The Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law by the President on March 27, 2020. This was not the first, and is likely not to be the last, economic stimulus package that will arise from the pandemic.
This particular series is focused on the impact on the real estate industry. In addition to the stimulus portions of the package as noted above, there were also technical corrections to the law that we feel will have a significant impact to the real estate community.
Part Two: Net Operating Losses and Interest Expense Limitation
Net operating loss – Corporate returns: Under prior law, the net operating loss (NOL) deduction for corporate returns was limited to 80% for carryovers from calendar years after 2017, and therefore could not fully offset current taxable income. The CARES Act removes the 80% limitation temporarily through 2020 so NOLs can fully offset income.
Net operating loss – Individuals: Under prior law, NOLs from 2018 and after could only be carried forward to offset future income and not carried back. Under the CARES Act, NOLs arising in calendar tax years 2018, 2019 and 2020 can be carried back to each of the 5 tax years preceding the year of loss and then carried forward indefinitely (subject to an 80% limitation after 2020).
Excess business loss limitations: Beginning calendar year 2018, there was a new limitation of business losses that generally allowed business losses to offset other income up to a $250,000 limit ($500,000 if married filing a joint return). The CARES Act temporarily eliminated this limitation, so that for tax years 2018, 2019, and 2020 there is no excess business loss limitation.
Interest expense limitation: Beginning in 2018, business interest expense was generally limited to 30% of adjusted taxable income (ATI). The CARES Act temporarily increases this limitation to 50% of ATI for tax years 2019 and 2020 (for partnerships, applies to 2020 only). Taxpayers may elect out of the increase.
The IRS also issued Revenue Procedure 2020-24, which addresses NOL elections, including the waiver of NOL carrybacks. The return for the first tax year ending after March 27, 2020, must include an election to waive NOL carryback with respect to 2018 and/or 2019 returns filed.
Notice 2020-26 was also issued to address NOL carrybacks, specifically extending the deadline to file Form 1045 and 1139 to June 30, 2020 for calendar year 2018 returns.
The next part of this series will focus on forbearance of residential mortgage payments for multifamily properties with federally backed loans and temporary moratorium on eviction filings.
Part One: Technical correction of qualified improvement property (QIP) and its impact on cast segregation studies
As an addendum to the QIP correction, the IRS issued Revenue Procedure 2020-23, which allows eligible partnerships to file amended partnerships for 2018 and 2019, instead of following the new partnership audit regime rules that do not permit the filing of amended partnership returns. This will help expedite changes to tax returns due to applying the qualified improvement property rules to 2018 and 2019 tax returns.
We will discuss the impacts with you directly when reviewing your tax returns but if you need additional information or have further questions, please do not hesitate to reach out.
PART 1: QIP AND COST SEGREGATION STUDIES
For more information on how the Coronavirus is impacting businesses across multiple industries, visit our COVID-19 resource page:
