Retail Glitch Patch Could Result in New Cash Flows

Thoughtware Alert Apr 03, 2020
Dollar Bill

On Friday, March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. Included in the CARES Act was a long-awaited correction to the “retail glitch” that has prevented countless taxpayers in the hospitality industry from immediately expensing leasehold improvements.

Before the Tax Cuts and Jobs Act (TCJA), qualified improvement property (QIP) generally had a 15-year depreciable life for tax purposes. The TCJA intended to retain that life while also allowing for QIP to be eligible for 100 percent bonus depreciation, i.e., immediately expensed. However, due to drafting errors, QIP placed in service after December 31, 2017, had a tax life of 39 years and wasn’t eligible for bonus depreciation. Since that time, the hospitality industry has been lobbying for a fix, and Congress has introduced technical correction bills without success.

The CARES Act retroactively corrects the error. QIP placed in service after December 31, 2017, now has a 15-year depreciable life and qualifies for 100 percent bonus depreciation. This presents opportunities to decrease tax and create income tax refunds in a time when the industry is desperate for cash. See potential opportunities below:

  • Reduce 2019 tax by accelerating depreciation of QIP placed in service during 2019 over 15 years versus 39 years
  • Create income tax refunds by amending previously filed 2018 and 2019 returns to claim increased depreciation
  • Instead of amending a 2018 return to claim additional depreciation on QIP, taxpayers may be able to claimed any missed 2018 deduction on a 2019 return via Form 3115, Application for Change in Accounting Method, and the related Internal Revenue Code Section 481(a) adjustment, i.e., catch-up deduction
  • If a net operating loss (NOL) is created due to the additional depreciation deductions, consider carrying back those losses to prior taxable years to claim income tax refunds (the CARES Act allows for NOLs generated in 2018, 2019 and 2020 to be carried back five years)

Although many hoped a fix to the retail glitch would come sooner, it arrived at an opportune time. Eligibility for the related deductions and tax refunds will depend on each taxpayer’s facts and circumstances. In a time when cash is needed immediately, it’s critical to quickly evaluate refund opportunities. For more information, reach out to your BKD Trusted Advisor™ or use the Contact Us form below.

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