Among its many other disaster relief and support measures, the Coronavirus Aid, Relief, and Economic Security (CARES) Act made several beneficial income tax changes. It addresses a long simmering problem from the 2017 tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA), and also temporarily reverses course on some of the TCJA’s other tax changes. These tax law change creates opportunities for income tax refunds and/or reduced income tax liabilities. Below are four of the most significant provisions your organization should evaluate in short order.
The Retail Glitch Fix
Congress inadvertently failed to assign a depreciable class life to qualified improvement property, which consolidated retail. leasehold, and restaurant property inthe TCJA. The oversight meant that owners of qualified improvement property could not claim bonus depreciation on that property. Bonus depreciation had been expanded to 100% under the TCJA for property placed in service after Sept. 27, 2017. The CARES Act clarifies that qualified improvement property has a 15-year depreciable class life, and thereby fixing the so-called “retail glitch” for property placed in service after Dec. 31, 2017.
What This Means
Business owners with qualified improvement property likely filed only one tax return that is subject to the retroactive retail glitch fix. They may consider filing an amended return to claim that additional depreciation, or they could request an automatic accounting method change under Section 6.01 of Rev. Proc. 2019-43 to claim the additional depreciation in the immediately succeeding tax year. We expect additional IRS guidance that should also help to address situations where a business has filed more than one return that would benefit from the retroactive retail glitch fix.
Net Operating Loss Carrybacks
The CARES Act restores and enhances the ability to carry back net operating losses (NOLs) to prior tax years. For NOLs incurred in taxable years beginning after Dec. 31, 2017 and before Jan. 1, 2021, the CARES Act permits businesses to carry back such NOLs for five years, and also permits businesses to use their NOLs to fully offset their income in those carryback years.
This provision is more generous than previous NOL rules. Prior to the TCJA, NOL carryback periods were limited to two years. The TCJA eliminated the carryback potential altogether, permitting only carryforwards that were limited to 80% of taxable income.
What This Means
If your business had NOLs in 2018 and 2019, you should work with your tax advisor to create a tax strategy that helps you optimize those NOLs over the 2018–2020 period. A request to carry back a net operating loss can be filed using Form 1139 or Form 1045, but in certain cases an amended return is required.
The revitalized NOL carryback period could also bring immediate relief for corporations that have tax payment liabilities due July 15, and anticipate an NOL in 2020 (because of the devastating economic impact of COVID-19, many businesses may find this to be the case). If the 2020 NOL will eliminate the tax liability in all fi preceding years, including 2019, the corporation can file Form 1138 to request an extension of time to pay its 2019 income tax liability. The extension will continue until the due date (including extensions) for the 2020 NOL year.
Excess Business Loss Limitation
Another tax reform change that has been temporarily suspended is the TCJA’s excess business loss limitation. Under the TCJA, non-corporate taxpayers could not deduct trade or business losses that exceeded $500,000 for married filing jointly returns or $250,000 for single filers. Disallowed losses were rolled into the NOL carryforwards. A non-corporate taxpayer’s trade or business losses from all sources are first aggregated before the single limitation amount is applied, which means that net losses passed through from all partnerships and S corporations must be aggregated; in other words, the limitation is not applied separately at each entity level.
The CARES Act suspends these excess business loss limitation rules for tax years after Dec. 31, 2017 through Dec. 31, 2020.
What This Means
Non-corporate taxpayers will need to evaluate whether they should file amended returns for 2018 in order to claim associated income tax refunds.
Business Interest Deductions
The CARES Act increases the Section 163(j) business interest deduction to 50% of adjusted taxable income for tax years beginning in 2019 or in 2020. For partnerships, the increase only applies in 2020, however partners can deduct 2019 excess business interest from a partnership during 2020 in an accelerated manner. Taxpayers can elect out of the change and use the business interest deduction that had been established by the TCJA, which is 30% of adjusted taxable income (roughly the tax-basis equivalent of EBITDA).
All taxpayers are subject to the business interest deduction, including individuals, corporations, partnerships, and trusts, except small taxpayers (three-year average gross receipts that do not exceed $26 million, adjusted for inflation) that are not tax shelters.
Under the CARES Act, taxpayers may also use the 2019 calculation for adjusted taxable income to figure the business interest limitation for a tax year beginning in 2020. Taxpayers can elect out of this provision if the adjusted taxable income amount is greater in 2020.
What This Means
You should work with your tax advisor to understand the optimal choices under the CARES Act changes with respect to the business interest deduction limitation.
Amended Return Guidance
On April 8, the IRS posted this guidance about amended returns on its website:
The IRS is aware that there are questions from practitioners and taxpayers on the filing of corporate and/or individual refund claims that may be available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The IRS is currently exploring available options and expects to issue filing instructions in the coming days. The IRS recommends that taxpayers await further instructions before utilizing traditional processes. Additional information will be posted to IRS.gov.
The CARES Act included several other tax benefits as well, including payroll tax credits and changes to the refundable portion of corporate alternative minimum tax (AMT). These updates may take some time to work through, and further guidance may be coming to help businesses and their tax advisors apply these changes.
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