Construction, Real Estate, & Hospitality 2020 Tax Overview
COVID-19 has seemingly affected all aspects of our day-to-day lives. When President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law on March 27, 2020, it brought with it some good news for virtually all taxpayers, but especially for those in the construction, real estate, and hospitality industries. The most notable and highly publicized provision of the CARES Act was the U.S. Small Business Administration’s Paycheck Protection Program. Digging deeper into the provisions of the CARES Act, taxpayers in these industries also benefited from modifications to the net operating loss carryback rules and excess business loss provisions allowing taxpayers to quickly monetize previous and current-year losses in the form of income tax refunds to recoup taxes previously paid.
An additional CARES Act provision had a significant effect on both landlords and tenants of commercial real estate. It’s common practice for lease negotiations between landlords and tenants to include certain amounts for improvements to the leased property. Under the Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017, these types of improvements were generally classified as “qualified improvement property” (QIP) with the intent to allow for accelerated tax depreciation for the year placed in service. However, due to an error in the drafting of the legislation, the intended tax treatment of QIP didn’t come to fruition, much to the chagrin of many in the commercial real estate industry and their tenants. At long last, the CARES Act introduced the so-called “retail glitch” fix, which clarified the proper tax treatment of QIP, including the assignment of a 15-year life for tax purposes and making such property eligible for 100 percent bonus depreciation retroactive to the 2018 tax year.
The provisions of the CARES Act also helped amplify the tax benefits of other tools historically used by owners of property within the commercial real estate industry—namely the cost segregation study. A cost segregation study takes an engineering-based approach to breaking out the components of a residential or nonresidential building into shorter-lived components typically eligible for 100 percent bonus depreciation. Without such a study in place, the depreciable lives for residential and nonresidential buildings are 27.5 and 39 years, respectively. With the retail glitch fix in place by way of the CARES Act, taxpayers should now be further incentivized to consider undertaking a cost segregation study to take advantage of the QIP and shorter-lived assets within their buildings to accelerate tax deductions.
With all these additional tax deductions available to taxpayers in these industries, the CARES Act provides a final avenue for taxpayers to quickly turn those deductions into cash in their pocket. Under the TCJA, taxpayers were no longer allowed to carry back losses generated in tax years 2018 and forward. The CARES Act reversed this change, allowing taxpayers with net operating losses in 2018, 2019, or 2020 to carry those losses back up to five tax years, resulting in cash tax refunds.
For help turning these deductions, particularly those related to depreciation, into cash tax refunds while navigating other COVID-19-related challenges, reach out to your BKD Trusted Advisor™ or use the Contact Us form below.