The $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act is delivering some much needed relief to Maine people and businesses. While this legislation is designed to help us move forward economically, it also provides some retroactive tax relief. There are provisions in the CARES Act that can affect 2018 and 2019 returns that may have been filed already — one provision can actually retroactively affect filings all the way back to 2013.
Here are four retroactive provisions in the CARES Act that may result in a tax refund for businesses and individuals should they amend prior-year returns.
1. Liberalized Rules for Deducting NOLs
The current economic downturn has many businesses here in Maine operating at a loss. But there is a silver lining. The CARES Act significantly liberalizes net operating loss (NOL) deductions and allows NOLs from 2018 to 2020 to be carried back five years. These NOL carry-backs allow you to claim refunds for taxes paid in the year it was carried back to. Since tax rates were higher prior to 2018, NOLs carried back before then can be financially beneficial.
2. Better Depreciation Rules for Real Estate QIP
The CARES Act includes a retroactive correction to the 2017 Tax Cuts and Jobs Act (TCJA) that allows much faster depreciation for real estate qualified improvement property (QIP) that’s placed in service after 2017.
QIP is an improvement to an interior portion of a nonresidential building that’s placed in service after the date the building was first placed in service. However, QIP doesn’t 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 CARES Act introduces a retroactive correction that allows you to claim 100% first-year bonus depreciation for QIP expenditures placed in service in 2018 through 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 this new QIP depreciation bonus may produce a lower tax bill or even generate a NOL (which, as explained above, can be carried back to recover taxes paid in a prior year).
You could also amend a 2018 or 2019 return to claim 15-year straight-line depreciation for QIP placed in service in those years. That might not create an NOL for 2018 or 2019, but it would still lower your tax bill for those years.
3. Suspended Excess Business Loss Disallowance Rule for Noncorporate Taxpayers
The TCJA also had a provision that eliminated deductions for “excess business losses” incurred by individuals and other noncorporate taxpayers in tax years beginning in 2018 through 2025. An excess business loss is one that exceeds $250,000 for an individual or $500,000 for a married joint-filing couple. Those limits are adjusted annually for inflation.
The CARES Act suspends that provision for tax years beginning in 2018 through 2020. Amending a 2018 or 2019 return to reflect the suspension of the excess business loss disallowance 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 prior year. Or it could just lower the 2018 or 2019 tax bill.
4. Liberalized Limit on Business Interest Expense Deductions
The TCJA also had an unfavorable provision that 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’s 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’s 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 prior year or lower your 2019 tax bill.
Special complicated rules apply to partnerships and LLCs that are treated as partnerships for tax purposes.
Important: Taxpayers with average annual gross receipts of $25 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 are also exempt if they choose to use slower depreciation methods for specified types of assets.
To Amend or Not to Amend?
The four retroactive tax-relief measures provided by the CARES Act can impact prior tax years for which returns have already been filed. And as you can see, taking advantage of one provision can have cascading effects that could trigger another retroactive tax provision. If you’re thinking of amending prior returns to benefit from some of the changes made by the CARES Act, contact Filler & Associates and we can help.