This article was originally published April 2020 in the Colorado Real Estate Journal.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. Certain tax provisions within the act could be used to obtain immediate tax savings and much needed cash infusions for the real estate industry. In addition, the IRS has released recent tax guidance expanding opportunities afforded by the CARES Act.
Given the capital intensive nature of the real estate business, it’s important to consider the following planning strategies which could be utilized to:
- Shore up cash flow and cover rent reductions and finance development projects
- Retain talent
- Make timely acquisitions
- Strengthen your position when negotiating with lenders
Private equity groups and heavy real estate investors are running into issues with affiliation rules that prevent financing from the Small Business Administration (SBA).
Below is a high-level overview of various tax-related incentives in the CARES Act. You should continue to work with your tax professional to evaluate options as the potential benefits and consequences vary across the industry and guidance is being published on a near-daily basis by the US Department of the Treasury.
The CARES Act made a technical correction to tax reform legislation passed in late 2017—also known as the Tax Cuts and Jobs Act (TCJA).
Prior to the CARES Act, an asset defined in the TCJA as qualified improvement property (QIP) was depreciated over 39 years. The CARES Act amended this time period to 15 years.
The CARES Act generally allows you to expense an asset if it meets the definition of a QIP under the bonus depreciation rules for QIP placed in service after September 27, 2017. This could lower the taxable income on your company’s 2018 and 2019 filed returns and potentially create a loss.
Taxpayers who made a Section 163(j)(7) real property trade or business elections in 2018 or 2019 weren’t eligible to take bonus depreciation. However, the recently issued Revenue Procedure 2020-22 permits taxpayers to revoke the Sec. 163(j)(7) election through the filing of amended returns and pursue bonus depreciation deductions.
Employee Retention Tax Credit (ERTC)
The ERTC is designed to encourage companies to keep employees on their payroll if their business has been fully or partially suspended due to the COVID-19 pandemic.
It’s a fully refundable tax credit for employers who aren’t able to obtain, or wish to forgo, financing from the SBA. For larger real estate enterprises, recent SBA guidance and determinations under the affiliation rules of the Paycheck Protection Program (PPP) outlined in the CARES Act have made financing options more complex.
The ERTC applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account for each employee is $10,000; the maximum credit paid to any employee is $5,000.
Employers will need to work through the details when calculating the amount of their full-time employee headcount to determine the amount of wages eligible for the tax credit. Qualified wages don’t include amounts paid for the sick leave credit or the family leave credit enacted by HR 6201.
Advance credit refunds could be procured through the filing of new Internal Revenue Service (IRS) Form 7200 if the amount of the credit for any calendar quarter exceeds the applicable payroll taxes due as outlined in Section 2301(I)(1) of the CARES Act.
Delay of Employer Payroll Tax Payments
Employers can defer payment for the employer portion of certain payroll taxes incurred beginning March 27, 2020 and ending on December 31, 2020 under Section 2302 of the CARES Act.
If deferred, the employer would pay 50% of the amount by December 31, 2021, and the remaining 50% by December 31, 2022. The eligible payroll taxes are the employer’s portion of social security taxes—6.2% of an employee’s wages.
Self-employed taxpayers can also defer the employer’s portion of social security taxes in the self-employment tax.
Employers that receive a PPP loan can’t defer payment of the payroll tax after the date the employer receives a formal decision from their lender that the loan is forgiven.
People who utilize a Certified Professional Employer Organization (CPEO) can choose this option, but they must notify the CPEO of their intention.
Net Operating Loss (NOL) Carrybacks
Prior to the CARES Act, net operating losses could be carried forward, but you could only offset 80% of your company’s future taxable income. The CARES Act repealed the 80% limitation and your business can now offset a 100% of your taxable income for years beginning before January 1, 2021.
In addition, taxpayers can now elect to carryback NOLs incurred in 2018, 2019, and 2020 to the five prior tax years and potentially receive a refund claim, or carry NOLs forward without the 80% limitation.
Certain tax partnerships that were subject to the Bipartisan Budget Act of 2015’s centralized partnership audit procedures now are allowed to file amended 2018 and 2019 tax returns under Revenue Procedure 2020-23 to take into account the CARES Act tax law changes as well as any other tax attributes.
For individual and pass-through real estate investors, it’s worth noting that the excess business loss limitation rule imposed under Internal Revenue Code Section 461(l)(1)—which capped aggregate trade or business losses at $500,000 for married filing jointly—has been lifted for 2018, 2019, and 2020 as part of the CARES Act. Certain investors may be permitted to amend 2018 and 2019 tax returns to increase tax losses, save on 2019 tax returns, or file an NOL carryback refund claim.
While these incentives have been put into place, you should consider whether there will be unintended consequences.
Scenario modeling is highly suggested, so you’re aware of the outcomes these tax provisions could create for your business. It’s critical to communicate with your tax advisor to stay on top of frequent guidance from the Treasury.
We’re Here to Help
If you have any questions about tax provisions in the CARES Act, please contact your Moss Adams professional.