- The CARES Act was designed to bring relief to organizations facing challenges from the coronavirus pandemic.
- With this new legislation came a number of changes to the tax code, including some specific to the real estate industry.
- Review the tax savings opportunities that may be available to you as a result of the CARES Act.
The Coronavirus Aid, Relief and Economic Security (CARES) Act, enacted March 27, 2020, provides $2.2 trillion of economic stimulus, including provisions for small businesses and individuals affected by the current pandemic. Several key provisions could have a significant impact on the real estate industry.
Loans and grants under the Paycheck Protection Program and EIDL
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In addition to expanding the Small Business Administration (SBA) Economic Injury Disaster Loan program (EIDL), the CARES Act created a new Paycheck Protection Program (PPP). Under the PPP, eligible small and midsize businesses can apply for loans of up to $10 million, to maintain payroll and related employee benefits and to pay pre-existing mortgage interest obligations, lease expenses and utility payments. Significantly, the borrower is eligible for forgiveness of PPP loan amounts spent on those allowable uses during the applicable eight-week covered period established by the PPP. [Note: Taxpayers are not allowed to participate in the PPP while utilizing the employee retention credit and will not be eligible for the payroll tax deferral (both of which are explained below).]
Multifamily forbearance programs
Congress provided multifamily mortgage forbearance for property owners who were negatively impacted by the COVID-19 outbreak, granting relief to owners with federally backed mortgages (Fannie Mae, Freddie Mac, or Federal Housing Administration). Owners may request forbearance for 30 days, with the option of two additional 30-day periods, as needed, for a total of 90 days.
The legislation imposes a 120-day moratorium on evictions and associated fees for nonpayment of rent at any property that has a mortgage backed by the federal government. After 120 days, owners must wait an additional 30 days before evicting residents. The temporary moratorium on evictions pertains only to the nonpayment of rent and does not prevent necessary evictions for criminal activity of residents.
Modification of business interest limitation
The CARES Act increases the limit on the amount of business interest that can be deducted to 50% of adjusted taxable income (ATI) for tax years beginning in 2019 and 2020. This could potentially increase your interest expense deductions and reduce taxable income (or create a net operating loss, which can be carried back). You can elect to use your 2019 ATI in computing the 2020 limit, which could provide relief if your income declines in 2020. You can elect to apply the more restrictive 30% of ATI limit, if desired.
A special rule applies to partnerships in 2019: instead of increasing the limit from 30% of ATI to 50% of ATI, half of the partnership’s excess business interest is treated as business interest of the partner in 2020 and is not subject to the business interest limit at the partner level. The other half of the excess business interest expense is subject to the normal rules for excess business interest. Partners can elect out of this relief provision, if desired. The 50% of ATI limit applies to partnerships in 2020.
Real estate companies that opted out of the 2017 tax law limit on write-offs of debt interest payments can now undo this decision under the new IRS guidance for the latest coronavirus relief effort. Revenue Procedure 2020-22 allows businesses to amend returns to subject themselves to the new limit, as their interest payments may be below the new 50% cap. It also allows them to amend the returns to make late elections to opt out.
A special rule for partnerships presents an opportunity to amend your tax return without having to file an administrative adjustment request, if your partnership already filed 2019 tax returns. Keep in mind, real estate companies may have already elected out of these provisions during their 2018 and 2019 filings.
Qualified improvement property (QIP)
When the Tax Cuts and Jobs Act passed in December 2017, there was a “glitch” in the drafting of the law that moved QIP from the 15-year depreciable life category to the 39-year depreciable life category. Not only was the depreciable life lengthened, but it also eliminated the ability to take bonus depreciation.
The CARES Act provides a “fix” — QIP is again considered 15-year depreciable property and is bonus eligible; this is retroactive to assets placed in service after December 31, 2017.
Since the QIP provision is retroactive and has effectively been out of the law for two years, this is an opportunity to review how the reintroduction of this provision could affect your tax strategy. You may be able to claim bonus depreciation for QIP-eligible assets from the 2018 and 2019 tax years by filing an amended tax return or a Form 3115 (Application for Change in Accounting Method).
Section 163(j) considerations
Keep in mind the impact on businesses that already elected out of the Section 163(j) interest limitation rules, which allow real estate businesses not to be subjected to the business interest expense limitation if they elect not to take bonus depreciation. Real estate businesses that utilized the election available under Section 163(j) cannot take bonus depreciation on the QIP assets unless they utilize the new Revenue Procedure 2020-22. The new procedure allows businesses to amend returns to reverse the election out of the Section 163(j) interest limitations.
Net operating losses (NOLs)
Following 2017 tax reform, NOLs generated in tax years ending after December 31, 2017 could not be carried back. NOLs generated in tax years beginning after December 31, 2017 could only offset up to 80% of taxable income in carryover years. The CARES Act permits NOLs from the 2018, 2019, and 2020 tax years to be carried back five tax years (beginning with the earliest year first). The CARES Act also suspends the 80% of taxable income limitation through the 2020 tax year.
You can elect to waive the loss carryback. For losses generated during the 2018 and 2019 tax years, you must elect the waiver before the extended tax return due date for the first year ending after the CARES Act is enacted. For example, a calendar year corporation with an NOL in 2018 that wants to forgo the carryback to 2013 would need to waive the carryback for the 2018 year by the 2020 tax return due date. You cannot elect a reduced carryback period (i.e., there is no election available to use a two-year carryback in lieu of the five-year carryback).
Aside from the cash flow benefits, NOL carrybacks present an opportunity to secure permanent tax savings by using losses to offset income generated prior to tax reform, when the top federal corporate tax rates were higher. For example, a corporate NOL from 2020 can be carried back to offset income from 2015, when the top corporate tax rate was 35%, rather than carried over to 2021, which will likely have a flat corporate income tax rate of 21%. It is possible that new federal legislation will increase federal tax rates sometime during the carryover period.
Depending on your situation, consider strategies and planning measures — such as accounting method changes — to accelerate deductions and defer income to enhance the NOL amount you can carry back. If 2019 was profitable but you anticipate a loss for 2020, focus your planning on accelerating income into the 2019 year and deferring deductions to 2020 to help maximize the NOL for 2020.
The CARES Act also made a few technical corrections to the tax reform NOL rules. For example, NOLs generated in a year beginning in 2017 and ending in 2018 can now be carried back two years. For tax years after 2020, the 80% of taxable income limitation is computed by increasing taxable income for deductions under Sections 199A and 250, and is reduced for NOL carryovers from pre-2018 tax years.
Deferral of employer Social Security tax
Under the CARES Act, an employer can defer its share of the 6.2% Social Security tax on wages paid from March 27, 2020, through December 31, 2020. Employers who elect to defer payment will need to deposit 50% of the delayed amount by December 31, 2021, and the remaining 50% by December 31, 2022. A similar rule applies to 50% of self-employment tax liability of partners and sole proprietors. The deferral is not available if you take advantage of loan forgiveness under the Paycheck Protection Program.
Employee retention credit
The CARES Act added a refundable payroll tax credit equal to 50% of qualified compensation (including health benefits) paid by eligible employers from March 13, 2020, to December 31, 2020. An eligible employer is one whose:
- Operations were fully or partially suspended due to a coronavirus-related shutdown order, or
- Gross receipts declined by more than 50% when compared to the same quarter in the prior year. The employer remains an eligible employer in subsequent quarters until the gross receipts exceed 80% of gross receipts compared to the same quarter for the prior year.
If the employer has more than 100 employees, the credit is available only for compensation paid to employees who are not working as a result of a coronavirus-related shutdown order or a significant decline in gross receipts. For employers with 100 or fewer employees, any compensation paid during the period when operations are fully or partially suspended or during a quarter in which gross receipts have significantly declined are eligible for the credit, even if the compensation was paid to an employee who is still working.
The credit is limited to the first $10,000 of compensation paid to a particular worker. The credit is not available for compensation taken into account in computing the sick leave or family medical leave credits under the Families First Coronavirus Response Act (FFCRA). Similarly, the credit is not available to employers who take advantage of a small business interruption loan under the Paycheck Protection Program.
Opportunity Zones, Sections 1033 and 1031 exchange deadlines extended
IRS Notice 2020-23 provides relief for Opportunity Zones and IRC Sections 1031 and 1033 transactions. More specifically, it provides relief for “Specified Time-Sensitive Action,” which includes:
- Opportunity Zone investment and deferral election — Making an investment at the election of a taxpayer due to be made during the 180-day period described in IRC Section 1400Z-2(a)(1)(A);
- Completion of Section 1031 exchanges — Extending an IRC Section 1031 exchanger’s deadline until July 15, 2020, with respect to the 45-day identification period or 180-day exchange period for exchanges initiated before April 1, 2020; and
- Section 1033 gain deferral election — Extending the date for making a nonrecognition of gain election related to an involuntary conversion of property under IRC Section 1033.
How we can help
Keeping on top of the latest tax guidance can be a challenge. At CLA, our real estate team can help you review your specific situation and understand your options.