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June 11, 2020

How to Monetize the Tax Changes in the CARES Act

Among its many other disaster relief and support measures, the Coronavirus Aid, Relief, and
Economic Security (CARES) Act
made several beneficial income tax changes. The net effect of the tax law changes creates opportunities for income tax refunds and/or reduced income tax liabilities. Following are four of the most significant provisions your organization may want to evaluate in short order.

The Retail Glitch Fix

The CARES Act clarifies that qualified improvement property has a 15-year depreciation recovery period and retroactively fixes the so-called “retail glitch” by specifying that the 15-year recovery period is effective for property placed in service after Dec. 31, 2017. Business owners may consider filing an amended return to claim that additional depreciation if only one tax year has lapsed since the property was placed in service, or they can request an automatic accounting method change under Section 6.01 of Rev. Proc. 2019-43 to claim the additional depreciation in the immediately succeeding tax year.

Net Operating Loss Carrybacks

For net operating losses (NOLs) incurred in taxable years beginning after Dec. 31, 2017 and before Jan. 1, 2021, the CARES Act permits businesses to carry back such NOLs for five years and also permits businesses 301.961.1943to use their NOLs to fully offset their income in those carryback years. If your business had NOLs in 2018 and 2019, you should work with your tax advisor to create a tax strategy that helps you optimize those NOLs over the 2018 to 2020 period. Corporations might get immediate relief for 2019 tax payments due July 15. If an NOL is anticipated in 2020 that would eliminate the entire previous five years’ of tax, the corporation can request an extension to pay its 2019 tax through the due date of the 2020 return.

Excess Business Loss Limitation

The excess business loss limitation has been temporarily suspended for tax years after Dec. 31, 2017 through Dec. 31, 2020. Non-corporate taxpayers will need to evaluate whether they should file amended returns for 2018 in order to claim associated income tax refunds.

Business Interest Deductions

The CARES Act increases the Section 163(j) business interest deduction to interest income plus 50% of adjusted taxable income (roughly the tax-basis equivalent of EBITDA) for tax years beginning in 2019 or 2020. Partnerships are eligible for the increase in 2020 only; however, partners can deduct 2019 excess business interest from a partnership in an accelerated manner. Taxpayers can elect out of the change and use the 30% business interest deduction that had been established by the 2017 tax reform law.

Under the CARES Act, taxpayers may also use 2019 adjusted taxable income to calculate the business interest limitation for a tax year beginning in 2020. Taxpayers can elect out of this provision if the adjusted taxable income amount is greater in 2020. You should work with your tax advisor to understand the optimal choices under the CARES Act changes with respect to the business interest deduction limitation.

By BILL SMITH | billsmith@cbiz.com | 301.961.1943

 

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