For Employers, CARES Act Tax Provisions May Offer More Relief

On top of payroll relief, the $2 trillion Coronavirus Aid, Relief and Economic Security Act contains tax provisions that may help business owners free up cash in the form of tax refunds.

The package is dense and the applications for aid are long and complex, leaving potential beneficiaries scrambling to understand, much less secure, payouts. On the bright side, the lengthy bill is full of opportunity: CohnReznick partner and practice leader of federal tax services Brian Newman said provisions could lead to previously unexpected potential refunds from past years, offering an extra boost for commercial real estate employers and property owners. 

“I think there’s a lot of optimism around it,” Newman said of CARES, which contains what he sees as taxpayer-friendly provisions that should help free taxpayer dollars.

These are included alongside the Small Business Association loan Paycheck Protection Program. For certain businesses with under 500 employees per location, forgivable loans are available from the SBA to address payroll expenses — salaries, bonuses, healthcare and retirement benefits, and parental leave — and in some cases, to a limited extent rent or mortgage interest payment. 

Businesses may then be able to apply for loan forgiveness for funds used in the first eight weeks of the program — but the amount forgiven will be reduced for employers that lay off employees or reduce wages by more than 25%. 

Newman said many business owners are focused on this loan in hopes of securing enough financial assistance to hang on to their employees. At this early stage, he said there are plenty of unanswered questions, down to the basics, such as what companies are eligible. “How do you determine whether you fit into the under 500 employees or not? We’re looking at these questions trying to help our clients make a determination, but we’re still hoping for additional guidance here.”

What many business owners are not so focused on are the tax provisions. In the pages of the CARES Act are bills concerning net operating losses, excess business losses, business interest expense and depreciation rules, to name a few.

According to Newman, CARES has reversed the 2017 Tax Cuts and Jobs Act’s provision barring the offset of excess business losses, retroactively providing taxpayers with 2018 and 2019 refunds and removing the limits on 2020’s excess business losses. 

The package also lifts limitations on, and permits carrybacks of, net operating losses.

“If a taxpayer has a net operating Loss, TCJA had eliminated the ability to carry back to get at taxes paid in prior years in order to generate income that would then offset the net operating loss,” Newman said. “This act allows taxpayers to take a net operating loss in 2018 or 2019 and carry it back up to five years, to wherever you have income. It’s another way to get at taxes that have already been paid and to help fund businesses.”

Newman, who is an adjunct professor for the University of Hartford’s Master of Science in Taxation, said that internally, this net operating losses provision was his “top choice” for possible taxpayer-friendly aspects he hoped to see in a stimulus bill. 

Another potential win for property owners, he said, is the provision regarding qualified improvement property. “There was a drafting error in the original TCJA. Originally, for commercial property, QIP additions made to the interior were supposed to be depreciable over a 15-year period, in which case they would have also been eligible for bonus depreciation. That would have meant you could’ve written them off in one year,” Newman said. “But because of technical error, that 15-year period became 39 years, without eligibility for bonus depreciation. This is something we’ve been living with for the past year and a half. It was never corrected — until now.” 

Per the CARES Act, Newman said businesses should be able to file an amended return for 2018 and free up extra cash. However, the precise steps for how to do that are yet to be laid out. 

On April 1, the House Financial Services Committee published an FAQ about the act’s financial service provisions, but there is still a great deal of clarity needed, and accountants and financial services experts are keeping tabs as those develop.

“We’re just guessing at this point. But it’s been fixed, and that’s going to provide real estate owners with a much-needed tax break in that area.”

And, there may be more good news on the horizon, in the form of a following bill with additional provisions. “Limitation on state and local tax deduction may be reconsidered in the next bill, which would again be taxpayer-friendly, so we’re looking forward to the next bill as well.”