On Friday March 27th the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law.  This $2 trillion dollar stimulus bill will provide relief to individuals, businesses, and state and local governments, and will bolster an economy gravely shaken by the unprecedented impact of the Coronavirus.

This Act contains several provisions relevant to commercial real estate and depreciation.  (To read the Act in its entirety click here).

Most significantly, Qualified Improvement Property (QIP) will be treated as 15-year property under the Tax Cuts and Jobs Act, and therefore will be eligible to qualify for 100% bonus.   This change will be retroactive to January 1st, 2018. 

This long-awaited technical correction will undo the notorious “QIP glitch.”  TCJA architects intended for the recovery period of QIP to be 15-years.  Unfortunately, in a drafting error, the new QIP was never actually put into Section 168(e)(3)(E), the subparagraph that lists assets eligible for a 15-year class life.  As such, under the TCJA, QIP had to be treated as 39-year class life, and was not eligible for bonus treatment.  (Recall that bonus-eligible property must have a recovery period of 20-years or less.)

By correcting this error, the CARES Act will provide a tremendous boost to real estate owners and businesses that have invested in interior improvements since 1/1/2018.

Other relevant legislation:

  • Raises the limitation on deductible business interest from 30% to 50% of earnings before interest, taxes, depreciation, amortization for 2019 and 2020.
  • Temporarily repeals the 80% income limitation for net operating loss deductions for years beginning before 2021. For losses arising in 2018, 2019, and 2020, a five-year carryback is allowed (taxpayers can elect to forgo the carryback).
  • Repeals the Sec. 461(l) excess loss limitation. Sec. 461(l) was added to the Code by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and it disallows excess business losses of noncorporate taxpayers if the amount of the loss exceeds $250,000 ($500,000 for married taxpayers filing jointly).
  • Excludes from income the cancellation of debt related to new, emergency small business loans.
  • Also includes provisions for payroll tax credit refunds, 2020 payroll tax delays, and employee retention credits.

The Capstan team is here to help you in any way we can.  We will be happy to revisit any reports that might be immediately impacted by the CARES Act, keeping in mind that the QIP change is retroactive, and we are ready to answer any questions about how the new legislation might affect you.