As the COVID-19 pandemic has forced countless businesses across the country to curtail operations, the U.S. government recently passed a massive stimulus package designed to minimize economic devastation: the Coronavirus Aid, Relief and Economic Security (CARES) Act. This $2 trillion measure offers both direct financial aid and various forms of tax relief in order to help individuals and businesses remain solvent as they weather the crisis.
Key CARES Act Provisions for Businesses
For the many businesses facing significant financial harm, the CARES Act may provide assistance through the following key provisions:
- The $350 billion Paycheck Protection Program (PPP), which was designed to incentivize organizations to keep their employees on payroll, allows small businesses with fewer than 500 employees to take out loans of up to $10 million. The loans may be completely forgiven if all employees are retained and the funds are used to cover qualifying expenses, such as payroll, rent, and utilities. However, the amount forgiven will be reduced proportionally as employees are removed from the payroll or employee compensation is diminished.
- Businesses that had net operating losses (NOLs) in 2018, 2019, or 2020 may carry back those losses for five years, without having to worry about the NOL limit of 80 percent of taxable income that usually exists. Therefore, businesses may fully offset their taxable income with NOLs. This provision may allow businesses to unlock much-needed cash flow by claiming refunds from prior years when they paid federal income taxes. As a result, now is the time for businesses to pursue strategies for generating NOLs through tax savings opportunities such as Cost Segregation studies, the §179D deduction, or the Research and Development (R&D) Tax Credit.
- Businesses with tax credit carryforwards or previous alternative minimum tax (AMT) liabilities will be eligible for larger refundable tax credits.
- To encourage employee retention, certain businesses may receive a refundable payroll tax credit of 50 percent of wages paid between March 13, 2020 and the end of the year, up to $5,000 per eligible employee. To qualify, businesses must have experienced a decline in gross receipts of at least 50 percent as compared to the same quarter in 2019.
- Employers may delay payment of Social Security payroll taxes, with 50 percent due on December 31, 2021 and the other 50 percent due on December 31, 2022.
CARES Act Changes to Qualified Improvement Property (QIP)
Another provision of the CARES Act rendered qualified improvement property (QIP) eligible for 100 percent bonus depreciation, offering a powerful opportunity for business and commercial building owners to quickly boost cash flow. QIP includes any improvements made by the taxpayer to the interior portion of a nonresidential building. The improvements—which may include the installation or replacement of mechanical, electrical or plumbing systems, ceilings, interior doors, and more—must be made after the building was first placed in service. QIP excludes enlargements to the building, changes to the internal structural framework, and the installation of elevators or escalators.
Added to the tax code under the Protecting Americans from Tax Hikes (PATH) Act of 2015, QIP was originally assigned a 39-year depreciable life due to a drafting error. Therefore, it was previously ineligible for bonus depreciation, which is only available for property assets with a recovery period of 20 years or less. Bonus depreciation allows taxpayers to depreciate a certain percentage of the cost of eligible business property during the asset’s first year in service, thereby yielding more substantial and immediate deductions than simply depreciating the property’s entire cost over its useful life. Through 2022, taxpayers may depreciate up to 100 percent of the cost of eligible property during its first year. This percentage will decrease incrementally in subsequent years—so now is the time for taxpayers to pursue all opportunities to take advantage of bonus depreciation.
The CARES Act rectified the PATH Act’s drafting error by changing the depreciable life for QIP from 39 to 15 years. As a result, QIP is now eligible for 100 percent bonus depreciation through 2022—a change that can immediately boost cash flow for qualifying taxpayers. Businesses may amend past tax returns to take advantage of this change.
Cost Segregation as a Tool for Maximizing Bonus Depreciation
To identify which assets may be categorized as QIP and would therefore be eligible for bonus depreciation, taxpayers must conduct a careful analysis of improvements made to the building. An effective way to do this is through Cost Segregation studies, which examine the assets within a building with the goal of identifying those that may be reclassified from real property to tangible personal property. In addition to identifying QIP, Cost Segregation allows commercial building owners to capture accelerated deductions by taking advantage of the shorter depreciation lives of personal property (which is typically depreciated over 5, 7, or 15 years, compared to 39 years for real property). In order to maximize tax savings and ensure compliance with IRS guidelines, Cost Segregation studies should be performed by experienced professionals with a combination of tax and engineering/commercial property expertise, such as the team at Capital Review Group.
As economic uncertainty persists in the wake of the coronavirus crisis, it is crucial for businesses to explore all available opportunities to minimize their tax burdens. Is your business prepared to take advantage of the tax relief available through the CARES Act? At Capital Review Group, our team is knowledgeable about this new legislation and other tax laws affecting businesses. We will leverage our wide-ranging expertise to help your business maximize tax savings, with a focus on incentives such as the R&D Tax Credit, the §179D deduction, and Cost Segregation. Contact us today to schedule a consultation!