The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. There are numerous provisions included in this $2 trillion+ stimulus package, but two stick out for taxpayers who own real estate (including leasehold interests) as most impactful: The Qualified Improvement Property (QIP) Rule and Net Operating Loss (NOL) Carryback. CBRE’s Cost Segregation practice is actively helping real estate owners and lessees explore these provisions to find ways to recover from financial setbacks resulting from COVID-19.
Topics covered and their significance:
- Qualified Improvement Property (QIP) Rule: This rule states any building capital spending from 2018-2022 can immediately be written off with certain exceptions (see below).
- Net Operating Loss (NOL) Carryback Rule: This rule allows real estate owners to offset taxable income to reduce their tax liability. NOLs incurred in 2018, 2019 and 2020 may be carried back five tax years.
1. Qualified Improvement Property (QIP) Rule
The Tax Cuts and Jobs Act (TCJA) passed in late 2017 made several changes to how leasehold improvements, retail, and restaurant property were accounted for by eliminating specialty rules and grouping owner-occupied non-structural improvements as “Qualified Improvement Property” (QIP). However, the class life of QIP from January 1, 2018 and onward was overlooked and not assigned a 15-year recovery period, making such improvements ineligible for bonus depreciation.
This was addressed in the CARES Act and now any owner, lessee, retail or restaurant owner with any qualified building capital spend from 2018 to 2022 can immediately write-off the costs. Improvements can now, and retroactively to January 1, 2018, have a 15-year tax-depreciable life making them subject to the 100% bonus depreciation rules.
To illustrate this, let’s assume a $5 million tenant build-out. Prior to the CARES Act, the annual write-off would be $128,200 for 39 years. Under the new rules, the entire $5 million can be written off in the same year.
- QIP does not include the following improvements:
Taxpayers with projects that meet the QIP definition would need to amend their previous tax returns to take advantage of the new QIP rules on a look-back basis. However, If a return has not yet been filed, taxpayers may need to adjust their cost segregation report.
- An enlargement of the building,
- Work on elevators or escalators,
- Some categories of work on the structural framework of the building (e.g., an internal staircase modifying a structural framework).
2. Net Operating Loss (NOL) Carryback Rule
An NOL happens when a business’s operating expenses exceed its revenues. NOLs can often be used in tax reporting as an offset to taxable income, reducing tax liability. The CARES Act has modified the NOL carryback rules for taxpayers enacted as part of the TCJA.
The following illustrates impacts of the NOL Carryback Rule prior to Sept 2017, after TCJA and, now, after the CARES Act:
||Prior to TCJA (Sept 2017)
||Per CARES Act
||2 taxable years
||NOLs incurred in 2018, 2019 and 2020 may be carried back five taxable years
||20 taxable years
|Taxable Income Limitation
||NOL deduction up to 100% of taxable income
||NOL deduction limited to 80% of taxable income
||In 2018-2020, NOL deduction up to 100% of taxable income; after 2020, NOL deduction limited to 80% of taxable income
Taxpayers with NOL may have the option depending on their particular situation to “carryback” NOL for five taxable years, which is a valuable accounting option that could increase cashflow.
For example, if XYZ Corp had the following income:
XYZ Corp may be able to “carryback” the NOL to 2014 offsetting all of that year’s income, and then roll the remaining $2,400,000 of NOL to 2015, offsetting all of that year’s income as well. This would leave $900,000 remaining to offset 2016 income.
- Taxpayers should evaluate the impact of the NOL carryback on any other tax benefits or liabilities incurred in prior years before deciding to amend their tax returns.
- Accelerated depreciation through cost segregation may increase or create NOL’s by accelerating deprecation expenses in the year construction costs are placed in service.
- Taxpayers could review properties placed in service as far back as 1987, but it’s generally feasible to look back 15-20 years due to diminishing returns at the halfway point of the assets’ depreciable life (39 years).
CBRE specializes in assisting real estate owners and lease holders with tax segregation and fixed asset analytics. Key actions CBRE can assist organizations with to take advantage of potential tax benefits include:
- Perform a cost segregation study (CBRE Cost Segregation can help, please contact Matt Rader)
- The filing of IRS Form 3115, Application for Change in Account Method on 2018 or 2019 tax returns.
- The filing of amended returns for the years impacted by the CARES Act, which may result in immediate refunds for taxes paid in the prior years.
- Engage the organization’s tax department to determine opportunities to evaluate all potential QIP and NOL rule impacts.
- Find resources on financial relief for your business here at CBRE’s Financial Relief Hub
About the Author:
Matt Rader is a Managing Director for CBRE and leads the Cost Segregation and Fixed Asset Analytics practice and has 22 years of experience in cost segregation, tangible property regulations, consulting, and valuation providing federal and state tax benefits to investors and real estate owners across the United States, as well as wholly-owned subsidiaries in Europe and Australia. Matt’s team has provided expertise and service to nearly every industry sector including multi-family, medical, office, restaurants and retail, professional services, manufacturing, and technology.
CBRE © 2020 All Rights Reserved. Information contained in this document is not intended to constitute legal or tax advice. CBRE does not provide legal or tax advice and clients should consult with their own attorneys with questions about applicability of this information to their own circumstances. CBRE’s Cost Segregation professionals work with clients and their legal and/or tax advisors to help assess each organization’s unique circumstances. The information herein is intended for general purposes and CBRE makes no representations or warranties regarding the applicability and/or impacts of the information relating to any specific client or circumstances. Some or all examples described may not be applicable depending on the unique facts and circumstances of your situation. The information herein is not intended to create any agreement or obligation on behalf of CBRE, should not be relied upon and is subject to change without notice.