At first glance, it wouldn’t appear that COVID-19 federal disaster assistance would benefit owners of real estate. However, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes advantages for real estate owners that accelerate bonus depreciation and generate greater cash flow during these challenging times.
Changes to Net Operating Losses (NOLs)
Before the CARES Act, NOLs were limited to 80% of current year taxable income, and these losses could not be carried back. Now, a loss from taxable years 2018, 2019 and 2020 can be carried back five years prior to generate refunds. The change removes taxable income limitations, allowing NOLs to fully offset income in current taxable years.
The CARES Act also eliminates the excess business loss limitation that was applicable to pass-through business owners and sole proprietors, enabling them to take advantage of the modified NOL rules. Read our recent blog about how NOL changes can ease cash flow.
Energy Tax Incentives
The NOL changes opened the door to retroactive refunds for 45L energy-efficient tax credits and 179D energy tax deductions.
45L Home Energy-Efficient Tax Credits
The 45L tax credit is an incentive for property owners to include energy-efficient features in their owner-occupied or rental dwelling building, such as insulation, HVAC systems and roofing. Before the CARES Act, the $2,000-per-unit tax credit for multifamily and residential new construction was retroactive from 2016 through 2020. Given the new NOL five-year carryback opportunity, property owners will want to work with their tax professionals to identify all 45L opportunities to access immediate tax savings and retroactive refunds.
179D Energy-Efficient Building Tax Deductions
Prior to the CARES Act, taxpayers could take $1.80 per square foot for all commercial buildings or residential structures with at least four stories that met certain energy-efficiency standards. These deductions are for new construction or improvements to HVAC systems, new lighting, windows and roofs retroactive 2006-2020. The new NOL five-year carryback means that building owners should review all 179D opportunities that would enable them to generate immediate tax savings and potentially, retroactive refunds.
[Learn more about cost-reduction opportunities for energy-efficient buildings.]
Qualified Improvement Property (QIP)
When the Tax Cuts and Jobs Act (TCJA) was enacted in 2017, a drafting error omitted QIP for accelerated or bonus depreciation. That meant that property owners had to apply a 39-year depreciable life for certain improvements to a nonresidential building’s interior. Despite numerous efforts by members of Congress to correct the error, the “QIP fix” never happened—until now.
Through a technical correction, the CARES Act makes QIP 15-year depreciable property. This is great news for property owners because of immediate expensing opportunities through retroactive 100% bonus depreciation. Owners of qualified retail property, restaurant property and leasehold property, including those who have been harshly affected by COVID-19 pandemic, can greatly benefit. In addition to the new 15-year classification for depreciation, the fix made the change retroactive to December 22, 2017, the date the TCJA was enacted. The change can mean larger NOLs given the new five-year carryback rule.
Taxpayers should work with their CPAs to determine how to claim retroactive depreciation. Property owners who used cost segregation for faster depreciation can file a Form 3115, change of accounting method, or amend 2018 and 2019 returns to generate potential refunds.
Goldin Peiser & Peiser can provide assistance with cost segregation studies to help property owners identify assets that qualify for accelerated depreciation.
Questions about tax planning or other real estate planning issues? Our real estate accountants can help. Contact Eric Olsen at (214) 635-2538.
GPP will continue to keep you posted through our COVID-19 Business Assistance and Resource Center. If your real estate business needs assistance during this challenging time, our COVID-19 Business Advisory and Planning Services Group is ready to assist.
For immediate questions, email CARETEAM@GPPcpa.com
Note: This content is accurate as of the date published above and is subject to change, as definitions change. Please seek professional advice before acting on any matter contained in this article.