How can businesses take advantage?
As communities enforce social distancing to combat the spread of the coronavirus, many businesses, especially those in the hospitality, restaurant, and retail industries, are experiencing negative economic consequences as a result. However, many companies, in particular those in the aforementioned industries, should see meaningful relief from the CARES Act.
The ability to immediately deduct costs associated with improving facilities instead of having to depreciate those improvements over 39 years not only increases businesses’ access to cash flow, but also incentivizes them to continue to invest in their facilities.
Companies that meet the following criteria should immediately consider amending prior year filings if:
- QIP was placed in service by Company after December 31, 2017;
- Company filed a tax return with QIP and depreciated it over 39 years with no bonus depreciation;*
- Company paid tax (i.e., had taxable income) on said tax return; and
- Company has a need for cash today.
*If two tax returns have been filed using the 39-year life for a given asset, the only way to “fix” the retail glitch would be through filing Form 3115, Application for a Change in Accounting Method. This defers the adjustment to the tax year for which the Form 3115 is filed.
Companies must weigh the option to fix the retail glitch through an amended return against filing a Form 3115 to change its accounting method. If the company has or is expecting a taxable loss in 2019 or 2020, a favorable Section 481(a) adjustment (i.e., reduction to taxable income) may create or add to such loss.
As part of the CARES Act legislation, the 80%-of-taxable-income limitation is eliminated for losses arising in tax years beginning in 2018, 2019, or 2020, and such losses are permitted to be carried back to the five preceding taxable years. Corporate taxpayers may be able to carry back that loss to a tax year when the corporate federal income tax rate was 35%, creating a permanent tax savings because of the rate differential.
Lastly, with many businesses – particularly retail and restaurant establishments – shuttered across the country, now may be a good time to consider investing in further necessary improvements. Those improvements, assuming they are also QIP, would likewise qualify for 100% bonus depreciation.