CARES Act Relief Provision Review – Pt 3: Tax Relief for Businesses, Professionals, Investors and Individuals Alike

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This article is the third installment of a four part series covering the relief provisions provide under the CARES Act, which was enacted by the federal government in response to the negative economic impact COVID-19 has had on America and its citizens.

Each part of this series will cover relief provisions in the CARES Act and how to take advantage of them by the following topics:

  • Part 1: Tax Due Date Relief
  • Part 2: PPP Loan, EIDL Advance, and the Stimulus Check
  • Part 3: Tax Relief for Businesses, Professionals, Investors, and Individuals Alike
  • Part 4: Utilization of Retirement Plan Funds and Extended Contribution Dates

This third installment of our CARES Act relief review will cover the relief provided for businesses, professional, investors, and individuals alike, and how to take advantage of such provisions.

There are a number of provisions passed as part of the CARES Act that provides relief to businesses, professionals, investors and individuals alike. There are some major provisions to be aware of—

  • Temporary forbearance on federally backed mortgages
  • Increase of “bonus depreciation” for property placed in service
  • Business Loss Carrybacks
  • Temporary increase of business interest expense limitations
  • Temporary removal of limitation on excess business losses

Temporary Forbearance of Federally Backed Mortgages

The CARES Act allows borrowers with federally back mortgage loans to request forbearance for a limited period. However, in order to be eligible for this treatment, the borrower must demonstrate that they have experienced a financial hardship in light of COVID-19. This request can be made you’re your loan servicers either orally or in writing. What is important to note is that this applies to both residential and multifamily borrowers (i.e. 5 or more residential dwelling unites).

The eligibility for forbearance on the payment of a federally backed loans began on March 27 and ends on December 31 for this year.

So how long will it last once forbearance has been granted? For non-multifamily federally back loans, forbearance lasts for up to 180 days, which can be extended for an additional period of 180 days. For multi-family borrowers will be granted forbearance for up to 30-days. Two extensions of 30-days can be requested for multi-family borrowers.

If forbearance was granted, no penalties, interest or fees will accrue for those with residential federally backed mortgage loans. However, please note that this favorable treatment is not afforded to those granted forbearance for multifamily federally back loans.

In addition to forbearance, there are certain protections afforded to those related to the properties for which forbearance was granted—

  • Foreclosure Moratorium: Loan servicers are not allowed to initiate foreclosures on properties within a 60-day period beginning on March 18. However, this does not apply to properties that were already vacant or abandoned.
  • Renter Protection: Multifamily borrowers receiving forbearance cannot, during the period of forbearance, evict tenants or change late fees, penalties or fines for the late payment of rent.
    • In addition, lessors cannot initiate an eviction of a tenant, nor can they charge fees, penalties or interest for non-payment of rent for a 120-day period beginning on March 27, 2020.

Increase of “Bonus Depreciation” for Property Placed in Service

As part of the Tax Cuts and Jobs Act in 2017, the federal government passed a provision that should have allowed owners of real estate to immediately expense certain types of after-market improvements made to a nonresidential building, better known as “qualified improvement property”.

 “Qualified improvement property” generally includes any improvements to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service, with some exceptions. It is easy to think of these as “tenant improvements”.

However, the law was written poorly, and led to a technical error whereby “qualified improvement property” was still not eligible for immediate expensing and rather had to be capitalized and depreciated over a 39-year period.

How COIVD-19 Relief Changed This: The government fixed this provision as part of the CARES act and is allowing taxpayers, who made such qualifying improvements, to go back and file amended returns to claim the increased expense for the 2018, 2019 and 2020 tax years.

Why is This Important? This provision is important because it allows qualifying owners of nonresidential property, or certain tenants who are deemed to own the tenant improvements, to go back and claim a refund for expenses they would otherwise have to recoup over a 39-year period.

                Business Loss Carrybacks

General Overview of Business Loss Carrybacks: As part of the Tax Cuts and Jobs Act of 2017, the federal government disallowed the ability of individuals and businesses alike to carryback taxable losses to prior years. Now, these excess business losses can only be carried forward to future years.  In addition to this limitation, the federal government now only allows 80% of these excess losses to be used.

How COIVD-19 Relief Changed This: However, due to the impact of COVID-19, this provision was once again changed so any taxable loss incurred in 2018, 2019, or 2020 can be carried back to each of the five taxable years preceding the year the loss was incurred. Additionally, the federal government scrapped the 80% loss limitation with respect to the losses generated in the 2018 – 2020 tax years.

Why This is Important: This is an important provision that allows taxpayers to go back and take advantage of losses against prior years where they had positive taxable income. The carryback of these losses are likely to result in a refund to the taxpayer, thus providing them additional liquidity.

How to Utilize Relief: There are two ways to claim a refund if there is a loss that can be carried back to prior years—through a tentative claim for a refund based on the carryback of a business loss or through the filing of an amended return.

Amendment v. Tentative Claim for Refund: An amended return takes much longer to prepare and may not be processed in a sufficient amount of time to meet a person’s liquidity needs. A tentative claim for a refund on the other hand is much quicker to prepare and is processed faster by the IRS. If you need cash now, filing a tentative claim for a refund is in your best interest.

What is important to note about these two methods is the ultimate due date—

  • A tentative refund claim for  business losses arising in 2018 is due by June 30 of this year;
  • A tentative refund claim for businesses losses arising in 2019 is due by December 31 of this year;
  • A tentative refund claim for losses arising in 2020 is due by December 31 of 2021

Temporary Increase of Business Interest Expense Limitations

General Overview of Business Interest Expense Limitation: As part of the Tax Cuts and Jobs Act of 2017, the federal government limited the amount of interest expense a qualifying person could deduct when calculating their taxable income essentially to 30% of their taxable income, adjusted for interest, taxes, depreciation and amortization (EBITDA).

This provision had a major effect on operators in the real estate industry which generally utilizes a high-level of financing as part of their business model.

How COIVD-19 Relief Changed This: The federal government temporarily increased this 30% limitation to 50% for the 2019 and 2020 tax years.

                Temporary Removal of Limitation on Excess Business Losses

General Overview of Excess Business Loss Provision: As part of the Tax Cuts and Jobs Act of 2017, the federal government limited the amount of a loss received through a flow-through entity such as an sole proprietorship, an single-member LLC, an S corporation or a partnership that an individual or corporation could offset other income they generated in a given tax year. This limitation was set at $250,000 for single filers and $500,000 for married filing joint filers.

This provision was intended to prevent a individual or corporation from offsetting excessive losses from one operation or investment against other income it generated in a given year.

How COIVD-19 Relief Changed This: This provision was suspended for the 2018, 2019 and 2020 tax years for taxpayers other than corporations. Thus, this relief can generally only be utilized by individuals.

Important Note on Passive Loss Rules: What is important to note that this relief provision does NOT affect the passive loss rules that many real estate professionals and investors are subject to.

  • In fact, the passive loss limitation rules are applicable to calculating taxable income before considering this provision on excess business losses.
  • If you or a client are subject to the passive loss  rules, you will continue to be subject to such limitations without relief.