Retroactive tax relief measures open up opportunities to file amended returns. You may be able to recover taxes paid in earlier years. Some of the tax relief measures offered up by the CARES Act are retroactive. Retroactive relief can affect 2018 and 2019 returns that have already been filed for you or your business.
One retroactive relief provision can, in some cases, go all the way back to 2013.
Here’s a quick summary of the CARES Act retroactive tax relief measures that can potentially benefit you or your business entity after amended prior-year returns have been prepared and filed.
Net operating losses and carrybacks
There are liberalized rules for deducting net operating losses. This means business activities generating tax losses can cause you/your business to have a net operating loss (NOL) for the year. The CARES Act significantly liberalizes the NOL deduction rules. It allows NOLs that arise in 2018-2020 to be carried back five years.
The NOL arising this year can result in carry back to 2015. An NOL that arising in 2018 can result in be carry back to 2013. Such NOL carry-backs allow you to claim refunds for taxes paid in the carry-back years. Tax rates were higher in pre-2018 years. So, NOLs carried back to those years can result in significant tax refunds.
Qualified improvement property
The CARES Act includes a retroactive correction to the 2017 Tax Cuts and Jobs (TCJA). It allows much faster depreciation for real estate qualified improvement property (QIP). It applies to property whose service life starts after 2017. QIP is defined as an improvement to an interior portion of a nonresidential building that is placed in service after the date the building was first placed in service.
QIP excludes any improvement for which the expenditure is attributable to the enlargement of the building. It also excludes any elevator, escalator, or the internal structural framework of the building. The retroactive correction allows you to claim 100% first-year bonus depreciation for QIP placed in service in 2018-2022. Alternatively, you can depreciate QIP placed in service in 2018 and beyond over 15 years using the straight-line method.
Amending a 2018 or 2019 return to claim 100% first-year bonus depreciation for QIP placed in service in those years could result in an NOL that can be carried back to a prior tax year to recover taxes paid in that prior year when tax rates would have been higher.
Suspension of excess business loss 2018-2025
The CARES Act includes a suspension of excess business loss disallowance rule. This means an unfavorable TCJA provision disallows current deductions for excess business losses. Specifically for those incurred by individuals and other non-corporate taxpayers in tax years beginning in 2018-2025. An excess business loss is one that exceeds $250,000 or $500,000 for a married joint-filing couple. The $250,000 and $500,000 limits are subject to adjustment annually for inflation.
The CARES Act suspends the excess business loss disallowance rule for losses that arise in tax years beginning in 2018-2020. Amending a 2018 or 2019 return to reflect the suspension of the excess business loss disallowance rule could result in a 2018 or 2019 NOL. That NOL was not subject to carry back to a prior tax year to recover taxes paid in that prior year.
This concludes the missive on the important COVID-19-related federal tax relief measures. The District of Columbia is not going to remain closed. Almost certainly, in the spirit of “free stuff” there will be more to come. Retroactive tax relief measures open up opportunities to file amended returns. Please stay safe out there, talk to your tax advisor and here’s hoping we all get back to work soon.