Amended Return Opportunities as a Result of COVID-19 Business Tax Relief

The CARES Act included some potentially impactful retroactive business tax relief provisions that can create tax-saving opportunities for small businesses and specifically owners of manufacturing pass-through business entities.  Here we highlight two significant relief opportunities for those manufacturers impacted by the COVID-19 pandemic:

• Retroactive Relief Provision for Shareholders with NOLs:

Change for Tax Years Beginning before 2021 – 

For tax years beginning before 2021, the CARES Act removes the TCJA taxable income limitation on deductions for prior-year NOLs (Net Operating Loss) carried over to those years. Therefore, NOL carryovers into tax years beginning before 2021 can be used to fully offset taxable income in those years.

Change for Tax Years Beginning after 2020 – 

For tax years beginning after 2020, the CARES Act allows NOL deductions equal to the sum of: (1) 100% of NOL carryovers from pre-2018 tax years, plus (2) the lesser of: (a) 100% of NOL carryovers from post-2017 tax years or (b) 80% of remaining taxable income (if any) after deducting NOL carryovers from pre-2018 tax years. Clearly, the rules are complex and difficult to navigate, but the change is considered permanent and appears to be more favorable than what the TCJA allowed.

Five-Year Carry-Back Allowed for NOLs Arising in 2018-2020 – 

The CARES Act allows NOLs that arise in tax years beginning in 2018-2020 to be carried back for five years.  This may help those taxpayers with NOLs generated as a direct result of adverse conditions associated with the pandemic.  The no-carry-back rule is set to return for NOLs that arise in tax years beginning after 2020.  

• Retroactive Correction to Depreciation Rules for Real Estate Qualified Improvement Property (QIP):

An unintentional consequence of the TCJA related to QIP required taxpayers to assign QIP as nonresidential real property to be depreciated over 39 years.  This unfavorable classification was however corrected through the recent passage of the CARES Act.    The correction causes QIP to be included in the Internal Revenue Code definition of 15-year property, which in turn makes QIP eligible for first-year bonus depreciation.   The result is that real estate owners can now claim 100% first-year bonus depreciation for QIP placed in service in 2018-2022.

The correction has retroactive effect for QIP that was placed in service in 2018 and 2019. Many small businesses filed 2018 and/or 2019 returns treating their new QIP in that less-favorable way.  Affected taxpayers can amend their returns for 2018 and/or 2019 to seek a refund associated with this accelerated depreciation method.   

If you want to learn more about these and other COVID-19 relief provisions, let us help.  We can schedule a review to get you started.  Email info@adccpa.com with any details.