years.
The CARES Act suspends the application of this excess business loss rule for 2020 and retroactively suspends the excess business loss limitation rule for 2018 and 2019. Thus, taxpayers will be allowed to offset their business losses against other income for these three years.
Many taxpayers have not yet filed for 2019, and the removal of the loss limitation rule should be considered in the preparation of the 2019 return.
If a taxpayer was subject to the excess business loss rule in his or her 2018 tax return, the taxpayer should consider amending the return to take advantage of the elimination of this rule.
Taxpayers may have a refund opportunity for 2018 if their net business losses were limited and may also find their 2019 tax liabilities either increased or decreased, depending on whether their business losses were being carried forward to 2019 or were sustained in 2019.
Interest Expense Limitations
Under the TCJA enacted in late 2017, only interest that exceeds the sum of the following three items can be deducted, with the rest being carried over for up to five years:
- Interest income;
- 30% of adjusted taxable income; and
- For automobile and other dealers, any interest on floor plan financing.
This limitation does not apply to businesses with average annual gross receipts of $25 million or less. Upon election, it also would not apply to many real property and farming businesses.
The CARES Act amends this limitation solely for taxable years beginning in 2019 and 2020 by replacing “30%” with “50%.” This change does not apply to partnerships for tax years beginning in 2019, but only for tax years beginning in 2020.
Compensation, Benefits, and Payroll Relief
Both the FFCRA & CARES Act provide compensation, benefits, and payroll relief due to COVID-19, which JPS has addressed in a previous article.
Additionally, two long-awaited provisions now allow employers to assist employees with college loan debt through tax-free payments up to $5,250 and restores over-the-counter medical supplies as permissible expenses that can be reimbursed through health care flexible spending accounts and health care savings accounts.
For corporations, the CARES Act temporarily increases the limitation on the deductibility of cash charitable contributions during 2020 from 10% to 25% of the taxpayer’s taxable income. The CARES Act also increases the limitation on deductions for contributions of food inventory from 15% to 25%.
Effects of the CARES Act at the State and Local Levels
For states like North Carolina that piggy-back the Federal law, they will need to determine if they will accept all of the Federal provisions. Some have already addressed certain provisions, while many more have yet to be addressed. North Carolina’s legislature is currently out of session, so we expect it will be late April or in May before these provisions can be addressed.
Stay updated with JPS. And, as always, feel free to contact our JPS team to assist you.
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Johnson Price Sprinkle PA is a 60+-year-old accounting firm providing small to middle-market businesses with tax, business consulting, audit, and technology solution services. With offices in Asheville, Boone, and Marion, NC, our CPAs, and JPS team strive to provide personal service alongside technical expertise resulting in our clients’ long-term financial success. We also invest time and energy in our community, taking pride in doing what we can to make Western North Carolina a better place. JPS Mission: To Be Greater by positively impacting our Clients, People, Community and Profession.