The year 2020 will be recorded as a time of volatility and market disruption—not to mention a presidential election that changed which party controls the executive branch. Long before COVID-19 entered the picture, the Tax Cuts and Jobs Act (TCJA) of 2017 included a number of benefits for property owners and investors. The Coronavirus Aid, Relief and Economic Security (CARES) Act included relief measures that are advantageous to property owners and investors. These changes make strategic tax planning even more critical this year. The following information includes a summary of changes and our recommended action steps.
As you know, the TCJA repealed the corporate alternative minimum tax (AMT) and permitted businesses to claim unused AMT credits in the tax years 2018, 2019, 2020 and 2021. The CARES Act fast-tracked this timeline, which allows corporations to claim remaining credits in either 2018 or 2019.
Action: You have several options for a quick refund, but if you want the fastest path, you will need to file a tentative refund claim on Form 1139 by Dec. 31, 2020.
Another provision in the CARES Act regarding net operating losses (NOL) allows businesses to use current losses against past income for immediate refunds. Specifically, NOLs from 2018, 2019 and 2020 can now be carried back five years for refunds against prior taxes.
Action: Work with your tax professional to spot opportunities to accelerate deductions into a loss year. The losses can offset income at the higher tax rates that were in place before 2018, so you have the opportunity to receive a larger refund. Remember, pass-through businesses like partnerships and S corporation pass losses to owners; they make the claim as opposed to C corporations that make the NOL claims. You must file tentative refund claims for 2019 by Dec. 31, 2020 using Form 1145. However, if your NOLs will be for this year, you can’t claim an NOL carryback until you file your claim, so you are encouraged to file in early January 2021.
Excess Business Loss Carryback
The CARES Act addressed the excess business loss limitation applicable to pass-through business owners and sole proprietors for taxable years beginning in 2018, 2019 and 2020. This change allows businesses to benefit from the modified NOL carryback rules.
Action: Work with your tax professional to determine if amended returns are required.
Cost Segregation: Bonus Depreciation
The latest tax reform made cost segregation even more beneficial to property owners through two changes in bonus depreciation. As you know, bonus depreciation enables businesses and individuals to deduct a percentage of the cost of their assets the first year they are placed in service. Thanks to changes in the tax law, bonus depreciation is 100% through tax year 2022, and used property is now eligible for bonus depreciation. The CARES Act added a new five-year carryback option.
Action: Now that NOLs can be carried back, you should review all cost segregation, 179 and 179D energy tax deduction opportunities to generate a NOL and potential refunds.
The CARES Act fixed a technical glitch that applies faster depreciation plus bonus depreciation to qualified improvement property (QIP), which includes most improvements to the interior of a building that is owned or leased. Learn more.
Action: The QIP fix is retroactive to 2018, so take advantage of the ability to fully deduct QIP dating back to Jan. 1, 2018. If you already filed 2018 and 2019 returns prior to this change, you can either reflect the additional retroactive deduction in 2020 via an accounting method change or amend the returns to apply for QIP bonus depreciation for each year.
Section 1031 Exchanges
As most real estate investors know, Section 1031 like-kind exchanges allow you to swap out one piece of real estate for another without paying federal income tax. This exceptional tax break has benefited many property owners over the years. The TCJA permanently eliminated 1031 treatment for the exchange of personal property that occurred after Dec. 31, 2017. However, properly structured like-kind exchanges of real property were left in place. President-elect Joe Biden’s proposed tax plan would eliminate this tax-savings tool for investors with income greater than $400,000.
Action: Property owners should act quickly to take advantage of the Section 1031 exchange break before it is eliminated. You must complete your 1031 exchange now, before the tax break is terminated.
Energy Tax Credits
Commercial and residential building owners and investors can earn tax credits for qualified energy-efficient improvements they make to their properties. The 45L energy-efficient home tax credit is equal to $2,000 per residential unit or dwelling, and the 179D tax deduction for commercial property owners may qualify for up to $1.80 per square foot. Both were retroactively extended to include tax years 2018 and 2019, and unused credits can be carried forward for up to 20 years.
Action: The energy tax credits are due to expire Dec. 31, 2020. While these tax incentives have been retroactively extended in the past, there is no guarantee they will continue. You should act now to claim these valuable tax credits. To do so, it is essential to obtain an analysis of all qualifying expenditures. You’ll also need a Section 45L tax credit certification or an Energy Policy Act certification for the 179D tax deduction to claim the incentives. ETS engineers and CPAs can help you qualify for the tax incentives by conducting a thorough review and providing you with the required documentation.
The Opportunity Zones Tax Incentive was included as part of the TCJA to provide developers with the opportunity to defer capital gains and help develop distressed communities through qualified opportunity zones (QOZs) for temporary tax deferral until 2026. Investors were able to gain the full tax benefit by making investments before the end of 2019, but there is still a good opportunity to defer capital gains and take advantage of this powerful incentive. Additionally, the IRS issued guidance in June to extend certain deadlines and working capital suspensions due to pandemic-related interruptions.
Action: Developers and business owners should work closely with their specialty tax advisors to ensure they can provide their investors with an exceptional tax-incentivized program. ETS can work with developers to gain maximum advantage of the opportunity zone tax incentive.
As a national specialty tax services business, ETS closely monitors federal and state legislation and guidance for property owners and investors. Our specialty tax experts can answer your questions and work closely with you to ensure you are taking advantage of every tax benefit that will help your business succeed. If you have questions, just give us a call at (800) 236-6519.