The $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) delivers meaningful tax relief to individuals and businesses. Some of that relief is retroactive, which can affect 2018 and 2019 returns that have already been filed. One retroactive provision can, in some cases, go all the way back to 2013.  Here is a summary of the CARES Act retroactive COVID-19 tax relief measures that can potentially benefit you or your business entity after amended returns have been prepared and filed.

Taxpayer-friendly Rules for Deducting Net Operating Losses (NOLs)

Business activities that generate tax losses can cause you or your business entity to have an NOL for the year. The CARES Act significantly liberalizes the NOL deduction rules and allows NOLs that arise in 2018–2020 to be carried back five years. So, an NOL that arises this year can be carried back to 2015. An NOL that arose in 2018 can be carried back to 2013. These carrybacks allow you to claim refunds for taxes paid in prior years. Because tax rates were higher in pre-2018 years, NOLs carried back to those years can be especially beneficial.

Better Depreciation Rules for Real Estate Qualified Improvement Property (QIP)

The CARES Act includes a retroactive correction to 2017 legislation that allows much faster depreciation for real estate Qualified Improvement Property (QIP) that is placed in service after 2017. QIP is defined as an improvement to an interior portion of a nonresidential building that is placed in service after the date the building was first placed in service. However, QIP does not include any improvement for which the expenditure is attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework of the building.

The retroactive correction allows you to claim 100% first-year bonus depreciation for QIP expenditures placed in service in 2018–2022. Alternatively, you can depreciate QIP placed in service in 2018 and beyond over 15 years using the straight-line method.

Amending a 2018 or 2019 return to claim 100% first-year bonus depreciation for QIP placed in service in those years could result in an NOL that can be carried back to a prior tax year to recover taxes paid in that year, as explained earlier. We will work with you to determine if it is better to claim 100% bonus depreciation or deduct the cost of QIP over 15 years.

Suspension of the Excess Business Loss Disallowance Rule for Non-corporate Taxpayers

An unfavorable tax law provision disallowed current deductions for so-called excess business losses incurred by individuals and other noncorporate taxpayers in tax years beginning in 2018–2025. An excess business loss is one that exceeds $250,000 or $500,000 for a married joint-filing couple. The $250,000 and $500,000 limits are adjusted annually for inflation.

The CARES Act suspends the excess business loss disallowance rule for losses that arise in tax years beginning in 2018–2020. Amending a 2018 or 2019 return to reflect the suspension of this rule could result in a 2018 or 2019 NOL that could then be carried back to a prior tax year to recover taxes paid in that year, as explained earlier.

Liberalization of Business Interest Expense Deduction Limitation

Another unfavorable tax law provision generally limited a taxpayer’s deduction for business interest expense to 30% of Adjusted Taxable Income (ATI) for tax years beginning in 2018 and beyond. Business interest expense that is disallowed under this limitation is carried over to the following tax year.

In general, the CARES Act temporarily and retroactively increases the taxable income limitation from 30% of ATI to 50% of ATI for tax years beginning in 2019 and 2020. There is no change for tax years beginning in 2018. Amending a 2019 return to reflect the liberalized taxable income limitation rule could result in a 2019 NOL that can be carried back to a prior tax year to recover taxes paid in that year, as explained earlier.

Special rules apply to partnerships and LLCs that are treated as partnerships for tax purposes. We can walk you through those rules and determine the best course of action for you.

Note: For 2019 and 2020, taxpayers with average annual gross receipts of $26 million or less for the three previous tax years are exempt from the business interest expense deduction limitation. Certain real property businesses and farming businesses also are exempt if they choose to use slower depreciation methods for specified types of assets.

Conclusion

The retroactive COVID-19 tax relief measures explained in this post can impact prior tax years for which returns have already been filed. Amended returns can allow you or your business entity to benefit from these retroactive changes and recover taxes paid in prior years. Contact us if you have questions, want more information, or want to discuss getting started on preparing amended returns for you or your business entity.

(This is Blog Post #810)