SPECIAL REPORT: Additional CARES Relief for Real Estate Professionals and Businesses through NOL Carrybacks, Bonus Depreciation, and 1031 Deadline Extensions

As you are likely aware by now, in response to the challenges that businesses are facing due to the COVID-19 pandemic, Congress passed the ‘Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to provide assistance to businesses in a variety of ways. However, several of the lesser discussed provisions of the CARES Act are particularly helpful for real estate professionals and businesses.

The CARES Act assists businesses via tax relief by providing a five-year net operating loss (“NOL”) carryback. The provision allows businesses to increase liquidity and reduce the cost of capital to ease the burden resulting from the COIVD-19 pandemic. The carryback includes a revision to the 2017 ‘Tax Cuts and Jobs Act’ (the “TCJA”) and a change in Section 163(j) interest deduction limitations.

The TCJA limited carrybacks for NOLs by providing that: (1) NOLs arising in tax years after December 31, 2017 could not be carried back to offset income in any prior tax year; and (2) NOLs arising in tax years beginning after December 31, 2017 and carried over to another tax year are limited to offsetting 80% of taxable income in the carryover year, without regard to the NOL deduction. The CARES Act temporarily removes the 80% limitation on the use of NOL carryovers for taxable years beginning before January 1, 2021. The CARES Act also amends the limitation on NOL carryovers for tax years beginning after December 31, 2020. Under the revised provision, there is no limit on the use of NOLs generated in tax years beginning before January 1, 2018, but the use of NOLs generated in tax years beginning after December 31, 2017 and carried to a tax year beginning after December 31, 2020, is limited to 80 percent of the excess (if any) of taxable income computed without regard to the NOL deduction and the deductions under Section 199A and Section 250, over the amount of NOL carryovers from taxable years beginning before January 1, 2018.

The CARES Act also amends Section 163(j) for tax years beginning in 2019 and 2020 by increasing the percentage of a taxpayer’s adjusted taxable income (“ATI”) from 30% to 50% for purposes of calculating the limitation under Section 163(j). Except with respect to a partnership, a taxpayer may elect for any year to not increase its ATI percentage from 30 percent to 50 percent. A partnership may only elect to do so for a tax year beginning in 2020. Once made, such an election is revocable only with the consent of the IRS. For tax years beginning in 2020, the CARES Act provides additional flexibility by permitting a taxpayer to elect to substitute its ATI from its 2019 tax year for its ATI in its 2020 Section 163(j) calculation.

In addition, the CARES Act also reinstates eligibility of qualified improvement property (“QIP”) for bonus depreciation. A QIP is an internal structural improvement made to nonresidential real property after the real property is placed in service. The improvement must be made “by the taxpayer”, which does not apply to subsequent purchasers, but should apply to commercial landlords who gave construction allowances to tenants that allow them to depreciate improvements the tenants built.

Prior to the CARES Act, the language of the TCJA disqualified QIP from the definition of qualified property eligible for bonus depreciation, notwithstanding that the legislative history for TCJA indicates Congress intended QIP to be eligible. The CARES Act rectified this mistake by treating QIP as 15-year property, which allows taxpayers to apply 100% bonus depreciation to eligible QIP.

The IRS issued Notice 2020-23 on April 9, 2020, which extended deadlines for §1031 like-kind exchange transactions.  The Notice provides relief from the 45-day identification period and the 180-day exchange period for taxpayers/exchangers whose deadlines for such periods were due on or after April 1, 2020 and before July 15, 2020. The deadlines to identify replacement property and acquire replacement property are automatically extended to July 15, 2020 pursuant to the Notice. It is also critical to note that the extensions are not retroactive, so they do not apply to 1031 exchange periods that expired before April 1, 2020.   

Real estate professionals and other affected businesses should consult with their financial and legal professionals to determine how they can benefit from these and other provisions of the CARES Act.

CONTACT

Andrew J. Annes, Esquire
aannes@satclaw.com
Mobile: (312) 246-3110

John W. Campbell, Jr., Esquire
jcampbell@satclaw.com
mobile: (312) 391-3126

Websites:
https://satclaw.com/
https://www.satcsolutions.com/