Real estate tax advantages in CARES Act end with 2020

Time is running out for commercial real estate investors with qualified improvement property to take advantage of significant tax savings provided by the CARES Act.

Interior renovations and upgrades made to qualified improvement property (QIP) can be depreciated in full immediately instead of carrying the expense over 39 years, if that deduction is taken in tax year 2020.

Just as significant: a net operating loss now can be carried back up to five years, which had not been permitted under the Tax Cuts and Jobs Act of 2017 (TCJA). That loss carryback also can be retroactive, meaning, for example, $2 million in building improvements that resulted in a loss in 2018 can be carried back to the 2013 tax year.

Not only does the taxpayer get the benefit of a loss now, but it also will be calculated based on the tax rate of that particular backdated year, which can lead to an additional significant advantage.

“Since people paid more tax five years ago, you get much more impact now,” said Lynn Mucenski-Keck, tax partner with The Bonadio Group.

She said it may very well make sense to amend tax returns from 2018 and 2019 to take advantage of this set of one-time benefits.

“If you spent $1 million or $10 million, we can amend your 2018 return,” she said.

Another benefit from the CARES Act impacts deduction limits. The net operation loss (NOL) deduction had been limited to 80 percent of taxable income. That section of the tax code, however, has been suspended for 2020, so 100 percent of the NOL is an allowable deduction. The 80-percent rule will be reinstated for 2021.

The favorable rule changes were enacted by Congress in order to put more money back in the hands of taxpayers to combat the economic turmoil caused by the coronavirus pandemic. But previous Internal Revenue Service regulations will once again govern 2021 tax returns.

“So to get the biggest bang for your buck, those benefits must be realized this year,” Mucenski-Keck said. “We want to drive that loss in 2020. If you generate a loss in 2021, it can’t be carried back and you can only carry it forward to offset 80 percent of your income.”

Don’t just look at what you have paid earlier this year or in the past two years. Look ahead to see what near-future expenses can be paid before Dec. 31, because that also will have a beneficial effect on the bottom line.

“Even if it’s an expense that isn’t due until January, you might want to pay it off now so you can capture that loss in 2020,” she said.

Some of the tax benefits in the CARES Act are from the correction of an error in the TCJA. Congress had intended to make QIP eligible for a 15-year depreciation period. That would have meant QIP would have been eligible for a first-year bonus depreciation of 100 percent.

But due to an error in the drafting of language for the final bill signed by President Donald Trump, not only was the 15-year clause lost, it was replaced with a 39-year depreciation window, meaning QIP would not be eligible for the bonus first-year full depreciation.

Those expenses now can be depreciated fully in the first year, and taxpayers can go back to use that depreciation method for properties acquired after Sept. 27, 2017, and placed in service before the end of that year.

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