Additional Tax Opprotunities
Originally Posted Apr. 17, 2020
The CARES act created a number of opportunities for businesses to increase their tax refunds. Did you pay a lot in taxes in 2018 and 2019? Check to see if you can get money back!
Though SDC is not a tax advising entity, it's important to be aware of these potential opportunities to then ask your accountant if they would help your business at all.
Note that the information below comes from an article titled: Business Tax Incentives and Relief Resulting from COVID-19 Response, Published by Holland & Knight Attorney Advising. The article can be found at: https://www.hklaw.com/en/insights/publications/2020/03/business-tax-incentives-and-relief-resulting-from-covid19-response
Relaxation of Net Operating Losses (NOLs)
The CARES Act modifies certain limitations on the use of NOLs that were enacted as part of the Tax Cuts and Jobs Act (TCJA). The TCJA eliminated the NOL carryback and limited the use of NOL carryforwards to offset 80 percent of a company's taxable income in a later year. The CARES Act modifies IRC § 172 by allowing NOLs that arise in 2018, 2019 and 2020 to be carried back for five years (different rules apply for real estate investment trusts (REITs), insurance companies and the year of an IRC § 965 inclusion). NOLs from taxable years that started prior to Jan. 1, 2018, are no longer subject to the 80 percent limitation. NOLs earned in tax years after Jan. 1, 2018, remain subject to the limitation with certain taxpayer favorable adjustments.
These changes should allow for businesses that will experience losses in 2020 to claim those losses against their prior year income and secure refunds for taxes paid in those prior years. While these NOLs will only arise at the end of the year, the additional changes described in the following sections may be relevant in reducing tax liabilities in 2018 and 2019 retroactively, which should be able to provide for more immediate tax refunds.
This change may also necessitate review of transactions entered into in 2018 and 2019 to consider whether the buyer or seller in those transactions would be entitled to benefit from any prior year tax refunds.
Prior to applying any NOL carryback, U.S. taxpayers with international operations should confirm that the carryback leads to no adverse results under the global intangible low-taxed income (GILTI) or the foreign derived intangible income (FDII) regimes.
The excess business loss limitation applicable to non-corporate taxpayers was eliminated retroactively for tax years beginning in 2018, 2019 and 2020. This will increase the likelihood that non-corporate taxpayers (such as individual partners of tax partnerships and shareholders of S corporations) will be able take advantage of the tax relief provided to businesses in the CARES Act.
Acceleration of AMT Credits
The TCJA repealed the corporate alternative minimum tax (AMT) but allowed refundable AMT credits for taxable years beginning in 2018, 2019, 2020 and 2021. The CARES Act amends such rule to allow corporations to accelerate the recovery of such AMT credits, including by requesting a tentative refund of such amounts on or before Dec. 31, 2020.
IRC § 163(j) Interest Expense Limitation
For taxpayers with more than $25 million in annual gross receipts, the TCJA modified the limitation on interest expense deductions under IRC § 163(j) by limiting interest deductions to the sum of the taxpayer's business interest income, 30 percent of the taxpayer's adjusted taxable income and the taxpayer's floor plan financing for the year. Taxpayers engaged in a real property trade or business are eligible to elect out of this limitation at the cost of slower depreciation schedules for their depreciable property.
The CARES Act modifies this limitation for tax years beginning in 2019 and 2020 tax years by substituting 50 percent for 30 percent. Special rules apply for partnerships, and taxpayers also may elect out of the CARES Act change. Taxpayers also will be able to elect to apply to their 2019 adjusted taxable income amount to tax years beginning in 2020, which may result in a more favorable limitation amount.
Expensing of Costs Associated with Qualified Improvement Property (QIP)
A technical error in the TCJA did not include QIP as depreciable property with a 15-year depreciable life. QIP is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service. QIP excludes any improvement for which the expenditure is attributable to 1) enlargement of the building, 2) any elevator or escalator, or 3) the internal structural framework of the building.
Because of this technical error, QIP placed in service after Dec. 31, 2017, had a depreciable life in excess of 20 years, and was therefore not "qualified property" eligible for immediate expensing under IRC § 168(k). Through a retroactive amendment to IRC § 168(e)(3), QIP placed in service after Dec. 31, 2017, was added to the category of 15-year property. This allows for such QIP to be immediately expensed under IRC § 168(k) through tax years beginning in 2022.